---

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB

(Mark one)

xANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2006

 ̈TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from___________ to ___________

Commission file number: 000-30841

UNITED ENERGY CORP.(Name of small
business issuer in its charter)

| |                                                                   |  |                                         | 
| | ----------------------------------------------------------------- |  | --------------------------------------- | 
| | Nevada                                                            |  | 22-3342379                              | 
| |                                                                   |  |                                         | 
| | (State or other jurisdiction of 
  incorporation or organization) |  | (I.R.S. Employer 
  Identification No.) | 
| |                                                                   |  |                                         | 
| | 600 Meadowlands Parkway, #20 
  Secaucus, New Jersey              |  | 07094                                   | 
| |                                                                   |  |                                         | 
| | (Address of principal 
  executive offices)                       |  | (Zip Code)                              | 

(201)-842-0288(Issuers telephone
number, including area code)

|                                                     |                                                         |  |                                             | 
|---------------------------------------------------- | ------------------------------------------------------- |  | ------------------------------------------- | 
|Securities registered Under Section 12(b) of the Act
|                                                     | Title
  of each class                                   |  | Name
  of each exchange on which registered | 
|                                                     |                                                         |  |                                             | 
|                                                     | None                                                    |  | None                                        | 
|                                                     |                                                         |  |                                             | 
|                                                     | Securities
  registered Under Section 12(g) of the Act: | 
|                                                     | Title
  of each class                                   |  | Name
  of each exchange on which registered | 
|                                                     |                                                         |  |                                             | 
|                                                     |                                                         |  |                                             | 
|                                                     | Common
  Stock, par value 
  $.01 per share             |  | Over-the-Counter
  (OTC) Bulletin Board     | 



---

Check
whether the issuer is not required to file reports pursuant to Section 13 or 15(d)
of the Exchange Act.

Yes o No x

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes
xNo 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 of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o

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

Yes o No x

---

---



The issuers total consolidated
revenues for the fiscal year ended March 31, 2006 were $492,235.

The aggregate market value of
the common equity held by non-affiliates of the registrant was $36,000,414 as of
June 23, 2006.

The number of shares
outstanding of the registrants common equity as of June 23, 2006 was
31,030,115 shares.

---



UNITED ENERGY CORP.

2006 FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS

|         |                                                                                                                   |     
|-------- | ----------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                   | Page
|         |                                                                                                                   |     
|PART I  
|        
|ITEM 1.  | DESCRIPTION OF
BUSINESS                                                                                           | 1   
|ITEM 2.  | DESCRIPTION OF
PROPERTY                                                                                           | 6   
|ITEM 3.  | LEGAL PROCEEDINGS                                                                                                 | 6   
|ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS                                                               | 6   
|         |                                                                                                                   |     
|PART II 
|        
|ITEM 5.  | MARKET FOR COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
  AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES  | 7   
|ITEM 6.  | MANAGEMENTS DISCUSSION AND
ANALYSIS OR PLAN OF
  OPERATION                                                       | 9   
|        
|ITEM 7.  | FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA                                                               | 22  
|ITEM 8.  | CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON
  ACCOUNTING AND FINANCIAL DISCLOSURE                            | 22  
|ITEM 8A. | CONTROLS AND
PROCEDURES                                                                                           | 22  
|ITEM 8B. | OTHER INFORMATION                                                                                                 | 22  
|         |                                                                                                                   |     
|PART III
|        
|ITEM 9.  | DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL
  PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT | 23  
|ITEM 10. | EXECUTIVE
COMPENSATION                                                                                            | 25  
|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
  MANAGEMENT AND RELATED STOCKHOLDER MATTERS                  | 27  
|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED
  TRANSACTIONS                                                                  | 29  
|ITEM 13. | EXHIBITS                                                                                                          | 29  
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND
SERVICES                                                                            | 32  

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

Overview

We
develop and distribute environmentally friendly specialty chemical products
with applications in several industries and markets. Our current line of
products includes:

| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | KH-30 paraffin dispersant
  for the oil industry and related products;                                          
| |  
| |  | Uniproof specialty-coated
  proofing paper for the printing industry; and                                       
| |  
| |  | following additional
  testing, Slick Barrier underwater protective coatings for use in marine
  applications.

Through
our wholly owned subsidiary, Green Globe Industries, Inc., we provide the U.S.
military with a variety of solvents, paint strippers and cleaners under our
trade name Qualchem. Green Globe is a qualified supplier for the U.S.
military and has sales contracts currently in place with no minimum purchase
requirements, which are renewable at the option of the U.S. Military.

We
have developed and patented a system referred to as our S2 system, to work
with our environmentally friendly paraffin dispersants products. This patented
technology produces high volumes of steam and heat at variable pressures and
temperatures to completely dissolve most deposits of paraffin and asphaltene
within oil wells, pipelines or storage tanks. The S2 system apparatus is
portable, compact and easy to use. We are further developing the process to
enhance and support sales of KH-30 and its related products for the oil
industry and for other potential applications.

A
key component of our business strategy is to pursue collaborative joint working
and marketing arrangements with established international oil and oil service
companies. We intend to enter into these relationships to more rapidly and
economically introduce our KH-30 product line to the worldwide marketplace for
refinery, tank and pipeline cleaning services. We have recently entered into a
non-exclusive distribution agreement with Champion Technologies Inc. and a
non-exclusive Master Purchase Agreement with Petrobras America Inc. for the
sale and distribution of our K-Line of patented specialty chemical solutions.
The agreements do not provide for any minimum amounts to be purchased. We are also
currently negotiating potential working arrangements with several other
companies, however, there can be no assurance that any of these arrangements
entered into or, if entered into, (as well as the agreements with Champion
Technologies and Petrobras America Inc.) will be successful.

We
provide specialty chemical and graphic arts products to our customers and
generated revenues of $492,235 for the fiscal year ended March 31, 2006 and
$1,850,954 for the fiscal year ended March 31, 2005.

Organizational History

We
were originally incorporated in Nevada in 1971 as Aztec Silver Mining Co. We
engaged in the manufacturing and distribution of printing equipment from 1995
through 1998. During that period, we began to develop specialty chemical
products for use in the printing industry. In March 1998, we discontinued our
printing equipment operations and changed our business focus to the development
of specialty chemical products.

Business Operations and Principal Products

K-Product Line of Chemicals

KH-30
is a mixture of modified oils, dispersants and oil-based surfactants designed
to control paraffin and asphaltene deposits in oil wells. When applied in
accordance with our recommended procedures, KH-30 has resulted in substantial
production increases in paraffin-affected oil and gas wells by allowing for a
faster penetration of paraffin and asphaltene deposits. KH-30 disperses and
suspends paraffin and asphaltene in a free-flowing state and prevents solids
from sticking to each other or to oil well equipment. KH-30 is patented
in the United States, Russia, Venezuela, Argentina,

---



Canada, China,
the European Union, Hong Kong, Malaysia and Mexico. We have ten additional
country patent applications pending in most of the major oil-producing
countries around the world.

Although
we believe that the application of our K-Line of products on a continuous basis
will result in higher production and lower lease operating costs in oil wells,
the introduction of our K-Line of products into the oil and gas producing
industry has been difficult. Many entrenched players such as the hot oilers
and the major oil service companies who benefit from high mark-ups on their
proprietary products have no incentive to promote the use of our K-Line of
products. Moreover, oil production engineers are reluctant to risk damage to a
well from a product that does not have the endorsement and backing of a major
enterprise. Consequently, the pace of introduction of our K-line of products
has been much slower than we initially anticipated. We believe that this
situation has begun to change as a result of our marketing efforts with several
oil service companies and well owners beginning to use our products after
successful trials.

KX-91
is used for cleanup and stimulation of well bores. It works on all gravities of
crudes. It penetrates and disperses faster than KH-30 and has a freeze point of
40F. KX-91 is good for tanks with buildup on the bottom and can be used on
pipelines with paraffin and asphaltene blockages.

KDR-75
is effective in reducing friction pressure of petroleum crude and related oil
products due to turbulent flow through pipelines and helps restore laminar
flow. As a result, an increase in flow rate and productivity with reduced
energy consumption can be achieved.

KX-100
is a product where contact time is limited for removal of a plug. It is fast
acting and an effective dispersant that can be used in temperatures as low as
25F. It can be used in nearly any application.

KX-105DS-A
Degreaser is a strong multi-functional, chemical cleaning compound designed to
dissolve and remove tough heavy organic and sludge deposits. It possesses
strong wetting, penetrating, dispersing and solvating properties. Hence, safe
for use in oil field cleaning applications.

KX-104PDC
is designed to reduce pour point, gel point, or cloud point of crude oil and
improve its cold flow property and pumpability in oil field processing
applications.

KX-404
EB is specifically formulated to destabilize both, oil-in-water and
water-in-oil type emulsions when used in low treatment dosages of 50-100 PPM
with minimal contact time. It triggers kinetically and thermodynamically
unstable, weaker, transient emulsion phase into a sharp clean break down of oil
and water phase. The application of steam heat up to 150-200F will activate and
speed up demulsification.

Additional Product Line of Chemicals

Gunzilla
BC-10 is a patent pending formula which was developed for the military as a
safer and more effective bore and chamber cleaner. It can be used on everything
from small handguns to 16 guns. Gunzilla BC-10 is currently being marketed and
distributed by TopDuck Products LLC.

FR-15
  is an environmentally friendly soil remediation agent.

AS-12
is an acidic cleaner in liquid form, which has been formulated to aid in the
removal of Iron Sulfide and mild depositions of Calcium Carbonate from
down-hole equipment surfaces and any other locations where a low pH may be
advisable. Due to its very low pH, it is recommended that general safety
precautions be observed while handling the concentrated material, wearing
suitable facial and skin precautions.

CI-98
is formulated around an oil-soluble, water-dispersible filming amine designed
for use in sour gas and producing oil wells. It is a liquid compound, which has
been formulated to give a very tenacious film with an extended persistency
without undesirable gunking on the down-hole tubulars.

SCI-97
Quaternary Surfacant is designed for use in down-hole cleanups in producing oil
wells. It is a quaternary ammonium chloride compound which has been
successfully used to clean the down-hole surfaces in producing wells, as well
as in salt water disposal and injections systems, while at the same time
water-wetting the solids to assist in removing these from the produced crude
oil.

2

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SI-18
Scale Inhibitor is a broad based spectrum, high-calcium tolerant, water soluble
scale inhibitor which has been formulated to inhibit the formation and
deposition of Calcium Carbonate scale in oil field brines. SI-15 will complex
well with the calcium cations, impeding crystal growth and subsequent scale
formation and deposition.

HI-17
is an aqueous solution of an alkyl amine along with other proprietary
ingredients, which is used to prevent precipitation of sodium chloride crystals
from high chloride brines. It may be applied over the wide range of
temperatures and pressures, which are typically found in producing oil and gas
wells with little to no impact on performance.

Uniproof Proofing Paper

We
have developed a photo-sensitive coating that is applied to paper to produce
what is known in the printing industry as proofing paper or blue line paper.
We developed this formulation over several years of testing. The formulation is
technically in the public domain as being within the scope of an expired patent
of duPont. However, to the best of our knowledge, other companies have not
duplicated the exact formulation utilized by us, and we protect it as a trade
secret.

We
introduced our proofing paper in June 1999. Sales of Uniproof proofing paper
totaled $106,019 for the fiscal year ended March 31, 2006 and $546,096 for the
fiscal year ended March 31, 2005. Revenues are expected to continue to decline
due to the industry switching to a digital technology.

Slick Barrier

Slick
Barrier is an underwater protective coating, which prevents the adherence of
barnacles to boat hulls. The product is environmentally friendly and
biodegradable, which we believe to be particularly appealing in fresh water
marine applications.

Aqueous Coating

We
have developed a patent pending aqueous coating with excellent oil, grease and
water repellency for hot/cold food packaging such as cups, plates, cartons, wrappers
and corrugated boxes which is biodegradable, decomposable, and recyclable.

Additional Technologies

We
have a patent pending apparatus for introducing a vapor-containing stream into
underground geological formations, pumps, conduits or tanks which represents an
advance over previous techniques. The technique allows vapor-containing steam
to bypass the well and be released to the atmosphere.

GreenGlobe Industries

In
November 1998, we acquired all of the outstanding shares of Green Globe in
exchange for 30,000 shares of our common stock. Green Globe is operated as a
separate subsidiary and sells its products under the trade name Qualchem. We
provide the U.S. military with a variety of solvents, paint strippers and
cleaners under our trade name Qualchem. Green Globe is a qualified supplier
for the U.S. military and has sales contracts currently in place with no
minimum purchase requirements, which are renewable at the option of the U.S.
Military.

Manufacturing and Sales

All
of the raw materials necessary for the manufacture of our products are
generally available from multiple sources. Although we have negotiated
favorable arrangements with some of our current suppliers, (which include Pride
Solvents and Chemical Co. of NJ Inc., Hy-Test Packaging Corp, Air Products and
Chemicals and Arista Industries Inc), we would have to repeat the process if
one or more of our current suppliers were no longer to be able to supply these
raw materials to us. We do not own any special manufacturing facilities. Our
chemical products are generally manufactured by contract blenders at a number
of different locations. This method of manufacturing has reduced the need for
us to invest in facilities and to hire the employees to staff them. Chemical
blenders are relatively easy to replace and are bound by confidentiality
agreements, where appropriate, which obligate them not to disclose or use our
proprietary information.

3

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We
are not responsible for any environmental expenditure with respect to the
manufacturing of our products. First, the chemical products that we use are
generally environmentally friendly products in that they are low in toxicity
and rank high in biodegradability. Further, any environmental issues involved
in manufacturing are the responsibility of the blending facilities, provided
they receive adequate and accurate information from us as to the components of
the chemicals involved, however, there can be no assurance that we will not be liable
as we are subject to various foreign, federal, state and local law and
regulations relating to the protection of the environment.

Currently,
the photosensitive coating for our Uniproof proofing paper is applied by an
independent coater who is bound by a confidentiality agreement that obligates
it not to disclose or use our confidential information. We believe this
facility has the capacity to meet our production needs for the foreseeable
future and also meets all environmental manufacturing regulations now or
expected to be enacted. We believe that the services of this facility can be
duplicated by others. We believe the need for a contract with the coater is
obviated by the coaters clear economic benefit from continuing to provide
services to us. We are more concerned about a precipitous event, such as damage
to the coaters facility, which could result in an interruption of Uniproof
production. We believe that alternate coating sources do exist and that the
coater could be replaced, although with at least some interruption in
production flow.

We
currently sell our Uniproof proofing paper to one customer, The Alameda Company
of Anaheim, California, which accounted for approximately 99% of our graphic
arts sales and 21.5% of our total customer sales for the fiscal year ended
March 31, 2006. In fiscal 2005, Alameda accounted for approximately 99% of our
graphic arts sales and 29.5% of our total customer sales. Revenue from sales of
our proofing paper is expected to continue to decline due to the paper
technology switching to a digital technology. A decision by Alameda to
discontinue its relationship with us could result in a significant loss of
revenue to us.

In
the fiscal year ended March 31, 2006, Howard Energy and Champion Technologies
purchased our KH-30 and KX-100 oil cleaning products, which accounted for
approximately 23.5% of our total customer sales. In the fiscal year ended March
31, 2005, PDVSA Services Inc. purchased our KH-30 and KX-91 oil well cleaning
products, which accounted for approximately 39.4% of our total customer sales.

Except
for these current and former customers, no other single entity has accounted
for more than 10% of our sales during any of the fiscal years ended March 31,
2006 and 2005.

All
of our products are sold in U.S. dollars and, therefore, we have had no foreign
currency fluctuation risk.

Our
current operations do not require a substantial investment in inventory other
than minimum commitments to our distributors. However, we anticipate that any
growth in our business will require us to maintain higher levels of inventory.

As
of March 31, 2006, the Companys backlog included $123,722 of specialty
chemical sales. Backlog represents products that the companys customers have
committed to purchase. The Companys backlog is subject to fluctuations and is
not necessarily indicative of future sales.

Marketing and Distribution

We
have engaged the services of independent contractors to market our K-Product
Line of chemicals. These contractors work under various non-exclusive
commission and distribution agreements and have substantial contacts among oil
well owners and major oil companies in the United States, Mexico, South
America, Africa, Europe and the Middle East. These contractors earn a
commission based upon the sales value of the products that they sell. These
independent contractors use our marketing materials, brochures and website to
interest clients and to describe the attributes of our products.

Although
we have not achieved the volume of sales we had anticipated for the oil
dispersant products, there have been significant barriers to entry in this
market. Most of these potential customers require substantial testing of our
product to prove its efficacy at cleaning wells, tanks and flow lines. In many
cases, additional laboratory testing is required to prove that our chemical
products are compatible with refinery systems and will not interfere with
certain chemical processes and safety requirements of the potential clients.
This process of testing has taken a great deal longer than was originally
anticipated. We believe that we have made significant inroads and currently
expect a higher volume of sales in the next fiscal year ending March 31, 2007,
although there can be no assurance that sales will increase in fiscal 2007.

4

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Research and Development

Our
K-Product Line of chemical products for the oil industry and Uniproof proofing
paper are developed and ready for market. Slick Barrier is in testing. All of
these products are the result of research and development expenditures paid in
the amounts of $193,032 and $212,613 for the fiscal years ended March 31, 2006
and 2005 respectively. We have had available the services of one research
chemist and one analytical chemist, as well as one petroleum engineer, to lead
in the development of our products. A significant amount of market adaptation
has taken place in the field involving the development of application
procedures for products. We do not anticipate having to make significant
research and development expenditures on existing products in the future.
However, we do expect to continue to develop new products to complement our
existing product lines.

Competition

We
compete directly or indirectly with other producers of specialty chemical
products with similar uses, most of which are more established companies and
have greater resources than we have. Generally, we attempt to compete by
offering what we hope to be lower prices and better service. However, our
KH-30, KX-91 and KH-30S products for the oil industry are often more expensive,
and with these products we attempt to compete by emphasizing product
effectiveness and environmental safety.

Proprietary Technologies

With
respect to our formulations, which are proprietary, we have patented our KH-30
oil well cleaner in the United States, Russia, Venezuela, Argentina,
Canada, China, the European Union, Hong Kong, Malaysia and Mexico. We have ten
additional country patent applications pending in most of the major
oil-producing countries around the world.

We believe our patent is strong and will help our competitive position.
However, we are aware that others may try to imitate our product or invalidate
our patents. We have in the past vigorously enforced our trade secrets such as
the one relating to our Uniproof proofing paper, and intend to continue to do
so in the future. However, we recognize that intellectual property rights
provide less than complete protection. We believe that no other company is
currently producing a product similar to KH-30.

In
addition to applying for patent protection on our KH-30 product, we have also
registered KH-30 as a trademark. Trademark protection has also been obtained
for the Uniproof name for our proofing paper. We anticipate applying for both
patent and trademark protection for our other products in those jurisdictions
where we deem such protection to be beneficial.

Employees

As
of March 31, 2006, we employed eleven people on a full-time basis and had
available the services of six other individuals under consulting or
product/production cooperation arrangements. The latter arrangement is meant to
include a situation where a chemist, engineer or significant marketing person
is engaged by an organization under contract with us to manufacture or market
one or more of our products.

None
of our employees are represented by a union. We consider our relations with our
employees to be good.

Available Information

We
file annual, quarterly and current reports, information statements and other
information with the Securities and Exchange Commission (the SEC). The public
may read and copy any materials we file with the SEC at the SECs Public
Reference Room at Station Place, 100 F Street, N.E., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The address of that site is http://www.sec.gov.

5

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ITEM 2. DESCRIPTION OF PROPERTY

We
lease 9,600 square feet of office space at 600 Meadowlands Parkway, #20,
Secaucus, New Jersey 07094. Under the terms of the lease, which runs through
June 2007, the monthly rent was $8,635 through June 2004, which then increased
to $9,600 for the remainder of the lease. In addition, we leased office space
of approximately 1,350 square feet in Midland, Texas as a regional sales office
at a rate of $759 per month. This lease ran through September 2005 and has not
been renewed.

We
use independent non-affiliated contract chemical blending and manufacturing
facilities in various locations around the United States for the manufacture of
our products. We contract the production of our products to independent
manufacturers and blenders and our products are therefore produced at the
manufacturing facilities of those entities. We do not own any manufacturing
facilities.

ITEM 3. LEGAL PROCEEDINGS

In
July 2002, an action was commenced against us in the Court of Common Pleas of
South Carolina, Pickens County, brought by Quantum International Technology,
LLC and Richard J. Barrett. Plaintiffs allege that they were retained as a
sales representative of ours and in that capacity made sales of our products to
the United States government and to commercial entities. Plaintiffs further
allege that we failed to pay to plaintiffs agreed commissions at the rate of
20% of gross sales of our products made by plaintiffs. The complaint seeks an
accounting, compensatory damages in the amount of all unpaid commissions plus
interest thereon, punitive damages in an amount treble the compensatory
damages, plus legal fees and costs. Plaintiffs maintain that they are entitled
to receive an aggregate of approximately $350,000 in compensatory and punitive
damages, interest and costs. In June 2003, the action was transferred from the
court in Pickens County to a Master in Equity sitting in Greenville, South
Carolina and was removed from the trial docket. The action, if tried, will be
tried without a jury. No trial date has yet been scheduled. We believe we have
meritorious defenses to the claims asserted in the action and intend to
vigorously defend the case. The outcome of this matter cannot be determined at
this time.

No
other legal proceedings are currently pending or threatened against us.

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

No matters were submitted to
a vote of security holders during the fourth quarter of our fiscal year ended
March 31, 2006.

6

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PART II

|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR
  REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
  OF EQUITY SECURITIES

As
of June 23, 2006, there were approximately 467 record holders of our common
stock and there were 31,030,115 shares of our common stock outstanding. We have
not previously declared or paid any dividends on our common stock and do not
anticipate declaring any dividends in the foreseeable future.

The
following table shows the high and low bid prices of our common stock as quoted
on the OTC Bulletin Board by quarter during each of our last two fiscal years
ended March 31, 2006 and 2005 and for each quarter after March 31, 2006. These
quotes reflect inter-dealer prices, without retail markup, markdown or
commissions and may not represent actual transactions. The information below
was obtained from those organizations, for the respective periods.

|                              |  |                                         |  |      |      |     |   |      | 
|----------------------------- |  | --------------------------------------- |  | ---- | ---- | --- | - | ---- | 
|Fiscal Year 
  ended March 31 |  | Quarter                                 |  | High |      | Low |  
|                              |  |                                         |  |      |      |     |  
|                             
|2005                          |  | First Quarter (April-June
  2004)       |  | $    | 1.08 |     | $ | .52  | 
|                              |  | Second Quarter
  (July-September 2004)  |  |      | 1.43 |     |   | .86  | 
|                              |  | Third Quarter
  (October-December 2004) |  |      | 1.25 |     |   | .50  | 
|                              |  | Fourth Quarter
  (January-March 2005)   |  |      | 1.40 |     |   | .46  | 
|                              |  |                                         |  |      |      |     |   |      | 
|2006                          |  | First Quarter (April-June
  2005)       |  | $    | 1.81 |     | $ | 1.06 | 
|                              |  | Second Quarter
  (July-September 2005)  |  |      | 2.85 |     |   | 1.33 | 
|                              |  | Third Quarter
  (October-December 2005) |  |      | 2.70 |     |   | 1.47 | 
|                              |  | Fourth Quarter
  (January-March 2006)   |  |      | 2.20 |     |   | 1.41 | 
|                              |  |                                         |  |      |      |     |   |      | 
|2007                          |  | First Quarter (through June
  23)       |  | $    | 2.08 |     | $ | 1.32 | 
|                              |  |                                         |  |      |      |     |   |      | 

The
high and low bid prices for shares of our common stock on June 23, 2006 were
$1.54 and $1.40 per share, respectively, based upon bids that represent prices
quoted by broker-dealers on the OTC Bulletin Board. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions, and may not represent actual
transactions.

Dividend Policy

While
there are no restrictions on the payment of dividends, we have not declared or
paid any cash or other dividends on shares of our common stock in the last two
years, and we presently have no intention of paying any cash dividends in the
foreseeable future. Our current policy is to
retain earnings, if any, to finance the expansion of our business. The future
payment of dividends will depend on the results of operations, financial
condition, capital expenditure plans and other factors that we deem relevant
and will be at the sole discretion of our board of directors.

7

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Equity Compensation Plan Information

The
following table provides information regarding the status of our existing
equity compensation plans at March 31, 2006.

|                                                             |  |                                                                                                         |  |                                                                                     |  |                                                                                                                                                                         |  |   |      |  |  |  |  |         |  | 
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---- |  |  |  |  | ------- |  | 
|Plan Category                                                |  | Number of securities 
  to be issued upon 
  exercise of 
  outstanding options, 
  warrants and rights |  | Weighted-average 
  exercise price of 
  outstanding option, 
  warrants and rights |  | Number of securities 
  remaining available 
  for future issuance 
  under equity 
  compensation plans 
  (excluding securities 
  reflected in the 
  second column) | 
|                                                             |  |                                                                                                         |  |                                                                                     |  |                                                                                                                                                                         | 
|                                                             |  |                                                                                                         |  | (a)                                                                                 |  |                                                                                                                                                                         |  |   | (b)  |  |  |  |  | (c)     |  | 
|Equity
  compensation plans approved by security holders     |  |                                                                                                         |  | 3,185,000                                                                           |  |                                                                                                                                                                         |  | $ | 1.11 |  |  |  |  | 265,000 |  | 
|                                                            
|Equity
  compensation plans not approved by security holders |  |                                                                                                         |  | 5,125,000                                                                           |  |                                                                                                                                                                         |  | $ | 1.68 |  |  |  |  |        |  | 
|                                                            
|Total                                                        |  |                                                                                                         |  | 8,310,000                                                                           |  |                                                                                                                                                                         |  |   |      |  |  |  |  | 265,000 |  | 

Recent Sales of Unregistered Securities

On
January 26, 2006, we entered into the First Amendment to Securities Purchase
Agreement dated March 18, 2005. Pursuant to the amendment, the investors agreed
to purchase the remaining Series A Units or 1,100,000 shares of our common
stock and Series A Warrants to purchase 550,000 shares of our common stock for
$580,000. The common stock and warrants underlying such Series A Units issued
by us were not registered under the Securities Act of 1933 in reliance upon the
exemption from registration provided by Section 4(2) of that Act and Regulation
D promulgated under that Act.

On March 9, 2006, we entered into the Second Amendment to Securities Purchase
Agreement with the investors. Pursuant to the second amendment, one of the
investors agreed to purchase three-tenths of one Series B unit, consisting of 3
shares of preferred stock and warrants to purchase 12,000 shares of our common
stock (the Series B Warrant), for an aggregate purchase price of $24,000. In
addition, the investors agreed to waive all existing defaults under the
purchase agreement, including our failure to timely file a Certificate of
Designations for the preferred stock and to timely issue common stock
certificates and warrants. The preferred stock and warrants were not registered
under the Securities Act of 1933 in reliance upon the exemption from
registration provided by Section 4(2) of that Act and Regulation D promulgated
under that Act.

We and the investors also agreed to terminate all further obligations of the
investors to purchase and our obligation to sell any remaining Series B units.
The remaining Series B units would have consisted of 417 shares of preferred
stock convertible into an aggregate of 3,336,000 shares of common stock at a
conversion price of $1.00 and of warrants to purchase 1,668,000 shares of
common stock at an exercise price of $1.00 per share. Instead thereof, we
agreed to issue to one of the investors warrants to purchase 5,004,000 shares
of our common stock at an exercise price of $1.00 (the Series C Warrant).
These warrants have been valued at $6,810,444 and shown as Non-cash equity
financing costs in the Consolidated Statements of Operations. The Series C
Warrant, as well as the preferred stock and the Series B Warrant, are subject
to anti-dilution provisions in the event that we issue shares of common stock
at a price less than the conversion price or the exercise price and contain
provisions limiting the holders right to convert or exercise if doing so would
cause such holder and its affiliates to beneficially own more than 9.99% of the
outstanding common stock. The Series C Warrants were not registered under the
Securities Act of 1933 in reliance upon the exemption from registration
provided by Section 4(2) of that Act and Regulation D promulgated under that
Act.

8

---



March 2006 Private Placement

On
March 24, 2006, we entered into Securities Purchase Agreement with the
purchasers named therein (the Purchasers) and a First Amendment to Securities
Purchase Agreement and Registration Rights Agreement pursuant to which we
raised $5,100,000 in gross cash proceeds from the sale to the Purchasers of
4,250,000 shares of common stock at a price of $1.20 per share. The common
stock was not registered under the Securities Act of 1933 in reliance upon the
exemption from registration provided by Section 4(2) of that Act and Regulation
D promulgated under that Act.

ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION

You
should read the following description of our financial condition and results of
operations in conjunction with the financial statements and accompanying notes
included in this Annual Report beginning on page F-1.

Overview

We develop and distribute environmentally friendly specialty chemical products
with applications in several industries and markets. Our current line of
products includes:

|  |                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------
|o | KH-30 paraffin dispersant
  for the oil industry and related products;                                          
|  |                                                                                                                 
|o | Uniproof specialty-coated
  proofing paper for the printing industry; and                                       
|  |                                                                                                                 
|o | following additional
  testing, Slick Barrier underwater protective coatings for use in marine
  applications.

Through
our wholly owned subsidiary, Green Globe Industries, Inc., we provide the U.S.
military with a variety of solvents, paint strippers and cleaners under our
trade name Qualchem. Green Globe is a qualified supplier for the U.S.
military and has sales contracts currently in place with no minimum purchase
requirements which are renewable at the option of the U.S. Military.

We have developed and patented a system referred to as our S2 system, to work
with our environmentally friendly paraffin dispersants products. This patented
technology produces high volumes of steam and heat at variable pressures and
temperatures to completely dissolve most deposits of paraffin and asphaltene
within oil wells, pipelines or storage tanks. The S2 system apparatus is
portable, compact and easy to use. We are further developing the process to
enhance and support sales of KH-30 and its related products for the oil
industry and for other potential applications.

A
key component of our business strategy is to pursue collaborative joint working
and marketing arrangements with established international oil and oil service
companies. We intend to enter into these relationships to more rapidly and
economically introduce our KH-30 product line to the worldwide marketplace for
refinery, tank and pipeline cleaning services. We have recently entered into a non-exclusive
distribution agreement with Champion Technologies Inc. and a non-exclusive
Master Purchase Agreement with Petrobras America Inc. for the sale and
distribution of our K-Line of patented specialty chemical solutions. The
agreements do not provide for any minimum amounts to be purchased. We
are also currently negotiating potential working arrangements with several
other companies however, there can be no
assurance that any of these arrangements entered into or, if entered into, (as
well as the agreements with Champion Technologies and Petrobras America Inc.)
will be successful.

We
provide specialty chemical and graphic arts products to our customers and
generated revenues of $492,235 for the fiscal year ended March 31, 2006 and
$1,850,954 for the fiscal year ended March 31, 2005.

9

---



Recent Developments

On
March 9, 2006, pursuant to a Second Amendment to Securities Purchase Agreement
with certain investors one of the investors agreed to purchase three-tenths of
one Series B unit, consisting of 3 shares of Preferred Stock and warrants to
purchase 12,000 shares of our common stock, for an aggregate purchase price of
$24,000. We and the investors also agreed to terminate all further obligations
of the investors to purchase and our obligation to sell any remaining Series B
units. The remaining Series B units would have consisted of 417 shares of
Series A Convertible Preferred Stock convertible into an aggregate of 3,336,000
shares of common stock at a conversion price of $1.00 and of warrants to
purchase 1,668,000 shares of common stock at an exercise price of $1.00 per
share. Instead thereof, we agreed to issue to one of the investors warrants to
purchase 5,004,000 shares of our common stock at an exercise price of $1.00.

On
March 24, 2006, we raised $5,100,000 in gross cash proceeds from the sale to
the purchasers in a private placement of 4,250,000 shares of our common stock
at a price of $1.20 per share.

Critical Accounting Policies and Estimates

The
preparation of consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.

On
an ongoing basis, we evaluate our estimates, including those related to product
returns, bad debts, inventories, valuation of options and warrants, intangible
assets, long-lived assets and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.

Revenue
Recognition

Our
primary source of revenue is from sales of our products. We recognize revenue
upon shipment and transfer of title.

Allowance
for Doubtful Accounts

We
monitor our accounts and note receivable balances on a monthly basis to ensure
they are collectible. On a quarterly basis, we use our historical experience to
determine our accounts receivable reserve. Our allowance for doubtful accounts
is an estimate based on specifically identified accounts, as well as general
reserves. We evaluate specific accounts where we have information that the
customer may have an inability to meet its financial obligations. In these
cases, management uses its judgment, based upon the best available facts and
circumstances, and records a specific reserve for that customer against amounts
due to reduce the receivable to the amount that is expected to be collected.
These specific reserves are re-evaluated and adjusted as additional information
is received that impacts the amount reserved. We also establish a general
reserve for all customers based upon a range of percentages applied to aging
categories. These percentages are based on historical collection and write-off
experience. If circumstances change, our estimate of the recoverability of
amounts due to us could be reduced or increased by a significant amount. A
change in estimated recoverability would be accounted for in the period in
which the facts that give rise to the change become known.

10

---



Results of Operations

Comparison of Fiscal Year Ended March 31, 2006 to Fiscal Year
Ended March 31, 2005

Sales.Sales
decreased to $492,235 for the year ended March 31, 2006 from $1,850,954 for the
year ended March 31, 2005. The $1,358,719 or 73%, decrease in sales was due to
lower levels of Specialty Chemicals and Uniproof proofing paper. Sales for our
specialty chemical products including KH-30 and KX-91, and our Green Globe /
Qualchem product line decreased by 70%. The decrease was primarily related to a
76% decrease in sales of our KH-30 family of oil field dispersant products
reflecting a lower level of orders. This was partially offset by a 105%
increase in the level of U.S. Military sales during the year. Our three largest
customers accounted for 45% of revenues for the year ended March 31, 2006
compared with 72% for the comparable period in 2005. Uniproof proofing paper
sales decreased by 81% due to lower level of orders from our primary customer. We
expect sales of proofing paper to continue to decrease in the future due to the
paper industry switching to a digital technology.

Cost
of Goods Sold.Cost of goods sold decreased to $301,642 or 61% of sales,
for the year ended March 31, 2006 from $759,064, or 41% of sales, for the year
ended March 31, 2005. The decrease in cost of goods sold was due to the
decreased sales of KH-30 products compared to the prior year and a decrease in
the volume of Uniproof proofing paper sales compared to the prior fiscal year.
The increase in cost of goods sold as a percentage of sales is due to an
increase in the level of U.S. Military sales during the year at a much lower
gross profit percentage.

Gross
Profit.Gross profit decreased to $190,593 or 39% of sales, for the year ended
March 31, 2006 from $1,091,890, or 59% of sales, for the year ended March 31,
2005. Gross profit for our specialty chemical products including KH-30 and
KX-91, decreased to $126,595 or 42% of specialty chemical sales, for the year
ended March 31, 2006 from $846,846 or 69% of specialty chemical sales, for the
year ended March 31, 2005. The decrease in gross profit was due to a decrease
in sales of our KH-30 family of oil field dispersant products reflecting a
lower level of orders. Gross profit for Uniproof proofing paper sales decreased
to $44,961 or 42% of sales, for the year ended March 31, 2006 from $238,146, or
43% of sales, for the year ended March 31, 2005. The decrease was due to a
lower level of orders from our primary customer, because the use of proofing
paper is slowly being phased out due to the paper industry switching to a
digital technology.

Selling,
General and Administrative Expenses.General and administrative expenses increased to
$3,584,653 or 728% of sales, for the year ended March 31, 2006 from $2,581,033,
or 139% of sales, for the year ended March 31, 2005. The increase in selling, general and
administrative expenses are primarily related to an increase in salaries due to
the exercise of options, the recording of stock-based compensation costs,
benefits and bad debts partially offset by a decrease in travel and entertainment expenses.

Non-cash
equity financing costs.On
March 9, 2006, the Company entered into the Second Amendment to Securities
Purchase Agreement with the investors. In an exchange to terminate all further
obligations of the investors to purchase and our obligation to sell any
remaining Series B Units, the Company issued warrants to purchase 5,004,000 shares
of our common stock at an exercise price of $1.00 valued at $6,810,444.

Impairment
loss. During the year
ended March 31, 2006, we tested our goodwill by estimating its fair value using
a discounted cash flow analysis. As a result of the impairment tests, the
Company did not record a goodwill impairment charge during the fiscal year
ended March 31, 2006, related to the Green Globe segment. During the year ended
March 31, 2005, we recorded a $2,010 impairment charge related to the Green
Globe segment.

Depreciation,
Amortization and Depletion. Depreciation, amortization and depletion decreased to $70,061 for the year ended March 31, 2006 from
$84,401 for the year ended March 31, 2005
reflecting the Companys use of an accelerated method of depreciation, offset
by a slight increase in fixed assets.

Interest
Expense. Interest expense
increased to $577,589 for the year ended
March 31, 2006 compared with $287,118 for
the year ended March 31, 2005. The increase was due to the additional
warrants issued to the holder of the convertible term note issued February 2005
and satisfied in August 2005.

Net
Loss. For the year
ended March 31, 2006, we incurred a net loss of $10,836,644, or $0.43 per
share, as compared to a net loss of $1,854,876 for the year ended March 31,
2005, or $0.08 per share. The average number of shares of common stock used in
calculating earnings per share increased to 25,330,737 from 22,377,184 shares.

11

---



Liquidity and Capital Resources

Since
1995, operations have been financed primarily through loans, equity
contributions from directors and executive officers and from third parties
supplemented by funds generated by our business. As of March 31, 2006, we had
$5,194,748 in cash and cash equivalents.

Net
Cash Used in Operating Activities. During the fiscal year ended March 31, 2006, net cash used in
operating activities was $1,520,032 compared with $1,887,981 for the fiscal
year ended March 31, 2005.

Net
Cash Used in Investing Activities. During the fiscal year ended March 31, 2006, net cash used in
investing activities increased to $108,407 compared with $24,701 for the year ended March 31, 2005. The increase
was primarily a result of an increased level of expenditures for the purchase
of fixed assets to support operations and capitalized legal fees required to
file patent applications for our KH-30, KX-91 and S2 system.

Net
Cash Provided by Financing Activities.  During
the fiscal year ended March 31, 2006, net
cash generated from financing activities increased to $6,457,577 resulting from
$6,060,000 of proceeds from the issuance of common stock, proceeds from related
parties of $200,000, proceeds from the issuance of preferred stock of $24,000,
proceeds from the exercise of stock options of $345,000, the receipt of stock
subscription receivable of $13,333, which was partially offset by the payment
of related party payable of $133,600 and the payment of private placement costs
of $51,156. This compares to cash provided by financing activities of $760,267
for the year ended March 31, 2005 resulting from the proceeds from our private
placements on March 18, 2005 in the amount of $626,667 and proceeds from
related party payable of $133,600.

On
March 18, 2005, we entered into a securities purchase agreement with two
private investors with the respect to the sale of shares of our common stock
and warrants. The agreement provides for two types of units, designated as
Series A and Series B.

The
Series A Units each consist of 100,000 shares of our common stock and a Series
A Warrant to purchase 50,000 shares of our common stock at $1.00 per share,
subject to adjustment. The Series A Warrants expire five (5) years from the
date they are issued. The purchase price for each Series A Unit is $80,000. The
securities purchase agreement provides for the sale of up to twenty (20) Series
A Units.

On
March 18, 2005, the contract date, the company issued 8 Series A Units or
800,000 shares of its common stock for a purchase price of $640,000. In
connection with the issuance of such Series A Units, 37,500 shares of Common
Stock were issued to investors counsel as reimbursement for their expenses.

The
Series B Units each consist of ten (10) shares of a new class of preferred
stock that will be converted into 80,000 shares of our common stock in the
aggregate, subject to adjustment, and Series B Warrant to purchase 40,000
shares of our stock at $1.50 per share. The Series B Warrants expire five (5)
years from the date they are issued. The purchase price for each Series B Unit
is $80,000. The securities purchase agreement provides for the sale of up to
forty-two (42) Series B Units.

On
August 25, 2005, we entered into an Amendment and Waiver Agreement with the
investors providing, among other things, that the investors would waive certain
defaults under the securities purchase agreement in exchange for a reduction in
the price of the shares issuable upon exercise of the Series B Warrants from
$1.50 to $1.00 per share.

During
the year ended March 31, 2006, the Company issued the remaining 12 Series A
Units or 1,200,000 shares of its common stock for a purchase price of $960,000
as per the securities agreement dated March 18, 2005.

12

---



On
January 26, 2006, the Company entered into the First Amendment to the
securities purchase agreement dated March 18, 2005. The agreement was scheduled
to expire on its first anniversary, March 18, 2006. The amendment changes that
date to the earlier of March 18, 2008 or thirty (30) days after notice of
termination from the holder of a majority of the shares issued under the
agreement. For the period beginning on the date of the amendment through June
30, 2007, the consent of the majority holder is required for the Company to do
any of the following:

| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) contract for equity
  financing or debt financing with an equity component or issue any equity
  securities or securities convertible to equity;                                   
| |                                                                                                                                                                                        
| | (ii) incur indebtedness in
  excess of $250,000 other than trade debt in the ordinary course of business;                                                                              
| |                                                                                                                                                                                        
| | (iii) merge or consolidate
  or sell, transfer or license our assets outside of the ordinary course of
  business;                                                                     
| |                                                                                                                                                                                        
| | (iv) enter into an
  operating or capital lease in a transaction or series of transactions with
  annual payments in excess of $250,000;                                               
| |                                                                                                                                                                                        
| | (v) make capital
  expenditures in excess of $125,000 per fiscal year;                                                                                                                 
| |                                                                                                                                                                                        
| | (vi) grant exclusive
  distribution rights with respect to any of our products; or                                                                                                     
| |                                                                                                                                                                                        
| | (vii) permit any of our
  officers to sign or endorse any check, note, draft or other form of
  indebtedness in excess of $5,000 without the prior written authority of our
  Chairman.

We
also agreed that from the date of the amendment through March 18, 2009 we will
not negotiate or contract for a future offering without first providing to the
investors a ten-day right of first refusal to participate in the future
offering. To the extent the investors choose not to participate, we will then
have 60 days to complete the future offering without re-offering the investors
the right to participate.

During
the period from the date of the amendment through March 18, 2008, the majority
holder has the right to designate someone to receive notices of our Board of
Directors meetings and attend as an observer.

For
so long as the investors hold 1,500,000 shares of common stock equivalents
(meaning shares of common stock and other securities convertible to or
exercisable for common stock), the majority holder shall have the right to
designate a majority of the members of our Board of Directors in the event of
any of the following, referred to as triggering events:

| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) if we fail to have
  gross revenue of at least $5,000,000 for the six months ending September 30,
  2006;                                                                
| |                                                                                                                                                                              
| | (ii) if we breach any of
  our representations, warranties, agreements, covenants, terms or obligations
  under the securities purchase agreement or ancillary agreements; or
| |                                                                                                                                                                              
| | (iii) if the investors
  purchase an aggregate of twenty one or more Series B Units                                                                                          

On
March 9, 2006, we entered into the Second Amendment to Securities Purchase
Agreement dated March 18, 2005. Pursuant to the second amendment, one of the
investors agreed to purchase three-tenths of one Series B Unit, consisting of 3
shares of preferred stock and Series B Warrants to purchase 12,000 shares of
our common stock, for an aggregate purchase price of $24,000. In addition, the
investors agreed to waive all existing defaults under the purchase agreement,
including our failure to timely file a Certificate of Designations for the
Preferred Stock and to timely issue common stock certificates and warrants.

13

---



We
and the investors also agreed to terminate all further obligations of the
investors to purchase and our obligation to sell any remaining Series B Units.
The remaining Series B Units would have consisted of 417 shares of preferred
stock convertible into an aggregate of 3,336,000 shares of common stock at a
conversion price of $1.00 and of warrants to purchase 1,668,000 shares of
common stock at an exercise price of $1.00 per share. Instead thereof, we
agreed to issue to one of the investors Series C Warrants to purchase 5,004,000
shares of our common stock at an exercise price of $1.00. The Series C Warrant,
as well as the preferred stock and the Series B Warrant, are subject to
anti-dilution provisions in the event that we issue shares of common stock at a
price less than the conversion price or the exercise price and contain
provisions limiting the holders right to convert or exercise if doing so would
cause such holder and its affiliates to beneficially own more than 9.99% of the
outstanding common stock.

For so long as the investors hold 1,500,000 shares of common stock equivalents
(meaning shares of common stock and other securities convertible to or
exercisable for common stock), the majority holder shall have the right to
designate a majority of the members of our Board of Directors in the event of
any of the following, referred to as triggering events:

| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) if we fail to have gross revenue of at least $5,000,000 for
        the six months ending September 30, 2006; or                                                                  
| |                                                                                                                                                                                       
| | (ii) if we breach any of our representations, warranties, agreements,
        covenants, terms or obligations under the securities purchase agreement
        or ancillary agreements.
| |                                                                                                                                                                                       

On
March 24, 2006, we entered into Securities Purchase Agreements with the
purchasers named therein and a First Amendment to Securities Purchase Agreement
and Registration Rights Agreement pursuant to which the we raised $5,100,000 in
gross cash proceeds from the sale to the purchasers in a private placement of
4,250,000 shares of our common stock at a price of $1.20 per share.

The
Company currently anticipates that its available cash in hand and cash
resources from expected revenues will be sufficient to meet its anticipated
working capital and capital expenditure requirements for at least the next
twelve months.

Our
continued existence is dependent upon several factors, including increased
sales volumes, collection of existing receivables and the ability to achieve
profitability from the sale of our product lines. In order to increase our cash
flow, we are continuing our efforts to stimulate sales and cut back expenses
not directly supporting our sales and marketing efforts.

Concentration of Credit Risk

We
currently sell our Uniproof proofing paper to one customer, The Alameda Company
of Anaheim, California, which accounted for approximately 99% of our graphic
arts sales and 21.5% of our total customer sales for the fiscal year ended
March 31, 2006. In fiscal 2005, Alameda accounted for approximately 99% of our
graphic arts sales and 29.5% of our total customer sales. Revenue from sales of
our proofing paper is expected to continue to decline due to the paper
technology switching to a digital technology. A decision by Alameda to
discontinue its relationship with us could result in a significant loss of
revenue to us.

Contractual Obligations

Below
is a table which presents our contractual obligations commitments at March 31,
2006:

| |                                       |  |       |         |                    |   |           |  |           |         |                 |   |         |  |   |   | 
| | ------------------------------------- |  | ----- | ------- | ------------------ | - | --------- |  | --------- | ------- | --------------- | - | ------- |  | - | - | 
| | Contractual
  Obligation              |  | Total |         | Less than
  1 Year |   | 1-3 Years |  | 3-5 Years |         | After
  5 Years |  
| |                                       |  |       |         |                    |   |           |  |           |         |                 |  
| |                                       |  |       |         |                    |   |           |  |           |         |                 |   |         |  |   |   | 
| | Short-term debt Obligations(1)        |  | $     | 444,141 |                    | $ | 444,141   |  | $         |        |                 | $ |        |  | $ |  | 
| | Operating leases                      |  |       | 548,341 |                    |   | 129,592   |  |           | 261,715 |                 |   | 157,034 |  |   |  | 
| |                                       |  |       |         |                    |   |           |  |           |         |                 |   |         |  |   |   | 
| | Total contractual  cash
  obligations |  | $     | 992,482 |                    | $ | 573,733   |  | $         | 261,715 |                 | $ | 157,034 |  | $ |  | 
| |                                       |  |       |         |                    |   |           |  |           |         |                 |   |         |  |   |   | 

14

---



(1)
Short-term debt obligations include an amount due to Robert Seaman, a
shareholder and former director of the Company. The amount due as of March 31,
2006 and 2005 is $244,141. This amount is unsecured, non-interest bearing and
due upon demand. The Chairman of the Board and Secretary, Ron Wilen and the
President and Chief Executive Officer, Brian King, each loaned the Company
$100,000. The loans were both unsecured, non-interest bearing and due upon
demand. Each of these loans were repaid in full in April, 2006.

Reporting by Segments

We
are primarily a specialty chemicals company because of our determination in
fiscal 1998 to close our printing equipment division and focus on our KH-30 oil
well cleaner and related products. However, a significant portion of our
revenues has been related to the printing and the graphic arts industry. We
believe that in the future our chemical sales will increase and that our
reliance on the graphic arts segment of the company will decrease. During the
past two fiscal years, we have derived additional revenues by acting as a
graphic arts products distributor.

We
do devote almost all of our time and effort into selling, promoting and
developing our chemical products and we are continuing to increase our
marketing efforts to develop new products as extensions of our original KH-30
product. We do believe that in the future our sales will increase. We also
believe that our reliance on the graphic arts segment of the company will
decrease.

The
following table shows the proportion of total revenues by segment in each of
the last two fiscal years:

| |             |  |                |         |                    |   |           | 
| | ----------- |  | -------------- | ------- | ------------------ | - | --------- | 
| | Fiscal Year |  | Graphic
  Arts |         | SpecialtyChemicals |  
| |             |  |                |         |                    |  
| |             |  |                |         |                    |   |           | 
| | 2005        |  | $              | 549,462 |                    | $ | 1,301,492 | 
| | 2006        |  | $              | 106,861 |                    | $ | 385,374   | 

Off-Balance Sheet Arrangements

We
do not currently have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to our stockholders.

Inflation

We
do not believe that inflation in the cost of our raw materials has had in the
past or will have in the future any significant negative impact on our
operations. However, no assurance can be given that we will be able to offset
such inflationary cost increases in the future.

Recently Issued Accounting Standards

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123(R)). This revised
accounting standard eliminates the ability to account for share-based
compensation transactions using the intrinsic value method in accordance with
APB Opinion No. 25 and requires instead that such transactions be accounted for
using a fair-value-based method. SFAS No. 123(R) requires public entities to
record noncash compensation expense related to payment for employee services by
an equity award, such as stock options, in their financial statements over the
requisite service period. SFAS No. 123(R) is effective as of the beginning of
the first interim or annual period that begins after December 15, 2005 for
small business issuers. On January 1, 2006, we adopted SFAS No. 123(R). We have
historically through the nine months ended December 31, 2005, provided pro
forma disclosures pursuant to SFAS No. 123 and SFAS No. 148 as if the fair
value method of accounting for stock options had been applied, assuming use of
the Black-Scholes option-pricing model. With the adoption of SFAS No. 123(R),
we have recorded $428,798, as stock-based compensation cost, which has had a
negative impact on our consolidated statement of operations.

15

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Quantitative and Qualitative disclosures About Market Risk

The
market risk inherent in our market risk sensitive instruments and positions are
the potential losses arising from adverse changes in interest rate and foreign
currency exchange rates.

Foreign Currency Exchange Rates

Although
our business is international in scope, to date our product sales have been all
U.S. dollar-denominated. As we expand, we may be affected by exchange rate
fluctuations in foreign currencies relative to the U.S. dollar. We do not
currently use derivative financial instruments to hedge our exposure to changes
in foreign currency exchange rates

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This
Annual Report contains forward-looking statements. These forward-looking
statements are based largely on our expectations and are subject to a number of
risks and uncertainties, many of which are beyond our control. Actual results
could differ materially from these forward-looking statements as a result of,
among other factors, risks related to the large amount of our outstanding term
loan; history of net losses and accumulated deficits; reliance on third parties
to market, sell and distribute our products; future capital requirements;
competition and technical advances; dependence on the oil services market for
pipe and well cleaners; ability to protect our patents and proprietary rights;
reliance on a small number of customers for a significant percentage of our
revenues; and other risks. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained in this Annual
Report will in fact occur.

RISK FACTORS

An
investment in our common stock involves a high degree of risk. You should
carefully consider the following material risks, before you decide to buy our
common stock. If any of the following risks actually occur, our business,
results of operations and financial condition would likely suffer. In these
circumstances, the market price of our common stock could decline and you may
lose all or part of your investment.

WE
HAD A CURRENT ACCUMULATED DEFICIT OF APPROXIMATELY $23,234,612 AS OF MARCH 31,
2006 AND IF WE CONTINUE TO INCUR OPERATING LOSSES, WE MAY BE UNABLE TO SUPPORT
OUR BUSINESS PLAN, WHICH WILL HAVE A DETRIMENTAL EFFECT ON OUR STOCK.

We
  have incurred losses in each of our last three fiscal years. As of March 31,
  2006, we had an accumulated deficit of $23,234,612. If we continue to incur
  operating losses and fail to become a profitable company, we may be unable to
  support our business plan, namely to market our KH-30 oil and gas well cleaning
  products. We incurred net losses of $10,836,649 and $1,854,876 in the fiscal
  years ended March 31, 2006 and 2005, respectively. Our future profitability
  depends in large part on our ability to market and support our KH-30 oil and
  gas well cleaners. We cannot assure you that we will achieve or sustain significant
  sales or profitability in the future. This would have a detrimental effect on
  the long-term capital appreciation of our stock.

THERE
ARE SIGNIFICANT OBSTACLES TO ENTERING THE OIL AND GAS PRODUCING INDUSTRY THAT
HAVE CONTRIBUTED TO THE SLOW PACE AT WHICH OUR KH-30 PRODUCTS ARE BEING
INTRODUCED TO THE MARKET.

Our
business plan is focused largely on marketing efforts for KH-30. Although we
believe that the application of KH-30 oil and gas well cleaning products on a
continuous basis will result in higher production and lower power lease
operating costs, the introduction of KH-30 into the oil and gas producing
industry has been extremely difficult. Many entrenched players such as the hot
oilers and the major oil service companies that benefit from high markups on
their proprietary products have no incentive to promote the use of KH-30.
Moreover, oil production engineers are extremely reluctant to risk damage to a
well from a product that does not have the endorsement of a major enterprise.
Consequently, the pace of introduction of KH-30 has been much slower than we
initially anticipated. If we and our KH-30 marketing partners are unable to
successfully achieve market acceptance for KH-30, our future results of operations
and financial condition will be adversely affected.

16

---



BECAUSE
WE EXPECT SALES OF UNIPROOF TO CONTINUE TO DECLINE, WE MAY NOT BE ABLE TO
GENERATE SUBSTANTIAL REVENUES OR ACHIEVE PROFITABILITY, WHICH WOULD SERIOUSLY
IMPAIR OUR ABILITY TO MARKET KH-30.

Our
sales to date have been substantially dependent on sales of our Uniproof
proofing paper. Sales of Uniproof accounted for approximately 21.5% and 29.5%
of revenues for the fiscal years ended March 31, 2006 and 2005, respectively.
The decline in the level of proofing paper sales is due to the paper industry
switching to a digital technology. Because we expect sales of this product to
continue to decline, if we are unable to generate significant revenue from this
product, or fail to develop significant revenue from other products in its
stead, our business plan and financial condition will be severely affected.

THE
SUCCESS OF OUR KH-30 PRODUCTS WILL BE HIGHLY DEPENDENT UPON THE LEVEL OF
ACTIVITY AND EXPENDITURES IN THE OIL AND NATURAL GAS INDUSTRIES AND A DECREASE
IN THE LEVELS THEREOF WOULD, IN ALL LIKELIHOOD, ADVERSELY IMPACT SALES OF
KH-30.

We
anticipate that demand for our oil and gas cleaning product will depend on the
levels of activity and expenditures in the industry, which are directly
affected by trends in oil and natural gas prices. We anticipate that demand for
KH-30 will be particularly sensitive to the level of development, production
and exploration activity of, and corresponding capital spending by, oil and
natural gas companies. Prices for oil and gas are subject to large fluctuations
in response to relatively minor changes in the supply of and demand for oil and
gas, market uncertainty, political stability and a variety of other factors that
are beyond our control. Any prolonged reduction in oil and natural gas prices
will depress the level of exploration, and development and production activity.
Lower levels of activity are expected to result in a corresponding decline in
the demand for our oil and gas well products, which could have an adverse
impact on our prospects, results of operations and financial condition. Factors
affecting the prices of oil and natural gas include:

|  |                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | worldwide political,
  military and economic conditions, including the ability of OPEC (the
  Organization of Petroleum Exporting Countries) to set and maintain production
  levels and prices for oil and gas;
|  |                                                                                                                                                                                                                 
| | overall levels of global
  economic growth and activity;                                                                                                                                                        
|  |                                                                                                                                                                                                                 
| | global weather conditions;                                                                                                                                                                                      
|  |                                                                                                                                                                                                                 
| | the level of production by
  non-OPEC countries;                                                                                                                                                                
|  |                                                                                                                                                                                                                 
| | the policies of
  governments regarding the exploration for and production and development of
  their oil and natural gas reserves; and                                                                         
|  |                                                                                                                                                                                                                 
| | actual and perceived
  changes in the supply of and demand for oil and natural gas.                                                                                                                             

IF
OUR STRATEGIC PARTNERS DO NOT EFFECTIVELY MARKET OUR PRODUCTS, WE WILL NOT
GENERATE SIGNIFICANT SALES OR PROFITS AND WE DO NOT CURRENTLY HAVE THE INTERNAL
RESOURCES TO MARKET OUR PRODUCTS DIRECTLY.

We
utilize third parties to assist in marketing, selling and distributing our
products. We believe that the establishment of a network of third party
strategic partners, particularly abroad, with extensive and specific knowledge
of the various applications in the oil and gas industry and printing market is
important for us to succeed in these sectors. We cannot assure you that our
current or future strategic partners will purchase our products at sufficient
levels or provide us with adequate support. If one or more of our partners underperforms
or if any of our strategic relationships are terminated or otherwise disrupted,
our operating performance, results of operations and financial condition will
be adversely affected.

17

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WE
DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, BUT WE HAVE NO LONG TERM CONTRACTS OR BINDING PURCHASE COMMITMENTS
FROM THESE CUSTOMERS.

We
currently have a limited number of recurring customers for our products, none
of whom have entered into long-term contracts or binding purchase commitments
with us. A significant portion of our revenue is earned in connection with
sales of Uniproof proofing papers to the Alameda Company of Anaheim,
California. During the fiscal years ended March 31, 2006 and 2005, sales
attributable to Alameda represented approximately 21.5% and 29.5%,
respectively, of our total revenues. Revenue from Alameda is expected to
continue to decline due to digital technology. However, a decision by Alameda
to discontinue its relationship with us could result in a significant loss of
revenue to us. Our three largest customers accounted for 45% and 72% of our
revenues for the fiscal years ended March 31, 2006 and 2005, respectively.

WE
RELY ON THIRD PARTIES FOR THE RAW MATERIALS NECESSARY TO MAKE OUR PRODUCTS,
LEAVING US POTENTIALLY VULNERABLE TO SUBSTANTIAL COST INCREASES AND DELAYS.

All
of the raw materials necessary for the manufacture of our products are
generally available from multiple sources, although we have negotiated
favorable arrangements with our current suppliers. If one or more of our
current suppliers were no longer able to supply the raw materials that we need,
we would be required to negotiate arrangements with alternate suppliers, which
would likely include some cost or delay and could be substantial. In addition,
no assurance can be given that any alternative arrangements that we secure
would be on terms as favorable as our current arrangements.

WE
DEPEND ON INDEPENDENT MANUFACTURERS OF OUR PRODUCTS; ANY PROLONGED INTERRUPTION
IN THEIR BUSINESS COULD CAUSE US TO LOSE OUR CUSTOMERS.

We
do not own any manufacturing facilities. Our chemical products are generally
manufactured by contract blenders at a number of different facilities. Chemical
blenders are relatively easy to replace. The photosensitive coating for our
Uniproof product is applied by one independent coater. While we believe these
facilities have the capacity to meet our current production needs and also meet
applicable environmental regulations, we cannot be certain that these
facilities will continue to meet our needs or continue to comply with
environmental laws. In addition, these facilities are subject to certain risks
of damage, including fire, that would disrupt production of our products. To
the extent we are forced to find alternate facilities, it would likely involve
delays in manufacturing and potentially significant costs.

The
chemical blender and independent coater that manufactures our products are
bound by confidentiality agreements that obligate them not to disclose or use
our proprietary information. A breach of one or more of these agreements could
have a detrimental effect on our business and prospects.

ENVIRONMENTAL
PROBLEMS AND LIABILITIES COULD ARISE AND BE COSTLY FOR US TO CLEAN UP.

We
are subject to various foreign, federal, state and local laws and regulations
relating to the protection of the environment, including the Industrial Site
Recovery Act, a New Jersey statute requiring clearance by the state prior to
the sale of any industrial facility. These laws provide for retroactive strict
liability for damages to natural resources or threats to public health and
safety, rendering a party liable without regard to its negligence or fault.
Sanctions for noncompliance may include revocation of permits, corrective
action orders, and administrative or civil penalties or even criminal
prosecution. We have not, to date, incurred any serious liabilities under
environmental regulations and believe that we are in substantial compliance
therewith. Nevertheless, we cannot be certain that we will not encounter
environmental problems or incur environmental liabilities in the future that
could adversely affect our business.

18

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BECAUSE
WE ARE SMALLER AND HAVE FEWER FINANCIAL AND MARKETING RESOURCES THAN MANY OF
OUR COMPETITORS, WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE EXTREMELY
COMPETITIVE SPECIALTY CHEMICAL AND PRINTING INDUSTRIES.

We
compete directly or indirectly with other producers of specialty chemical
products, most of which are or have aligned themselves with more established
companies, have greater brand recognition and greater financial and marketing
resources. Generally, we attempt to compete by offering what we hope to be
lower prices and better service. However, the prices for our KH-30 and related
line of cleaners are higher than competing products; therefore, we attempt to
compete by emphasizing product effectiveness and environmental safety.

We also believe that our efforts to patent the KH-30 oil well cleaner in the
principal oil producing countries worldwide will improve our competitive
position in this market. However, we are aware that other companies may try to
imitate our products or invalidate our patents. In the past we have vigorously
enforced our trade secrets and other intellectual property, and intend to
continue to do so in the future. We recognize that we may incur significant costs
to defend our intellectual property and that intellectual property rights
provide less than complete protection.

WE
MAY NOT BE ABLE TO RETAIN OUR EXECUTIVE OFFICERS WHO WE NEED TO SUCCEED, AND
ADDITIONAL QUALIFIED PERSONNEL ARE EXTREMELY DIFFICULT TO ATTRACT.

Our
performance depends, to a significant extent, upon the efforts and abilities of
our executive officers. We do not have employment agreements with certain of
our executive officers and do not maintain any key man insurance on their lives
for our benefit. The loss of the services of our executive officers could have
a serious and adverse effect on our business, financial condition and results
of operations. Our success will also depend upon our ability to recruit and
retain additional qualified senior management personnel. Competition is intense
for highly skilled personnel in our industry and, accordingly, no assurance can
be given that we will be able to hire or retain sufficient personnel.

OUR
MANAGEMENT OWNS A SUBSTANTIAL AMOUNT OF OUR STOCK AND IS CAPABLE OF INFLUENCING
OUR BUSINESS AND AFFAIRS.

Our
directors and executive officers beneficially own approximately 25.3% of our
outstanding common stock. As such, they will be able to significantly influence
the election of the members of our board of directors and the outcome of
corporate actions that require shareholder approval, such as mergers and
acquisitions. This level of ownership, together with particular provisions of
our articles of incorporation, bylaws and Nevada law, may have a significant
effect in delaying, deferring or preventing any change in control and may
adversely affect the voting and other rights of our other shareholders.

IF
WE CANNOT PROTECT OUR PROPRIETARY RIGHTS AND TRADE SECRETS OR IF WE WERE FOUND
TO BE INFRINGING ON THE PROPRIETARY RIGHTS OF OTHERS, OUR BUSINESS WOULD BE
SUBSTANTIALLY HARMED.

Our
success depends in large part on our ability to protect the proprietary nature
of our products, preserve our trade secrets and operate without infringing the
proprietary rights of third parties. If other companies obtain and copy our
technology or claim that we are making unauthorized use of their proprietary
technology, we may become involved in lengthy and costly disputes. If we are
found to be infringing on the proprietary rights of others, we could be
required to seek licenses to use the necessary technology. We cannot assure you
that we could obtain these licenses on acceptable terms, if at all. In
addition, the laws of some foreign countries may not provide adequate
protection for our proprietary technology.

To
protect our intellectual property, we seek patents and enter into
confidentiality agreements with our employees, manufacturers and marketing and
distribution partners. We cannot assure you that our patent applications will
result in the successful issuance of patents or that any issued patents will
provide significant protection for our technology and products. In addition, we
cannot assure you that other companies will not independently develop competing
technologies that are not covered by our patents. There is also no assurance
that

19

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confidentiality
agreements will provide adequate protection of our trade secrets, know-how or
other proprietary information. Any unauthorized disclosure and use of our
proprietary technology, whether in breach of an agreement or not, could have an
adverse effect on our business, prospects, results of operations and financial
condition.

THE
PUBLIC MARKET FOR OUR COMMON STOCK HAS BEEN CHARACTERIZED BY A LOW VOLUME OF
TRADING AND OUR STOCKHOLDERS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE
THE PRICE AT WHICH THEY PURCHASED THEIR SHARES, IF AT ALL.

Historically,
the volume of trading in our common stock has been low. A more active public
market for our common stock may not develop or, even if it does in fact
develop, may not be sustainable. The market price of our common stock may
fluctuate significantly in response to factors, some of which are beyond our
control. These factors include:

|  |                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------
| | product
  liability claims and other litigation;                                                              
|  |                                                                                                               
| | the
  announcement of new products or product enhancements by us or our
  competitors;                        
|  |                                                                                                               
| | developments
  concerning intellectual property rights and regulatory approvals;                              
|  |                                                                                                               
| | quarterly
  variations in our competitors results of operations;                                             
|  |                                                                                                               
| | developments
  in our industry; and                                                                           
|  |                                                                                                               
| | general
  market conditions and other factors, including factors unrelated to our own
  operating performance.

Recently,
the stock market in general has experienced extreme price and volume
fluctuations. In particular, market prices of securities of specialty chemical
products companies have experienced fluctuations that are often unrelated to or
disproportionate from the operating results of these companies. Continued
market fluctuations could result in extreme volatility in the price of shares
of our common stock, which could cause a decline in the value of our shares.
Price volatility may be worse if the trading volume of our common stock is low.

OUR
COMMON STOCK IS CONSIDERED A PENNY STOCK AND MAY BE DIFFICULT TO SELL WHEN
DESIRED.

The
SEC has adopted regulations that define a penny stock, generally, to be an
equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions.
The market price of our common stock has been less than $5.00 per share. This
designation requires any broker or dealer selling our securities to disclose
certain information concerning the transaction, obtain a written agreement from
the purchaser and determine that the purchaser is reasonably suitable to
purchase the securities. These rules may restrict the ability of brokers or
dealers to sell our common stock and may affect the ability of stockholders to
sell their shares. In addition, since our common stock is currently quoted on
the OTC Bulletin Board, stockholders may find it difficult to obtain accurate
quotations of our common stock, may experience a lack of buyers to purchase our
shares or a lack of market makers to support the stock price.

A
SIGNIFICANT NUMBER OF OUR SHARES ARE ELIGIBLE FOR SALE AND THEIR SALE OR
POTENTIAL SALE WILL PROBABLY DEPRESS THE MARKET PRICE OF OUR STOCK.

Sales
of a significant number of shares of our common stock in the public market
could harm the market price of our common stock. As additional shares become
available for resale in the public market pursuant to this registration
statement, the supply of our common stock will increase, which could decrease
its price. Some or all of the shares of our common stock may also be offered
from time to time in the open market without registration pursuant to Rule 144,
and these sales could have a depressive effect on the market for our common
stock. In general, a person who has held restricted shares for a period of one
year may, upon the filing of a notification on Form 144 with the SEC, sell
common stock in an amount equal to the greater of 1% of the outstanding shares
or the average

20

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weekly number
of shares sold in the prior one week period. These sales may be repeated once
during each 3 month period. In addition, any person that is not an affiliate of
ours may sell all of his, hers or its restricted shares after the shares have
been held for 2 years or more pursuant to Rule 144(k).

WE
DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE
FUTURE; THEREFORE, YOU SHOULD NOT BUY THIS STOCK IF YOU WISH TO RECEIVE CASH
DIVIDENDS.

We
currently intend to retain our future earnings in order to support operations
and finance expansion; therefore, we do not anticipate paying any cash
dividends on our common stock in the foreseeable future.

21

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|        |                                              
|------- | ---------------------------------------------
|ITEM 7. | FINANCIAL
  STATEMENTS AND SUPPLEMENTARY DATA

The
response to this item is submitted as a separate section of this Report
beginning on page F-1.

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

None

|         |                          
|-------- | -------------------------
|ITEM 8A. | CONTROLS
  AND PROCEDURES

Evaluation of the Companys Disclosure Controls

As
of March 31, 2006 (the end of the period covered by this report), our
management carried out an evaluation, with the participation of our Chief
Executive Officer and Interim Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures. The evaluation process, including the
inherent limitations on the effectiveness of such controls and procedures, is
more fully discussed below. Based upon that evaluation, the Chief Executive
Officer and Interim Chief Financial Officer concluded that as of the end of the
period covered by this report, our disclosure controls were not effective due
to the material weakness in our internal controls over the financial reporting
process, as described below. In designing and evaluating our disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended), management recognized that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurances of achieving the desired control objectives, as ours
are designed to do, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.

In
connection with the audit by our independent registered public accounting firm
of our financial statements, as of March 31, 2006 and for the year then ended,
our independent registered public accounting firm notified our management and
the Board of Directors that they had identified a deficiency that they
considered a material weakness in the our internal controls over the financial
reporting process due to the communication between the Chairman of the Board of
Directors, the CEO and the interim CFO. Adjustments were identified during the
audit process relating to the recording of options that the Company issued
during 2006 and 2005. These adjustments were made to the consolidated financial
statements for the year ended March 31, 2006 and 2005.

The
reportable conditions have been discussed in detail among management and our
independent registered public accounting firm, and we are committed to
resolving the issue. We have taken the appropriate steps in correcting the
matter by enhancing the communications process among the members of management
to ensure more timely notification of current issues, including through the
institution of more regularly scheduled meetings among management.

No
change occurred in our internal control over financial reporting during our
fourth quarter that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

However,
in connection with reportable conditions above, we have subsequently enhanced
our internal controls over financial reporting as described above.

8B.    OTHER INFORMATION

None

22

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PART III

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

The
following table shows the positions held by our board of directors and
executive officers and their ages as of June 23, 2006.

|                      |  |     |  |                                                
|--------------------- |  | --- |  | -----------------------------------------------
|Name                  |  | Age |  | Position                                       
|                      |  |     |  |                                                
|Ronald Wilen          |  | 67  |  | Chairman of
  the Board, Secretary and Director
|Brian King            |  | 53  |  | President
  and Chief Executive Officer        
|James
  McKeever, CPA |  | 40  |  | Interim
  Chief Financial Officer              
|Louis
  Bernstein     |  | 56  |  | Director                                       
|Andrea
  Pampanini    |  | 66  |  | Director                                       
|Martin
  Rappaport    |  | 69  |  | Director                                       
|                      |  |     |  |                                                

The
principal occupations for the past five years (and, in some instances, for
prior years) of each of our executive officers and directors are as follows:

Ronald
Wilen. Mr. Wilen has served as a member of our board
since October 1995 and Secretary since May 2006. Mr. Wilen served as our Chief
Executive Officer from October 1995 to September 2004, our President from
October 1995 to August 2001 and has been our Chairman of the Board since August
2001.

Brian
King.Mr. King was appointed as the companys
President and Chief Executive Officer in September 2004. Prior to joining United
Energy he was employed by Concord Camera Corp., a publicly traded company, from
1996 through 2004. During his tenure with Concord, Mr. King held several senior
level officer positions including Chief Operating Officer and Senior Executive
Vice President. Mr. King holds a BS from the University of Maryland and an MBA
from Long Island University.

James
McKeever, CPA.Mr.
McKeever has been our Interim Chief Financial Officer since January 2004. He
also continues to be a partner in the accounting firm of Abrams & McKeever
CPAs, which he joined in January 2000. Mr. McKeever has more than 16 years
experience in public accounting and financial reporting, and is a member of the
New Jersey Society of Certified Public Accountants.

Louis
Bernstein. Mr. Bernstein has served as a member of our
board since September 2003. Mr. Bernstein is currently an Assistant General
Counsel of Pfizer Inc., one of the worlds largest pharmaceutical companies,
where he has served as in-house counsel since December 1975. He is retiring
from Pfizer Inc. effective August 8, 2006. Mr. Bernstein is also a member of
the board of directors of Xethanol Corporation.

Andrea
Pampanini. Mr. Pampanini has served as a member of our
board since December 2001. Mr. Pampanini is an organizational advisor with
extensive restructuring, marketing and strategic planning experience serving,
among other industries, the chemical, petroleum, pharmaceutical, basic metals,
electrical equipment, power generation and heavy industrial goods sectors. In
1989, Mr. Pampanini founded Turnaround Associates Inc., a consulting firm
specializing in the financial and operational organization of medium to
large-sized companies. Since 1998, Mr. Pampanini has been a member of
Leadership Strategies LLC, a group of professionals specializing in strategic
planning and personal leadership coaching. Mr. Pampanini has devoted a major
portion of his career to the Middle East, including serving as Executive Vice
President of Development Resources Corporation from 1971 to 1977, during which
time he supervised the final phases of the Dez hydroelectric power and
irrigation project in Iran.

23

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Martin
Rappaport. Mr. Rappaport has served as a member of our
board since June 2001. Mr. Rappaport is self-employed. For more than 30 years,
he has developed and managed commercial and residential real estate (including
owning the building where our office is located). Mr. Rappaport is an active
supporter and contributor to Blythedale Childrens Hospital in Valhalla, New
York.

Directors
are elected annually and serve until the next annual meeting of the Companys
stockholders, and until their successors have been elected and have qualified.
Officers are appointed to their positions, and continue in such positions, at
the discretion of the directors.

Committees of the Board

The
Board of Directors is the acting Audit Committee. Our Board of Directors has
determined that there is no person on our Board of Directors who qualifies as
an audit committee financial expert as that term is defined by applicable Securities
and Exchange Commission rules. The Board of Directors believes that obtaining
the services of an audit committee financial expert is not economically
rational at this time in light of the costs associated with identifying and
retaining an individual who would qualify as an audit committee financial
expert.

Director Compensation

Each
non-employee director and Ron Wilen receives options for 10,000 shares of our
common stock in lieu of an annual retainer and meeting fees. Other than the
10,000 options granted there are no special fees, contracts entered into, or
payments made in consideration of any directors service as a director.

Indebtedness of Executive Officers and
Directors

No
executive officer, director or any member of these individuals immediate
families or any corporation or organization with whom any of these individuals
is an affiliate is or has been indebted to us since the beginning of our last
fiscal year.

Family Relationships

There
are no family relationships among our executive officers and directors.

Legal Proceedings

During
the past five years, none of our executive officers, directors, promoters or
control persons has been involved in a legal proceeding material to an
evaluation of the ability or integrity of such person.

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

Section
16(a) of the Securities Act of 1934, as amended, requires our directors and
executive officers, and persons who own more than 10% our outstanding common
stock, to file with the SEC, initial reports of ownership and reports of
changes in ownership of our equity securities. These persons are required by
SEC regulations to furnish us with copies of all the reports they file.

To
our knowledge, based solely on a review of the copies of the reports furnished
to us and written or oral representations that no other reports were required
for those persons during the fiscal year ended March 31, 2006, we believe that
all of our officers, directors and greater than 10% beneficial owners complied
with the reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934, as amended except for Joseph Grano, who failed to timely file a
statement of changes in beneficial ownership on Form 4 with respect to warrants
issued in March 2005 and April 2005 and common stock acquired in January 2006,
Brian King, who failed to timely file an initial statement of beneficial
ownership of securities on Form 3 with respect to his appointment as Chief
Executive Officer and President of the Company in September 2004, a statement
of changes in beneficial ownership on Form 4 with respect to stock options
granted on September 15, 2004, a statement of changes in beneficial ownership
on Form 4 with respect to stock options granted on April 1, 2005, and a
statement of changes in beneficial ownership

24

---



on Form 4 with
respect to stock options granted on April 1, 2006, Ronald Wilen, who failed
to timely file a statement of changes in beneficial ownership on Form 4 with
respect to stock options granted on March 15, 2005 and a statement of changes
in beneficial ownership on Form 4 with respect to stock options granted on
January 1, 2006, Louis Bernstein, who failed to timely file a statement of
changes in beneficial ownership on Form 4 with respect to stock options granted
on March 15, 2005 and a statement of changes in beneficial ownership on Form 4
with respect to stock options granted on January 1, 2006, Andrea Pampanini, who
failed to timely file a statement of changes in beneficial ownership on Form 4
with respect to stock options granted on March 15, 2005 and a statement of
changes in beneficial ownership on Form 4 with respect to stock options granted
on January 1, 2006, and Martin Rappaport, who failed to timely file a statement
of changes in beneficial ownership on Form 4 with respect to stock options
granted on March 25, 2003, a statement of changes in beneficial ownership on
Form 4 with respect to stock options granted on March 15, 2005 and a statement
of changes in beneficial ownership on Form 4 with respect to stock options
granted on January 1, 2006.

Code of Ethics

The
Company has adopted a Code of Ethics for its Principal Executive Officer and
its Senior Financial Officers. A copy of the Code of Ethics is filed as Exhibit
14 to this Annual Report.

|         |                       
|-------- | ----------------------
|ITEM 10. | EXECUTIVE COMPENSATION

The
following Summary Compensation Table sets forth, for the years indicated, all
cash compensation paid, distributed or accrued for services, including salary
and bonus amounts, rendered in all capacities by our Chief Executive Officer
and all other executive officers who received or are entitled to receive
remuneration in excess of $100,000 during the stated periods.

Summary Compensation Table

|                                        |  |                       |  |                          |  |       |  |                                |     |                                |   |                                         |         |                |   |                            |  
|--------------------------------------- |  | --------------------- |  | ------------------------ |  | ----- |  | ------------------------------ | --- | ------------------------------ | - | --------------------------------------- | ------- | -------------- | - | -------------------------- | -
|                                        |  | Annual
  Compensation |  | Long-term
  Compensation | 
|                                        |  |                       |  |                          | 
|Name and
  Principal Position           |  | Fiscal
  year         |  | Salary                   |  | Bonus |  | Other
  Annual 
  Compensation |     | Restricted
  Stock 
  Award(s) |   | Securities
  Underlying 
  Options/SARs |         | LTIP
  Payouts |   | All
  other
  Compensation |  
|                                        |  |                       |  |                          |  |       |  |                                |     |                                |   |                                         |         |                |   |                            |  
|                                        |  |                       |  | ($)                      |  | ($)   |  | (1)                            |     |                                |   | (#)                                     |         | ($)            |   |                            |  
|                                        |  |                       |  |                          |  |       |  |                                |     |                                |   |                                         |         |                |   |                            |  
|Ronald Wilen                            |  | 2006                  |  | 207,693                  |  |      |  | 17,039                         | (2) |                                |  |                                         | 10,000  |                |  |                            | 
|Chairman                                |  | 2005                  |  | 205,547                  |  |      |  | 18,639                         | (2) |                                |  |                                         | 40,000  |                |  |                            | 
|                                        |  |                       |  |                          |  |       |  |                                |     |                                |   |                                         |         |                |   |                            |  
|Brian King(3)                           |  | 2006                  |  | 178,154                  |  |      |  | 14,424                         | (4) |                                |  |                                         | 500,000 |                |   |                            |  
|President and Chief
  Executive Officer |  | 2005                  |  | 60,000                   |  |      |  |                               |     |                                |  |                                         | 500,000 |                |  |                            | 



---

|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We pay for
  medical insurance for all employees. Included in the table is the amount of
  the premiums paid by us dependent on the coverage provided.                                                                                 
|    |                                                                                                                                                                                                                                        
|(2) | During the
  fiscal years ended March 31, 2006 and 2005, we paid for the leases on two
  automobiles used by Mr. Wilen under monthly lease payments. We also paid for
  medical insurance for Mr. Wilen at a rate of $469.49 per month.
|    |                                                                                                                                                                                                                                        
|(3) | Mr. King was
  appointed as our President and Chief Executive Officer in September 2004 and
  has an annual salary of $200,000.                                                                                                        
|    |                                                                                                                                                                                                                                        
|(4) | We also paid
  for Mr. Kings medical insurance at a rate of $1,602.64 per month.                                                                                                                                                      

25

---



Options/SAR Grants in Last Fiscal Year

|                                   |  |                                                               |  |                                                                           |  |                                 |  |            | 
|---------------------------------- |  | ------------------------------------------------------------- |  | ------------------------------------------------------------------------- |  | ------------------------------- |  | ---------- | 
|Name                               |  | Number of Securities
  Underlying Options/
  SARs Granted (#) |  | Percent of Total
  Options/SARs
  Granted
  to Employees
  in Fiscal Year |  | Exercise or
  Base Price ($/Sh) |  | Expiration | 
|                                   |  |                                                               |  |                                                                           |  |                                 |  |            | 
|(a)                                |  | (b)                                                           |  | (c)                                                                       |  | (d)                             |  | (e)        | 
|                                   |  |                                                               |  |                                                                           |  |                                 |  |            | 
|Ronald Wilen
  Chairman            |  | 10,000                                                        |  | 2%                                                                        |  | 1.00                            |  |           | 
|                                   |  |                                                               |  |                                                                           |  |                                 |  |            | 
|Brian King President and
  CEO (1) |  | 500,000                                                       |  | 91%                                                                       |  | $ 1.06                          |  |           | 

(1) Mr. King was appointed as our Chief Executive Officer in September 2004.

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

|                                    |  |                                   |  |                      |  |                                                                                                                    |  |                                                                                                           | 
|----------------------------------- |  | --------------------------------- |  | -------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------- | 
|Name                                |  | Shares Acquired
  on Exercise (#) |  | Value
  Realized ($) |  | Number of Securities
  Underlying Unexercised
  Options/SARs at Fiscal
  Year End Exercisable/
  Unexercisable (#) |  | Value of Unexercised In-
  The-Money
  Options/SARs at Fiscal
  Year End Exercisable/
  Unexercisable ($) | 
|                                    |  |                                   |  |                      |  |                                                                                                                    |  |                                                                                                           | 
|(a)                                 |  | (b)                               |  | (c)                  |  | (d)                                                                                                                |  | (e)                                                                                                       | 
|                                    |  |                                   |  |                      |  |                                                                                                                    |  |                                                                                                           | 
|Ronald Wilen
  Chairman             |  |                                  |  |                     |  | 550,000/0                                                                                                          |  | 447,500                                                                                                   | 
|                                    |  |                                   |  |                      |  |                                                                                                                    |  |                                                                                                           | 
|Brian King President 
  and CEO (1) |  |                                  |  |                     |  | 1,000,000/0                                                                                                        |  | 1,020,000                                                                                                 | 
|                                    |  |                                   |  |                      |  |                                                                                                                    |  |                                                                                                           | 

(1) Mr. King was
appointed as our President and Chief Executive Officer in September 2004.

Stock Option Plan

In
August 2001, our stockholders approved the 2001 Equity Incentive Plan which
provides for the grant of stock options to purchase up to 2,000,000 shares of
common stock to any employee, non-employee director or consultant at our
boards discretion. Under the 2001 Equity Incentive Plan, options may be
exercised for a period up to ten years from the date of grant. Options issued
to employees are exercisable upon vesting, which can range between the date of
the grant to up to five years.

An
amendment and restatement of the 2001 Equity Incentive Plan increasing the
number of shares issuable under the plan to a total of 4,000,000 was approved
by the Board of Directors on May 29, 2002 and was approved by our shareholders
at the annual meeting.

Under
the 2001 Plan, options are granted to non-employee directors upon election at
the annual meeting of stockholders at a purchase price equal to the fair market
value on the date of grant. In addition, non-employee director stock options
shall be exercisable in full twelve months after the date of grant unless
determined otherwise by the compensation committee.

There
were stock options to purchase 265,000 shares of our common stock available for
future grant as of March 31, 2006 under the 2001 Equity Incentive Plan.

26

---



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

Beneficial Ownership Information

The
following table sets forth information regarding the number of shares of our
common stock beneficially owned on June 23, 2006, by each of our directors,
each of our executive officers named in the Summary Compensation Table above,
all of our executive officers and directors as a group, and by any person or
group, as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934, known to us to own beneficially more than 5% of the outstanding
shares of our common stock. Except as otherwise set forth below, the address of
each of the persons listed below is c/o United Energy Corp., 600 Meadowlands
Parkway, #20, Secaucus, New Jersey 07094.

|                                                                                                                 |  |                                                      |     |                          |       | 
|---------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------- | --- | ------------------------ | ----- | 
|Name and
  Address     of Beneficial Owner                                                                       |  | Amount
  and
  Nature of
  Beneficial
  Ownership(1) |     | Percent
  of
  Class (1) |      
|                                                                                                                
|                                                                                                                 |  |                                                      |     |                          |       | 
|Ronald Wilen                                                                                                     |  | 4,137,000                                            | (2) |                          | 13.1% | 
|                                                                                                                 |  |                                                      |     |                          |       | 
|Brian King                                                                                                       |  | 1,270,000                                            | (3) |                          | 3.9%  | 
|                                                                                                                 |  |                                                      |     |                          |       | 
|James McKeever, CPA                                                                                              |  | 3,000                                                |     |                          | *     | 
|                                                                                                                 |  |                                                      |     |                          |       | 
|Louis Bernstein                                                                                                  |  | 30,000                                               | (4) |                          | *     | 
|                                                                                                                 |  |                                                      |     |                          |       | 
|Andrea Pampanini                                                                                                 |  | 82,500                                               | (5) |                          | *     | 
|                                                                                                                 |  |                                                      |     |                          |       | 
|Martin Rappaport                                                                                                 |  | 3,020,000                                            | (6) |                          | 9.5%  | 
|                                                                                                                 |  |                                                      |     |                          |       | 
|All current executive
  officers and directors as a group (5 persons)                                            |  | 8,542,500                                            |     |                          | 25.3% | 
|                                                                                                                 |  |                                                      |     |                          |       | 
|5% or Greater
  Stockholders:                                                                                    |  |                                                      |     |                          |       | 
|                                                                                                                 |  |                                                      |     |                          |       | 
|Joseph J. Grano, Jr.
  c/o Centurion Holdings LLC
  1185 Avenue of the Americas, Suite 2250
  New York, NY 10036 |  | 2,941,665                                            | (7) |                          | 9.1%  | 
|                                                                                                                 |  |                                                      |     |                          |       | 
|Jack Silver
  SIAR Capital LLC
  660 Madison Avenue
  New York, NY 10021                                         |  | 3,121,088                                            | (8) |                          | 9.9%  | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless otherwise indicated
  in these footnotes, each stockholder has sole voting and investment power
  with respect to the shares beneficially owned. All share amounts reflect
  beneficial ownership determined pursuant to Rule 13d-3 under the Exchange
  Act. All information with respect to beneficial ownership has been furnished
  by the respective director, executive officer or stockholder, as the case may
  be.

27

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes (i) stock options to purchase 400,000
        shares at an exercise price of $1.11 per share, (ii) stock options to
        purchase 100,000 shares at an exercise price of $1.80 per share, (iii)
        stock options to purchase 40,000 shares at an exercise price of $1.00 per share,
        and (iv) stock options to purchase 10,000 shares at an exercise price
        of $1.60 per share, which are currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(3) | Includes stock options to purchase 500,000
        shares at an exercise price of $1.00 per share, options to purchase 500,000
        shares at an exercise price of $1.06 and options to purchase 250,000 shares
        at an exercise price of $2.06 per share, which are currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(4) | Includes (i) stock options to purchase 10,000
        shares at an exercise price of $1.55 per share, (ii) stock options to
        purchase 10,000 shares at an exercise price of $1.00 per share, and (iii)
        stock options to purchase 10,000 shares at an exercise price of $1.60
        per share, which are currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(5) | Includes (i) stock options to purchase 10,000
        shares at an exercise price of $0.70 per share, (ii) stock options to
        purchase 10,000 shares at an exercise price of $1.30 per share, (iii)
        stock options to purchase 10,000 shares at an exercise price of $1.18
        per share, (iv) stock options to purchase 20,000 shares at an exercise
        price of $1.00 per share and (v) stock options to purchase 10,000 shares
        at an exercise price of $1.60 per share, which are currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(6) | Includes (i) stock options to purchase 10,000
        shares at an exercise price of $0.70 per share, (ii) stock options to
        purchase 10,000 shares at an exercise price of $1.30 per share, (iii)
        stock options to purchase 10,000 shares at an exercise price of $1.18
        per share, (iv) stock options to purchase 20,000 shares at an exercise
        price of $1.00 per share, (v) stock options to purchase 10,000 shares
        at an exercise price of $1.60 per share and (vi) warrants to purchase
        750,000 shares of common stock at an exercise price of $2.00 per share,
        which are currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(7) | Includes 1,608,332 shares of common stock,
        warrants to purchase 1,333,333 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(8) | Includes (i) 2,313,333 shares held by Sherleigh
        Associates Profit Sharing Plan (Sherleigh), a trust of which
        Mr. Silver is the trustee, (ii) 133,300 shares of common stock held by
        Romy Silver, Mr. Silvers daughter, (iii) 133,200 shares of common
        stock held by Leigh Silver, Mr. Silvers son, (iv) 24,000 shares
        of common stock issuable upon conversion of Series A Convertible Preferred
        Stock, which prohibits conversion thereof to the extent following the
        conversion, the holder or its affiliates would beneficially own more than
        9.9% of the total number of issued and outstanding common stock of the
        Company and (v) 517,255 shares of common stock issuable to Sherleigh upon
        exercise of warrants which warrants prohibit exercise thereof to the extent
        following the exercise the holder or its affiliates would beneficially
        own more than 9.9% of the total number of issued and outstanding common
        stock of the Company. The foregoing does not include 5,165,412 shares
        of common stock issuable to Sherleigh upon exercise of Series C Warrants
        which warrants prohibit exercise thereof to the extent following the exercise
        the holder or its affiliates would beneficially own more than 9.9% of
        the total number of issued and outstanding common stock of the Company.

28

---



Equity Compensation
Plan Information

The
following table provides information regarding the status of our existing
equity compensation plans at March 31, 2006.

|                                                             |  |                                                                                                       |  |                                                                                   |  |                                                                                                                                                         | 
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Plan Category                                                |  | Number of securities
  to be issued upon 
  exercise of 
  outstanding options,
  warrants and rights |  | Weighted-average 
  exercise price of
  outstanding option,
  warrants and rights |  | Number of securities
  remaining available
  for future issuance
  under equity
  compensation plans
  (excluding securities
  reflected in column (a)) | 
|                                                             |  |                                                                                                       |  |                                                                                   |  |                                                                                                                                                         | 
|                                                             |  | (a)                                                                                                   |  | (b)                                                                               |  | (c)                                                                                                                                                     | 
|                                                             |  |                                                                                                       |  |                                                                                   |  |                                                                                                                                                         | 
|Equity
  compensation plans approved by security holders     |  | 3,185,000                                                                                             |  | $ 1.11                                                                            |  | 265,000                                                                                                                                                 | 
|                                                             |  |                                                                                                       |  |                                                                                   |  |                                                                                                                                                         | 
|Equity
  compensation plans not approved by security holders |  | 5,125,000                                                                                             |  | $ 1.68                                                                            |  |                                                                                                                                                        | 
|                                                             |  |                                                                                                       |  |                                                                                   |  |                                                                                                                                                         | 
|Total                                                        |  | 8,310,000                                                                                             |  |                                                                                   |  | 265,000                                                                                                                                                 | 

|         |                                                 
|-------- | ------------------------------------------------
|ITEM 12. | CERTAIN
  RELATIONSHIPS AND RELATED TRANSACTIONS

We
  have an amount due to Robert Seaman, a shareholder and former director of the
  Company. The amount due as of December 31, 2006 and 2005 is $244,141. This amount
  is unsecured, non-interest bearing and due upon demand.

Martin
Rappaport, one of our directors, owns the building in which we lease our
principal executive offices in Secaucus, New Jersey. We pay $115,200 per year
under the lease, excluding real estate taxes. We believe that this transaction
was advantageous to us and was on terms no less favorable to us than could have
been obtained from unaffiliated third parties.

During
January and February 2005, the Chairman of the Board, Ron Wilen, loaned the
Company $133,600. The loan was unsecured, non-interest bearing and due upon
demand. The loan was repaid in April 2005.

During
August 2005, the Chairman of the Board, Ron Wilen and the President and Chief
Executive Officer, Brian King, each loaned the Company $100,000. The loans are
both unsecured, non-interest bearing and due upon demand. Each of these loans
were repaid in full in April, 2006.

|         |         
|-------- | --------
|ITEM 13. | EXHIBITS

|                 |                                                                                                                       
|---------------- | ----------------------------------------------------------------------------------------------------------------------
|Exhibit
  Number | Description of Document                                                                                               
|                 |                                                                                                                       
|3.1              | Articles of Incorporation
  of United Energy Corp. (1)                                                                
|                 |                                                                                                                       
|3.2              | Amendment to the Articles
  of Incorporation. (2)                                                                     
|                 |                                                                                                                       
|3.3              | By-Laws of United Energy
  Corp. (1)                                                                                  
|                 |                                                                                                                       
|4.1              | Articles of Incorporation:
  Articles Fourth, Fifth and Seventh. (1)                                                  
|                 |                                                                                                                       
|4.2              | By-Laws: Article I:
  Sections: Six, Seven, Eight, Nine, Ten; Article II: Section Nine: Article IV:
  Section Two. (1)

29

---



|      |                                                                                                                                                                                            
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.3   | New Article V of the
  Bylaws. (14)                                                                                                                                                        
|      |                                                                                                                                                                                            
|4.4   | Form of Stock Certificate
  of United Energy Corp.(1)                                                                                                                                      
|      |                                                                                                                                                                                            
|4.5   | Secured Convertible Term
  Note dated March 24, 2004.(4)                                                                                                                                   
|      |                                                                                                                                                                                            
|5.1   | Opinion of Katten Muchin
  Rosenman LLP(15)                                                                                                                                                
|      |                                                                                                                                                                                            
|10.1  | Distribution Agreement and
  Option Agreement with International Research and Development, dated August
  25, 1999. (1)                                                                    
|      |                                                                                                                                                                                            
|10.2  | 2001 Equity Incentive
  Plan, as amended on May 29, 2002. (5)                                                                                                                              
|      |                                                                                                                                                                                            
|10.3  | Securities Purchase
  Agreement, dated March 24, 2004, between United Energy Corp. and Laurus
  Master Fund, Ltd. (4)                                                                      
|      |                                                                                                                                                                                            
|10.4  | Secured Convertible Term
  Note dated March 24, 2004. (4)                                                                                                                                  
|      |                                                                                                                                                                                            
|10.5  | Security Agreement, dated
  March 24, 2004, between United Energy Corp. and Laurus Master Fund, Ltd. (4)                                                                                   
|      |                                                                                                                                                                                            
|10.6  | Registration Rights
  Agreement, dated March 24, 2004, between United Energy Corp. and Laurus
  Master Fund, Ltd. (4)                                                                      
|      |                                                                                                                                                                                            
|10.7  | Common Stock Purchase
  Warrant, dated March 24, 2004. (4)                                                                                                                                 
|      |                                                                                                                                                                                            
|10.8  | Amendment and Waiver,
  dated February 28, 2005, between United Energy Corp. and Laurus Master Fund,
  Ltd. (7)                                                                            
|      |                                                                                                                                                                                            
|10.9  | Securities Purchase
  Agreement, dated March 18, 2005, between United Energy Corp. and the
  Purchasers set forth on the signature page thereto. (8)                                       
|      |                                                                                                                                                                                            
|10.10 | March 2005 Series A
  Purchase Warrant. (8)                                                                                                                                                
|      |                                                                                                                                                                                            
|10.11 | March 2005 Series B
  Purchase Warrant. (8)                                                                                                                                                
|      |                                                                                                                                                                                            
|10.12 | Registration Rights
  Agreement, dated March 18, 2004, between United Energy Corp. and the persons
  identified as Purchasers pursuant to that certain Securities Purchase
  Agreement. (8)
|      |                                                                                                                                                                                            
|10.13 | 2005 Series B Secured
  Convertible Note. (8)                                                                                                                                              
|      |                                                                                                                                                                                            
|10.14 | Certificate of
  Designations, Preferences and Rights of Series A Convertible Preferred Stock.
  (8)                                                                                       
|      |                                                                                                                                                                                            
|10.15 | Consulting Services
  Agreement, dated April 27, 2005, between United Energy Corp. and Ben Barnes.
  (9)                                                                                   
|      |                                                                                                                                                                                            
|10.16 | Warrant Certificate, dated
  April 27, 2005. (9)                                                                                                                                           
|      |                                                                                                                                                                                            
|10.17 | 2002 Common Stock and
  Warrant Purchase Agreement. (10)                                                                                                                                   
|      |                                                                                                                                                                                            
|10.18 | 2002 Common Stock Purchase
  Warrant. (10)                                                                                                                                                 
|      |                                                                                                                                                                                            
|10.19 | Common Stock Purchase
  Warrant, dated February 28, 2005. (7)                                                                                                                              
|      |                                                                                                                                                                                            
|10.20 | Amendment to Articles of
  Incorporation of United Energy Corp. (11)                                                                                                                       
|      |                                                                                                                                                                                            
|10.21 | United Energy Corp. 2001
  Equity Incentive Plan, Amended and Restated Effective May 29, 2002. (12)                                                                                        

30

---



|      |                                                                                                                                                                                                
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.22 | Form of Incentive Stock
  Option Agreement. (12)                                                                                                                                               
|      |                                                                                                                                                                                                
|10.23 | Form of
  Stock Option Agreement. (12)                                                                                                                                                         
|      |                                                                                                                                                                                                
|10.24 | First Amendment to
  Securities Purchase Agreement, dated January 26, 2006, by and among United
  Energy Corp., Sherleigh Associates, Inc. Profit Sharing Plan and Joseph J.
  Grano, Jr. (13) 
|      |                                                                                                                                                                                                
|10.25 | Certificate of
  Designations, Preferences and Rights of Series A Convertible Preferred Stock
  pursuant to NRS 78.1955. (14)                                                                  
|      |                                                                                                                                                                                                
|10.26 | Second Amendment to
  Securities Purchase Agreement, dated as of March 9, 2006. (14)                                                                                                           
|      |                                                                                                                                                                                                
|10.27 | Registration Rights
  Agreement, dated as of March 9, 2006. (14)                                                                                                                               
|      |                                                                                                                                                                                                
|10.28 | Form of Series C Warrant.
  (14)                                                                                                                                                               
|      |                                                                                                                                                                                                
|10.29 | Form of Securities
  Purchase Agreement dated as of March 24, 2006. (15)                                                                                                                       
|      |                                                                                                                                                                                                
|10.30 | Form of Registration
  Rights Agreement dated as of March 24, 2006. (15)                                                                                                                       
|      |                                                                                                                                                                                                
|10.31 | Form of First Amendment to
  Securities Purchase Agreement and Registration Rights Agreement dated as of
  March 24, 2006. (15)                                                                
|      |                                                                                                                                                                                                
|10.32 | Form of Warrant between
  United Energy Corp. and Connie Kristan. *                                                                                                                            
|      |                                                                                                                                                                                                
|10.33 | Form of Warrant between
  United Energy Corp. and Joseph Grano. *                                                                                                                              
|      |                                                                                                                                                                                                
|14.1  | Code of Ethics. *                                                                                                                                                                              
|      |                                                                                                                                                                                                
|16.1  | Letter re Change in
  Certifying Accountant. (3)                                                                                                                                               
|      |                                                                                                                                                                                                
|21.1  | Subsidiaries of Small
  Business Issuer*                                                                                                                                                       
|      |                                                                                                                                                                                                
|23.1  | Consent of Imowitz Koenig
  & Co. LLP*                                                                                                                                                         
|      |                                                                                                                                                                                                
|31.1  | Chief Executive Officers
  Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                          
|      |                                                                                                                                                                                                
|31.2  | Interim Chief Financial
  Officers Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002. *                                                                                
|      |                                                                                                                                                                                                
|32.1  | Chief Executive Officers
  and Interim Chief Financial Officers Certificate, pursuant to 18 U.S.C.,
  Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
  2002. *
|      |                                                                                                                                                                                                
|*     | Filed herewith                                                                                                                                                                                 
|      |                                                                                                                                                                                                
|(1)   | Incorporated by reference
  from the exhibits filed with the Form 10 on June 20, 2000.                                                                                                         
|      |                                                                                                                                                                                                
|(2)   | Incorporated by reference
  from the exhibits filed with the Form 10-Q for the period ended September 30,
  2001.                                                                              
|      |                                                                                                                                                                                                
|(3)   | Incorporated by reference
  from the exhibits filed with the Form 8-K filed on June 3, 2002.                                                                                                   
|      |                                                                                                                                                                                                
|(4)   | Incorporated by reference
  from the exhibits filed with the Form 8-K filed on March 30, 2004.                                                                                                 
|      |                                                                                                                                                                                                
|(5)   | Incorporated by reference
  from the exhibits filed with the Schedule 14A for the year ended March 31,
  2003.                                                                                 

31

---



|     |                                                                                                                     
|---- | --------------------------------------------------------------------------------------------------------------------
|(6)  | Incorporated by reference
  from the exhibits filed with the Registration Statement on Form SB-2 (No. 333
  115484).
|     |                                                                                                                     
|(7)  | Incorporated by reference
  from the exhibits filed with the Form 8-K filed on April 12, 2005.                      
|     |                                                                                                                     
|(8)  | Incorporated by reference
  from the exhibits filed with the Form 8-K filed on March 23, 2005.                      
|     |                                                                                                                     
|(9)  | Incorporated by reference
  from the exhibits filed with the Form 8-K filed on June 3, 2005.                        
|     |                                                                                                                     
|(10) | Incorporated by reference
  from the exhibits filed with the Form S-3 filed on September 13, 2005.                  
|     |                                                                                                                     
|(11) | Incorporated by reference
  from the exhibits filed with the Definitive Schedule 14A filed on July 18,
  2005       
|     |                                                                                                                     
|(12) | Incorporated by reference
  from the exhibits filed with the Form S-8 filed on September 29, 2005.                  
|     |                                                                                                                     
|(13) | Incorporated by reference
  from the exhibits filed with the Form 8-K filed on January 27, 2006.                    
|     |                                                                                                                     
|(14) | Incorporated by reference
  from the exhibits filed with the Form 8-K filed on March 9, 2006.                       
|     |                                                                                                                     
|(15) | Incorporated by reference
  from the exhibits filed with the Form SB-2 filed on April 24, 2006.                     

|         |                                         
|-------- | ----------------------------------------
|ITEM 14. | PRINCIPAL
  ACCOUNTANT FEES AND SERVICES

Audit Fees

The
aggregate fees billed or expected to billed by Imowitz, Koenig & Co., LLP
(Imowitz) for professional services rendered for the audit of our annual
financial statements for the fiscal year ended March 31, 2006 and 2005 and for
the reviews of the interim financial statements included in our Quarterly
Reports on Form 10-QSB for the fiscal years were approximately $71,431 and
$65,800, respectively.

Audit-Related Fees

No
fees were billed by Imowitz for audit-related services rendered for accounting
consultations for the fiscal years ended March 31, 2006 and 2005.

Tax Fees

No
fees were billed by Imowitz for tax services rendered for the fiscal years
ended March 31, 2006 and 2005.

All Other Fees

Imowitz
did not render any other services, other than the services described above
under Audit Fees, Audit-Related Fees and Tax Fees for the fiscal year
ended March 31, 2006 or for the fiscal year ended March 31, 2005.

Audit Committee

Our
board of directors has established a policy requiring its pre-approval of all
audit services and permissible non-audit services provided by the independent
auditors, along with the associated fees for those services. The policy
requires the specific pre-approval of all permitted services. When considering
the pre-approval of non-audit services, our board considers whether the
provision of such non-audit service is consistent with the auditors
independence and the Securities and Exchange Commission rules regarding auditor
independence. Additionally, our board considers whether the independent
auditors are best positioned and qualified to provide the most effective and
efficient service, based on factors such as the independent auditors
familiarity with our business, personnel, systems or risk profile and whether
provision of the service by the independent auditors would enhance our ability
to manage or control risk or improve audit quality or would otherwise be
beneficial to us.

32

---



SIGNATURES

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

|                      |  |                       |                                  
|--------------------- |  | --------------------- | ---------------------------------
|                      |  | UNITED
  ENERGY CORP.
|                      |  |                       |                                  
|Date: June
  29, 2006 |  | By:                   | /s/ Brian
  King                 
|                      |  |                       |                                  
|                      |  |                       | Brian
  King                     
|                      |  |                       | Chief
  Executive Officer        
|                      |  |                       |                                  
|                      |  | By:                   | /s/ James
  McKeever             
|                      |  |                       |                                  
|                      |  |                       | James
  McKeever                 
|                      |  |                       | Interim
  Chief Financial Officer

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

|                       |  |                                                    |  |                
|---------------------- |  | -------------------------------------------------- |  | ---------------
|/s/ Brian
  King       |  | Chief
  Executive Officer and President            |  | June 29,
  2006
|                       |  | (principal
  executive officer)                    |  |                
|Brian King             |  |                                                    |  |                
|                       |  |                                                    |  |                
|/s/ James
  McKeever   |  | Interim
  Chief Financial Officer                  |  | June 29,
  2006
|                       |  | (principal
  financial and accounting officer)     |  |                
|James
  McKeever       |  |                                                    |  |                
|                       |  |                                                    |  |                
|                       |  |                                                    |  |                
|/s/ Louis
  Bernstein  |  | Director                                           |  | June 29,
  2006
|                       |  |                                                    |  |                
|Louis
  Bernstein      |  |                                                    |  |                
|                       |  |                                                    |  |                
|/s/ Andrea
  Pampanini |  | Director                                           |  | June 29,
  2006
|                       |  |                                                    |  |                
|Andrea
  Pampanini     |  |                                                    |  |                
|                       |  |                                                    |  |                
|/s/ Martin
  Rappaport |  | Director                                           |  | June 29,
  2006
|                       |  |                                                    |  |                
|Martin
  Rappaport     |  |                                                    |  |                
|                       |  |                                                    |  |                
|/s/ Ronald
  Wilen     |  | Chairman of
  the Board of Directors and Secretary |  | June 29,
  2006
|                       |  |                                                    |  |                
|Ronald Wilen           |  |                                                    |  |                

---



UNITED ENERGY CORP. AND SUBSIDIARIES

FORM 10-KSB

ITEM 7

INDEX OF FINANCIAL STATEMENTS AND SCHEDULES

The
following financial statements of United Energy Corp. and its subsidiaries
required to be included in Item 7 are listed below:

|                                                                      |  |         
|--------------------------------------------------------------------- |  | --------
|                                                                      |  | Page    
|                                                                      |  |         
|                                                                      |  |         
|Report of independent registered public
  accounting firm             |  | F-2     
|Consolidated balance sheets as of March 31,
  2006 and March 31, 2005 |  | F-3-F-4 
|For the
  periods ended March 31, 2006 and 2005:                      |  |         
|Consolidated statements of operations                                 |  | F-5     
|Consolidated statements of stockholders
  equity                     |  | F-6     
|Consolidated statements of cash flows                                 |  | F-7- F-8
|Notes to consolidated financial
statements                            |  | F-9-F-22

F-1

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of United Energy Corp.:

We have audited the accompanying consolidated balance sheets of United
Energy Corp. (a Nevada corporation) and subsidiaries as of March 31, 2006 and
March 31, 2005 and the related consolidated statements of income, cash flows
and stockholders equity for the years then ended. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material
misstatement. The Company is not required to have, nor have we been engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for purposes 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 consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated
financial position of United Energy Corp. and subsidiaries as of March 31, 2006
and March 31, 2005 and the consolidated results of their operations and their consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the
United States of America.

/s/ IMOWITZ, KOENIG & CO., LLP
New York, New York
June 9, 2006

F-2

---



UNITED ENERGY CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND 2005

|                                                                                                |  |                  |           |                  |   |           | 
|----------------------------------------------------------------------------------------------- |  | ---------------- | --------- | ---------------- | - | --------- | 
|                                                                                                |  |                  |           |                  |  
|                                                                                                |  | March 31,
  2006 |           | March 31,
  2005 |  
|                                                                                                |  |                  |           |                  |  
|                                                                                                |  |                  |           |                  |  
|ASSETS                                                                                          | 
|                                                                                                |  |                  |           |                  |   |           | 
|CURRENT ASSETS:                                                                                 |  |                  |           |                  |   |           | 
|Cash and cash equivalents                                                                       |  | $                | 5,194,748 |                  | $ | 365,610   | 
|Accounts receivable, net of allowance for doubtful
accounts of $5,018 and $22,192, respectively |  |                  | 91,557    |                  |   | 783,004   | 
|Inventory, net of allowance of $16,290 and $16,290,
respectively                                |  |                  | 106,957   |                  |   | 135,960   | 
|Note receivable, net of reserve of $10,525 and
$31,350, respectively                            |  |                  | 19,476    |                  |   | 28,650    | 
|Prepaid expenses and other current assets                                                       |  |                  | 84,657    |                  |   | 120,574   | 
|                                                                                                |  |                  |           |                  |   |           | 
|Total current assets                                                                            |  |                  | 5,497,395 |                  |   | 1,433,798 | 
|                                                                                                |  |                  |           |                  |   |           | 
|PROPERTY AND EQUIPMENT, net                                                                     |  |                  | 146,994   |                  |   | 165,587   | 
|                                                                                                |  |                  |           |                  |   |           | 
|OTHER ASSETS:                                                                                   |  |                  |           |                  |   |           | 
|Goodwill, net                                                                                   |  |                  | 15,499    |                  |   | 15,499    | 
|Patents, net of accumulated amortization of
$119,794 and $92,486,
  respectively                |  |                  | 327,572   |                  |   | 295,603   | 
|Loans receivable                                                                                |  |                  | 364       |                  |   | 137       | 
|Deposits                                                                                        |  |                  | 1,385     |                  |   | 1,385     | 
|Deferred financing costs, net of accumulated
amortization of $104,303
  at March 31, 2005       |  |                  |          |                  |   | 206,590   | 
|                                                                                                |  |                  |           |                  |   |           | 
|Total assets                                                                                    |  | $                | 5,989,209 |                  | $ | 2,118,599 | 
|                                                                                                |  |                  |           |                  |   |           | 

The accompanying notes are an integral part of these consolidated
statements

F-3

---



UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND 2005

|                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | ---------------- | - | ----------- | -
|                                                                                                                                                                                        |  | March 31,
  2006 |             | March 31,
  2005 |  
|                                                                                                                                                                                        |  |                  |             |                  |  
|                                                                                                                                                                                       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                    | 
|                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|CURRENT LIABILITIES:                                                                                                                                                                    |  |                  |             |                  |   |             |  
|Accounts payable                                                                                                                                                                        |  | $                | 279,303     |                  | $ | 258,940     |  
|Accrued expenses                                                                                                                                                                        |  |                  | 134,286     |                  |   | 96,106      |  
|Convertible term note payable                                                                                                                                                           |  |                  |            |                  |   | 583,330     |  
|Due to related parties                                                                                                                                                                  |  |                  | 444,141     |                  |   | 377,741     |  
|                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|Total current liabilities                                                                                                                                                               |  |                  | 857,730     |                  |   | 1,316,117   |  
|                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|LONG TERM LIABILITIES:                                                                                                                                                                  |  |                  |             |                  |   |             |  
|Convertible term note payable                                                                                                                                                           |  |                  |            |                  |   | 672,268     |  
|                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|Total liabilities                                                                                                                                                                       |  |                  | 857,730     |                  |   | 1,988,385   |  
|                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|STOCKHOLDERS EQUITY:                                                                                                                                                                   |  |                  |             |                  |   |             |  
|Series
        A Convertible Preferred Stock: $8,000 stated value, 420 shares authorized;
        3 and 0 shares issued and outstanding as of March 31, 2006 and March 31,
        2005 |  |                  | 24,000      |                  |   |            |  
|Common stock: $0.01 par value 100,000,000 shares
authorized;
  31,017,615 and 23,267,000 shares issued and outstanding as of March 31, 2006
  and March 31, 2005                        |  |                  | 310,176     |                  |   | 232,670     |  
|Additional paid-in capital                                                                                                                                                              |  |                  | 28,031,915  |                  |   | 12,308,845  |  
|Stock subscription receivable                                                                                                                                                           |  |                  |            |                  |   | (13,333     | )
|Accumulated deficit                                                                                                                                                                     |  |                  | (23,234,612 | )                |   | (12,397,968 | )
|                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|Total stockholders equity                                                                                                                                                              |  |                  | 5,131,479   |                  |   | 130,214     |  
|                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|Total liabilities and stockholders
equity                                                                                                                                              |  | $                | 5,989,209   |                  | $ | 2,118,599   |  
|                                                                                                                                                                                        |  |                  |             |                  |   |             |  

The accompanying notes are an integral part of these consolidated
statements

F-4

---



UNITED ENERGY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005

|                                                                  |  |      |             |      |   |            |  
|----------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ---------- | -
|                                                                  |  | 2006 |             | 2005 |  
|                                                                  |  |      |             |      |  
|                                                                 
|REVENUES, net                                                     |  | $    | 492,235     |      | $ | 1,850,954  |  
|                                                                  |  |      |             |      |   |            |  
|COST OF GOODS SOLD                                                |  |      | 301,642     |      |   | 759,064    |  
|                                                                  |  |      |             |      |   |            |  
|                                                                  |  |      |             |      |   |            |  
|Gross profit                                                      |  |      | 190,593     |      |   | 1,091,890  |  
|                                                                  |  |      |             |      |   |            |  
|                                                                  |  |      |             |      |   |            |  
|OPERATING EXPENSES:                                               |  |      |             |      |   |            |  
|Selling, general and administrative                               |  |      | 3,584,653   |      |   | 2,581,033  |  
|Non-cash equity financing expense                                 |  |      | 6,810,444   |      |   |           |  
|Impairment loss                                                   |  |      |            |      |   | 2,010      |  
|Depreciation, amortization and depletion                          |  |      | 70,061      |      |   | 84,401     |  
|                                                                  |  |      |             |      |   |            |  
|Total operating expenses                                          |  |      | 10,465,158  |      |   | 2,667,444  |  
|                                                                  |  |      |             |      |   |            |  
|                                                                  |  |      |             |      |   |            |  
|Loss from operations                                              |  |      | (10,274,565 | )    |   | (1,575,554 | )
|                                                                  |  |      |             |      |   |            |  
|                                                                  |  |      |             |      |   |            |  
|OTHER INCOME (EXPENSE), net:                                      |  |      |             |      |   |            |  
|Interest income                                                   |  |      | 15,510      |      |   | 7,796      |  
|Interest expense                                                  |  |      | (577,589    | )    |   | (287,118   | )
|                                                                  |  |      |             |      |   |            |  
|Total other (expense) income, net                                 |  |      | (562,079    | )    |   | (279,322   | )
|                                                                  |  |      |             |      |   |            |  
|                                                                  |  |      |             |      |   |            |  
|Net loss                                                          |  | $    | (10,836,644 | )    | $ | (1,854,876 | )
|                                                                  |  |      |             |      |   |            |  
|                                                                  |  |      |             |      |   |            |  
|BASIC AND DILUTED LOSS PER SHARE:                                 |  |      |             |      |   |            |  
|Total basic and diluted loss per share                            |  | $    | (0.43       | )    | $ | (0.08      | )
|                                                                  |  |      |             |      |   |            |  
|                                                                  |  |      |             |      |   |            |  
|WEIGHTED AVERAGE NUMBER OF SHARES, OUTSTANDING, basic and
diluted |  |      | 25,330,737  |      |   | 22,377,184 |  
|                                                                  |  |      |             |      |   |            |  

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

F-5

---



UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005

|                                                            |  |              |            |           |   |         |                   |         |        |         |   |                   |   |       |             |   |   |         |   |   |             |  
|----------------------------------------------------------- |  | ------------ | ---------- | --------- | - | ------- | ----------------- | ------- | ------ | ------- | - | ----------------- | - | ----- | ----------- | - | - | ------- | - | - | ----------- | -
|                                                            |  | Common Stock |            |           |   |         | AdditionalPaid-In |         |        |         |   | Stocksubscription |   |       |             |  
|                                                            |  |              |            | Preferred |   |         | Accumulated       |         |        |         |  
|                                                            |  | Shares       |            | Amount    |   | Stock   |                   | Capital |        | Deficit |   | receivable        |   | Total |            
|                                                            |  |              |            |           |   |         |                   |         |        |         |   |                   |   |       |            
|BALANCE, April 1, 2004                                      |  |              | 22,192,003 |           | $ | 221,920 |                   | $       |       |         | $ | 11,143,148        |   | $     | (10,543,092 | ) | $ |        |   | $ | 821,976     |  
|Warrants granted in lieu of accrued expenses                |  |              |           |           |   |        |                   |         |       |         |   | 75,000            |   |       |            |   |   |        |   |   | 75,000      |  
|Common stock issued in consideration for services           |  |              | 112,500    |           |   | 1,125   |                   |         |       |         |   | 84,375            |   |       |            |   |   |        |   |   | 85,500      |  
|Warrants granted in consideration for services              |  |              |           |           |   |        |                   |         |       |         |   | 48,240            |   |       |            |   |   |        |   |   | 48,240      |  
|Common stock issued in conversion of note payable           |  |              | 150,000    |           |   | 1,500   |                   |         |       |         |   | 148,500           |   |       |            |   |   |        |   |   | 150,000     |  
|Common stock issued in consideration for interest expense   |  |              | 12,497     |           |   | 125     |                   |         |       |         |   | 12,372            |   |       |            |   |   |        |   |   | 12,497      |  
|Warrants granted in consideration for convertible term
note |  |              |           |           |   |        |                   |         |       |         |   | 165,210           |   |       |            |   |   |        |   |   | 165,210     |  
|Common stock issued for private placement                   |  |              | 800,000    |           |   | 8,000   |                   |         |       |         |   | 632,000           |   |       |             |   |   | (13,333 | ) |   | 626,667     |  
|Net loss                                                    |  |              |            |           |   |         |                   |         |        |         |   |                   |   |       | (1,854,876  | ) |   |         |   |   | (1,854,876  | )
|                                                            |  |              |            |           |   |         |                   |         |        |         |   |                   |   |       |             |   |   |         |   |   |             |  
|BALANCE, March 31, 2005                                     |  |              | 23,267,000 |           |   | 232,670 |                   |         |       |         |   | 12,308,845        |   |       | (12,397,968 | ) |   | (13,333 | ) |   | 130,214     |  
|Common stock issued in convertion of note payable           |  |              | 2,000,000  |           |   | 20,000  |                   |         |        |         |   | 1,580,000         |   |       |            |   |   |        |   |   | 1,600,000   |  
|Common stock issued in consideration for interest           |  |              | 615        |           |   | 6       |                   |         |        |         |   | 486               |   |       |            |   |   |        |   |   | 492         |  
|Proceeds from stock subscription receivable                 |  |              |           |           |   |        |                   |         |        |         |   |                  |   |       |            |   |   | 13,333  |   |   | 13,333      |  
|Warrants granted in consideration for consulting services   |  |              |           |           |   |        |                   |         |        |         |   | 129,720           |   |       |            |   |   |        |   |   | 129,720     |  
|Compensation expense associated with options                |  |              |           |           |   |        |                   |         |        |         |   | 906,076           |   |       |            |   |   |        |   |   | 906,076     |  
|Exercise of stock options                                   |  |              | 300,000    |           |   | 3,000   |                   |         |        |         |   | 342,000           |   |       |            |   |   |        |   |   | 345,000     |  
|Common stock issued for private placement                   |  |              | 5,450,000  |           |   | 54,500  |                   |         |        |         |   | 6,005,500         |   |       |            |   |   |        |   |   | 6,060,000   |  
|Warrants issued for private placement                       |  |              |           |           |   |        |                   |         |        |         |   | 6,810,444         |   |       |             |   |   |         |   |   | 6,810,444   |  
|Private placement costs                                     |  |              |            |           |   |         |                   |         |        |         |   | (51,156           | ) |       |             |   |   |         |   |   | (51,156     | )
|Preferred stock issued                                      |  |              |            |           |   |         |                   |         | 24,000 |         |   |                   |   |       |             |   |   |         |   |   | 24,000      |  
|Net loss                                                    |  |              |           |           |   |        |                   |         |       |         |   |                  |   |       | (10,836,644 | ) |   |         |   |   | (10,836,644 | )
|                                                            |  |              |            |           |   |         |                   |         |        |         |   |                   |   |       |             |   |   |         |   |   |             |  
|BALANCE, March 31, 2006                                     |  |              | 31,017,615 |           | $ | 310,176 |                   | $       | 24,000 |         | $ | 28,031,915        |   | $     | (23,234,612 | ) | $ |        |   | $ | 5,131,479   |  
|                                                            |  |              |            |           |   |         |                   |         |        |         |   |                   |   |       |             |   |   |         |   |   |             |  

The accompanying notes are an integral part of this consolidated
statement.

F-6

---



UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005

|                                                                             |  |      |             |      |   |            |  
|---------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ---------- | -
|                                                                             |  | 2006 |             | 2005 |  
|                                                                             |  |      |             |      |  
|                                                                            
|CASH FLOWS FROM OPERATING
  ACTIVITIES:                                      |  |      |             |      |   |            |  
|Net loss                                                                     |  | $    | (10,836,644 | )    | $ | (1,854,876 | )
|Adjustments to reconcile
  net loss to net cash used in operating activities |  |      |             |      |   |            |  
|Depreciation, amortization and depletion                                     |  |      | 645,795     |      |   | 322,630    |  
|Impairment loss                                                              |  |      |            |      |   | 2,010      |  
|Stock granted in consideration for
services                                  |  |      |            |      |   | 85,500     |  
|Warrants granted in consideration for
services                               |  |      | 129,720     |      |   | 48,240     |  
|Warrants issued in consideration of
financing                                |  |      | 6,810,444   |      |   |            |  
|Compensation expense associated with
options                                 |  |      | 906,076     |      |   |            |  
|Stock granted in consideration for interest
expense                          |  |      | 492         |      |   | 12,497     |  
|Changes in operating
  assets and liabilities                                |  |      |             |      |   |            |  
|Decrease (increase) in accounts receivable,
net                              |  |      | 691,447     |      |   | (389,063   | )
|Decrease in inventory, net                                                   |  |      | 29,003      |      |   | 40,527     |  
|Decrease in note receivable, net                                             |  |      | 9,174       |      |   | 35,000     |  
|Decrease (increase) in prepaid expenses and other
current assets             |  |      | 35,917      |      |   | (40,279    | )
|Decrease in deposits                                                         |  |      |            |      |   | 75,000     |  
|Increase (decrease) in accounts payable and accrued
expenses                 |  |      | 58,544      |      |   | (225,167   | )
|                                                                             |  |      |             |      |   |            |  
|Net cash used in operating activities                                        |  |      | (1,520,032  | )    |   | (1,887,981 | )
|                                                                             |  |      |             |      |   |            |  
|CASH FLOWS FROM INVESTING
  ACTIVITIES:                                      |  |      |             |      |   |            |  
|Employee loans                                                               |  |      | (227        | )    |   | 1,401      |  
|Proceeds from sale of fixed asset                                            |  |      |            |      |   | 15,000     |  
|Payments for acquisition of property and
equipment                           |  |      | (48,903     | )    |   | (29,469    | )
|Payments for patent                                                          |  |      | (59,277     | )    |   | (11,633    | )
|                                                                             |  |      |             |      |   |            |  
|                                                                            
|Net cash used in investing activities                                        |  |      | (108,407    | )    |   | (24,701    | )
|                                                                             |  |      |             |      |   |            |  
|CASH FLOWS FROM FINANCING
  ACTIVITIES:                                      |  |      |             |      |   |            |  
|Proceeds from related party                                                  |  |      | 200,000     |      |   | 133,600    |  
|Payments of related party payable                                            |  |      | (133,600    | )    |   |           |  
|Proceeds from issuance of preferred stock                                    |  |      | 24,000      |      |   |           |  
|Proceeds from the exercise of stock
options                                  |  |      | 345,000     |      |   |           |  
|Proceeds from issuance of common stock                                       |  |      | 6,060,000   |      |   | 626,667    |  
|Payments of private placement costs                                          |  |      | (51,156     | )    |   |           |  
|Proceeds from stock subscription
receivable                                  |  |      | 13,333      |      |   |           |  
|                                                                             |  |      |             |      |   |            |  
|Net cash provided by financing activities                                    |  |      | 6,457,577   |      |   | 760,267    |  
|                                                                             |  |      |             |      |   |            |  
|Net increase (decrease) in cash and cash
equivalents                         |  |      | 4,829,138   |      |   | (1,152,415 | )
|CASH AND CASH EQUIVALENTS,
  beginning of period                             |  |      | 365,610     |      |   | 1,518,025  |  
|                                                                             |  |      |             |      |   |            |  
|CASH AND CASH EQUIVALENTS,
  end of period                                   |  | $    | 5,194,748   |      | $ | 365,610    |  
|                                                                             |  |      |             |      |   |            |  

The accompanying notes are an intergral part of these consolidated
statements

F-7

---



UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005

|                                                                      |  |      |           |      |   |         | 
|--------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ------- | 
|                                                                      |  | 2006 |           | 2005 |  
|                                                                      |  |      |           |      |  
|                                                                     
|SUPPLEMENTAL DISCLOSURES
  OF CASH FLOW INFORMATION:                  |  |      |           |      |   |         | 
|                                                                     
|Cash paid during the period                                           |  |      |           |      |   |         | 
|Interest                                                              |  | $    | 2,451     |      | $ | 92,885  | 
|Income taxes                                                          |  | $    | 1,434     |      | $ | 1,520   | 
|                                                                      |  |      |           |      |   |         | 
|Discount on convertible term loan                                     |  | $    |          |      | $ | 165,210 | 
|Conversion of accrued expenses due to a former
employee into warrants |  | $    |          |      | $ | 75,000  | 
|Conversion of note payable into common
stock                          |  | $    | 1,600,000 |      | $ | 150,000 | 

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

F-8

---



UNITED ENERGY CORP. AND SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005

|   |                                          
|-- | -----------------------------------------
|1. | DESCRIPTION OF BUSINESS AND BUSINESS PLAN

United Energy Corp. (United Energy or the
Company) considers its primary business focus to be the developement, manufacture and sale of environmentally friendly specialty chemical products
with applications in several industries and markets.  Our current line of products includes:

KH-30 paraffin dispersant for the oil industry and related products;

Uniproof specialty-coated proofing paper for the printing industry; and

following additional testing, Slick Barrier underwater protective coatings for use in marine     applications.

Through our wholly owned subsidiary, Green Globe Industries, Inc.,
we provide the U.S. military with a variety of solvents, paint strippers and cleaners under our trade name Qualchem. Green Globe is a qualified
supplier for the U.S. military and has sales contracts currently in place with no minimum purchase requirements, which are renewable at the option of the
U.S. Military.

We
  have developed and patented a system referred to as our S2 system,
  to work with our environmentally friendly paraffin dispersants products. This
  patented technology produces high volumes of steam and heat at variable pressures
  and temperatures to dissolve most deposits of paraffin and asphaltene within
  oil wells, pipelines or storage tanks.

F-9

---



The
Company currently anticipates that its available cash in hand and cash
resources from expected revenues will be sufficient to meet its anticipated
working capital and capital expenditure requirements for at least the next
twelve months.

Our
continued existence is dependent upon several factors, including increased
sales volumes, collection of existing receivables and the ability to achieve
profitability from the sale of our product lines. In order to increase our cash
flow, we are continuing our efforts to stimulate sales and cut back expenses
not directly supporting our sales and marketing efforts.

|   |                                           
|-- | ------------------------------------------
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The
consolidated financial statements include the accounts of United Energy Corp.
and its wholly-owned subsidiary Green Globe Industries, Inc. and currently
inactive subsidiary, Nor-Graphic Industries. All intercompany transactions and
accounts have been eliminated in consolidation.

Use of Estimates

The
preparation of consolidated financial statements in accordance with accounting
principals generally accepted in the United States of America requires United
Energy to make 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, United Energy evaluates its estimates, including those
related to option and warrant values, bad debts, inventories, intangible
assets, contingencies and litigation. United Energy bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Revenue Recognition

The
Companys primary source of revenue is from the sales of its products. The
Company recognizes revenue upon shipment and transfer of title.

Cash and Cash Equivalents

Cash
and cash equivalents consist of cash and highly liquid investments with
original maturities of three months or less.

F-10

---



Inventories

Inventories
consist predominately of finished goods. Inventories are valued at the lower of
cost (first-in, first-out method) or market.

Allowance for Doubtful Accounts

The
Company monitors its accounts and note receivable balances on a monthly basis
to ensure they are collectible. On a quarterly basis, the Company uses its
historical experience to determine its accounts receivable reserve. The
Companys allowance for doubtful accounts is an estimate based on specifically
identified accounts as well as general reserves. The Company evaluates specific
accounts where it has information that the customer may have an inability to
meet its financial obligations. In these cases, management uses its judgment,
based upon the best available facts and circumstances, and records a specific
reserve for that customer against amounts due to reduce the receivable to the
amount that is expected to be collected. These specific reserves are
reevaluated and adjusted as additional information is received that impacts the
amount reserved. The Company also establishes a general reserve based upon a
range of percentages applied to aging categories. These percentages are based
on historical collection and write-off experience. If circumstances change, the
Companys estimate of the recoverability of amounts due the Company could be
reduced or increased by a material amount. Such a change in estimated
recoverability would be accounted for in the period in which the facts that
give rise to the change become known.

Property and Equipment

Property
and equipment are stated at cost. Depreciation has been calculated over the estimated
useful lives of the assets ranging from 3 to 15 years. Leasehold improvements
are amortized over the lives of the respective leases (15 years), which are
shorter than the useful life. The cost of maintenance and repairs is expensed
as incurred. Depreciation and amortization expense for the years ended March
31, 2006 and 2005 was $67,496 and $92,196, respectively.

Property and
equipment consists of the following at March 31, 2006 and 2005:

| |                                                   |  |      |          |      |   |          |  
| | ------------------------------------------------- |  | ---- | -------- | ---- | - | -------- | -
| |                                                   |  | 2006 |          | 2005 |  
| |                                                   |  |      |          |      |  
| | Furniture
  and fixtures                          |  | $    | 78,309   |      | $ | 74,379   |  
| | Machinery
  and equipment                         |  |      | 333,423  |      |   | 288,450  |  
| | Vehicles                                          |  |      | 82,139   |      |   | 82,139   |  
| | Leasehold
  improvements                          |  |      | 26,203   |      |   | 26,203   |  
| |                                                   |  |      |          |      |   |          |  
| |                                                   |  |      | 520,074  |      |   | 471,171  |  
| |                                                   |  |      |          |      |   |          |  
| | Less-
  Accumulated depreciation and amortization |  |      | (373,080 | )    |   | (305,584 | )
| |                                                   |  |      |          |      |   |          |  
| | Property and
  equipment, net                     |  | $    | 146,994  |      | $ | 165,587  |  
| |                                                   |  |      |          |      |   |          |  

Goodwill

The
Company capitalized goodwill related to the acquisition of Green Globe in
September of 1998. Goodwill represents cost in excess of fair value on the net
assets acquired. Goodwill was amortized over a 15 year period using a straight
line amortization method until the adoption of SFAS No. 142 Goodwill and Other
Intangible Assets, on April 1, 2002. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives (but with no
maximum life). Effective April 1, 2002, the Company adopted the provisions of
SFAS No. 142, which had no material effect on its results of operations and
financial position.

As
required by SFAS 142, the Company completed its transitional impairment testing
of intangible assets. Under SFAS 142, the goodwill impairment exists if the net
book value of a reporting unit exceeds its estimated fair value. The impairment
testing is performed in two steps: (i) the Company determines impairment by
comparing fair value of a reporting unit with its carrying value, and (ii) if
there is an impairment the Company measures the amount of impairment loss by
comparing the implied fair value of goodwill with the carrying amount of that
goodwill.

As
of March 31, 2006 the Company completed its annual impairment testing of
goodwill. The Company estimated the fair value of its goodwill by using
discounted cash flow analysis. As a result of the impairment tests, the Company
did not record a goodwill impairment charge related to the Green Globe segment,
during the year ended March 31, 2006. During the year ended March 31, 2005, the
Company recorded a goodwill impairment charge of $2,010.

F-11

---



Goodwill
consists of the following at March 31, 2006 and 2005:

| |                                  |  |      |        |      |   |        | 
| | -------------------------------- |  | ---- | ------ | ---- | - | ------ | 
| |                                  |  | 2006 |        | 2005 |  
| |                                  |  |      |        |      |  
| | Goodwill                         |  | $    | 86,523 |      | $ | 86,523 | 
| | Less:
  Impairment loss          |  |      | 53,320 |      |   | 53,320 | 
| | Less:
  Accumulated amortization |  |      | 17,704 |      |   | 17,704 | 
| |                                  |  |      |        |      |   |        | 
|
| | Goodwill,
  net                  |  | $    | 15,499 |      | $ | 15,499 | 
| |                                  |  |      |        |      |   |        | 

Research & Development

Our
products are the result of research and development expenditures. The Companys
policy is to expense any research and development costs as they are incurred.
The Company incurred research and development costs of $193,032 and $212,613
for the fiscal years ended March 31, 2006 and 2005, respectively.

Patents

The
Company capitalizes legal costs incurred to obtain patents. Amortization begins
when the patent is approved using the straight-line basis over the estimated
useful life of 15 years.

Sale of Oil Well Leases

In
April 2004, the Company sold its oil well leases located in Laramie County,
Wyoming for $15,000 and a 4.5% royalty on all future oil sales from these
wells. The company recognized no gain or loss on the sale of the oil well
leases. In May 2004, the state of Wyoming returned a $75,000 deposit made by
the Company at the time the oil leases were purchased. There were no royalty
payments received during the years ended March 31, 2006 and 2005.

Accounting for Long-Lived Assets

The
Companys long-lived assets include property and equipment and patents.

In
accordance with SFAS 144, long-lived assets other than goodwill are reviewed on
a periodic basis for impairment whenever events or changes in circumstances
indicate that the carrying amounts of the assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.

Income Taxes

The
Company accounts for income taxes using the asset and liability method. Under
this method, deferred tax assets and liabilities are determined based on the
temporary differences between the financial statement and the income tax bases
of assets and liabilities and for net operating loss carry forwards existing at
the balance sheet date using enacted tax rates in effect for the years in which
the taxes are expected to be paid or recovered. A valuation allowance is
established when it is considered more likely than not that such assets will
not be realizable. The effect on deferred tax assets or liabilities of a change
in tax rates is recognized in the period in which the tax change occurs.

Stock-Based Compensation

Effective
January 1, 2006, the Company adopted the fair value recognition provision of
Statement of Financial Standards (SFAS) No. 123 (revised 2004), Shared-based Payments, (SFAS 123(R))
using the modified prospective transition method and therefore has not restated
results for prior periods. Under this transition method, stock based
compensation expense for the fourth quarter of fiscal year 2006 includes
compensation expense for all stock-based compensation awards granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provision of SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS 123). Stock-based compensation expense for all stock-based compensation
awards granted after January 1, 2006 is based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R).

F-12

---



Prior
to the adoption of SFAS No. 123(R), the Company measured compensation expense
for its employee stock-based compensation plans using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
(APB No. 25). The Company applied the disclosure provisions of SFAS No. 123
as amended by SFAS No. 148, Accounting for
Stock-based Compensation-Transition and Disclosure, as if the
fair-value-based method had been applied in measuring compensation expense.

At
  March 31, 2006, the Company has stock based compensation plans, which are described
  more fully in Note 9. As permitted by SFAS No.123, Accounting for Stock Based
  Compensation, the Company accounted for stock-based compensation arrangements
  with employees in accordance with provisions of Account Principles Board (APB)
  Opinion No. 25, Accounting for Stock Issued to Employees through December 31,
  2005. On January 1, 2006, the Company adopted SFAS No. 123(R) which requires
  public entities to record noncash compensation expense related to payment for
  employee services by an equity award, such as stock options, Compensation expense
  for stock options issued to employees is based on the difference on the date
  of grant, between the fair value of the Companys stock and the exercise
  price of the option. As a result of adopting SFAS 123(R), net loss for the year
  ended March 31, 2006 was higher by $428,798 than if the Company had not adopted
  SFAS 123(R). The impact on both basic and diluted loss per share for the year
  ended March 31, 2006, was $0.02 per share. The Company accounted for equity
  instruments issued to non-employees in accordance with the provisions of SFAS
  No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting
  for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
  or in Conjunction with Selling, Goods or Services until the adoption of SFAS
  123(R). All transactions in which goods or services are the consideration
  received for the issuance of equity instruments are accounted for based on the
  fair value of the consideration received or the fair value of the equity instrument
  issued, whichever is more reliably measurable. Stock based compensation for
  non-employees was $219,998 and $208,740 for the years ended March 31, 2006 and
  2005, respectively.

The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 up
through the adoption of SFAS No. 123(R) to all stock-based compensation:

|                                                                                                                                                 |  |                                         |             |                                                       |               |                                         |               |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------- | ----------- | ----------------------------------------------------- | ------------- | --------------------------------------- | ------------- | - | ---------- | -
|                                                                                                                                                 |  | For the
  Year
  ended March 31,
  2006 |             | For the
  Nine
  Months ended 
  December 31, 
  2005 |               | For the
  Year
  ended March 31,
  2005 |              
|                                                                                                                                                 |  |                                         |             |                                                       | (Restated)(1) |                                         | (Restated)(2) |  
|                                                                                                                                                 |  |                                         |             |                                                       |               |                                         |               |  
|Net loss as reported                                                                                                                             |  | $                                       | (10,836,644 | )                                                     | $             | (2,898,419                              | )             | $ | (1,854,876 | )
|Add:                                                                                                                                             |  |                                         |             |                                                       |               |                                         |               |   |            |  
|Stock based compensation expenses included
  in reported net loss prior to adoption of SFAS No. 123(R)                                           |  |                                         | 516,720     |                                                       |               | 387,000                                 |               |   | 208,740    |  
|Deduct:                                                                                                                                          |  |                                         |             |                                                       |               |                                         |               |   |            |  
|Total stock based employee compensation
  expense determined under fair value based method for all awards prior to
  adoption of SFAS No. 123(R) |  |                                         | (612,071    | )                                                     |               | (612,071                                | )             |   | (1,059,709 | )
|                                                                                                                                                 |  |                                         |             |                                                       |               |                                         |               |   |            |  
|Pro forma                                                                                                                                        |  | $                                       | (10,931,995 | )                                                     | $             | (3,123,490                              | )             | $ | (2,705,845 | )
|                                                                                                                                                 |  |                                         |             |                                                       |               |                                         |               |   |            |  
|Basic and diluted loss per common share                                                                                                          |  |                                         |             |                                                       |               |                                         |               |   |            |  
|As reported                                                                                                                                      |  | $                                       | (0.43       | )                                                     | $             | (0.12                                   | )             | $ | (0.08      | )
|                                                                                                                                                 |  |                                         |             |                                                       |               |                                         |               |   |            |  
|Pro forma                                                                                                                                        |  | $                                       | (0.43       | )                                                     | $             | (0.13                                   | )             | $ | (0.12      | )
|                                                                                                                                                 |  |                                         |             |                                                       |               |                                         |               |   |            |  

During
  the year ended March 31, 2006, the Company realized that certain option transactions
  including issuances and cancellations were not disclosed or reflected in the
  consolidated financial statements for the nine months ended December 31, 2005 or the
  year ended March 31, 2006. The Company has restated the prior period pro
  forma loss for the nine months ended December 31, 2005 and for the year ended
  March 31, 2005, as follows:

| |     |                                                                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Pro forma
  loss increased to $3,123,490 from $2,855,110 and the pro forma basic and diluted loss
  per share increased to $0.13 from $0.12 for the Nine Months ended December
  31, 2005.
| | (2) | Pro forma
  loss increased to $2,705,845 from $2,336,624 and the pro forma basic and diluted loss
  per share increased to $0.12 from $0.10 for the Year ended March 31, 2005.            

F-13

---



Recently Issued Accounting Standards

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123(R). This revised accounting standard eliminates the ability to account
for stock based compensation transactions using the intrinsic value method in
accordance with APB Opinion No. 25 and requires instead that such transactions
be accounted for using a fair-value-based method. SFAS No. 123(R) requires
public entities to record noncash compensation expense related to payment for
employee services by an equity award, such as stock options, in their financial
statements over the requisite service period. SFAS No. 123(R) is effective as
of the beginning of the first interim or annual period that begins after
December 15, 2005 for small business issuers. On January 1, 2006, the Company
adopted SFAS No. 123(R). The Company has historically through the nine months
ended December 31, 2005, provided pro forma disclosures pursuant to SFAS No.
123 and SFAS No. 148 as if the fair value method of accounting for stock
options had been applied, assuming use of the Black-Scholes option-pricing
model. With the adoption of SFAS No. 123(R), the Company has recorded $428,798,
as stock based compensation cost, which has had a negative impact on the our
consolidated statement of operations.

Per Share Data

SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS). The standard requires the presentation of basic EPS and diluted
EPS. Basic EPS is calculated by dividing income/loss available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing
income/loss available to common shareholders by the weighted average number of
common shares outstanding adjusted to reflect potentially dilutive securities.
Diluted loss per share for the years ended March 31, 2006 and 2005 does not
include 15,046,000, and 7,670,000 stock options and warrants since the
inclusion of the outstanding stock options and warrants would be antidilutive.

Concentrations of Risk

Cash and Cash Equivalents

The
Company maintains cash balances at financial institutions insured up to
$100,000 by the Federal Deposit Insurance Corporation. Balances exceeded these
insured amounts during the year.

Accounts and Notes
Receivable

The
Company had two customers which accounted for 69% and three customers which
accounted for 87% of the total
accounts receivable at March 31, 2006 and 2005 respectively. Credit
losses, if any, have been provided for in the consolidated financial statements
and are based on managements expectations.

At
March 31, 2003, the Company converted an accounts receivable balance of
$179,034 to a one year note receivable. The note accrues interest at the rate
of 4.5%, was to be paid in 12 monthly installments and provides for a security
interest in the inventory held by this customer. During the year ended March
31, 2004, the customer returned goods in the amount of $30,226, which decreased
the note. Principal payments in the amount of $53,808 have also been received.
In addition, the Company decreased the reserve by $13,850 to $17,500. No
interest has been paid to date. On March 28, 2004, the customer agreed to a
balance of $95,000, which was to be paid $5,000 per month. During the year
ended March 31, 2006, the customer made six monthly payments. The balance at
March 31, 2006 is $30,000, prior to the reserve of $10,525.

Significant Customers

The
Companys revenues from major customers, as a percentage of revenues, for the
years ended March 31, 2006 and 2005, are as follows:

|           |  |      |  |      |   |  |  |  |    |   | 
|---------- |  | ---- |  | ---- | - |  |  |  | -- | - | 
|           |  | 2006 |  | 2005 |  
|           |  |      |  |      |  
|          
|Customer A |  |      |  | 14   | % |  |  |  | 3  | % | 
|Customer B |  |      |  | 22   | % |  |  |  | 30 | % | 
|Customer C |  |      |  | 0    | % |  |  |  | 39 | % | 
|Customer D |  |      |  | 10   | % |  |  |  | 2  | % | 

F-14

---



Vendors

The
Company purchased supplies from major venders for the years ended March 31,
2006 and 2005, as follows:

|         |  |      |  |      |   |  |  |  |    |   | 
|-------- |  | ---- |  | ---- | - |  |  |  | -- | - | 
|         |  | 2006 |  | 2005 |  
|         |  |      |  |      |  
|        
|Vendor A |  |      |  | 13   | % |  |  |  | 21 | % | 
|Vendor B |  |      |  | 20   | % |  |  |  | 12 | % | 
|Vendor C |  |      |  | 13   | % |  |  |  | 6  | % | 
|Vendor D |  |      |  | 1    | % |  |  |  | 11 | % | 

Fair Value of Financial Instruments

The
carrying amounts of cash and cash equivalents, accounts receivable, note and loan
receivable, inventory, accounts payable and accrued expenses approximate their
fair values due to the short-term maturity of these instruments.

|   |          
|-- | ---------
|3. | INVENTORY

Inventory
consists of the following as of March 31, 2006 and 2005:

| |                     |  |      |         |      |   |         | 
| | ------------------- |  | ---- | ------- | ---- | - | ------- | 
| |                     |  | 2006 |         | 2005 |  
| |                     |  |      |         |      |  
|
| | Paper               |  | $    |        |      | $ |        | 
| | Blended
  chemicals |  |      | 68,255  |      |   | 80,380  | 
| | Raw
  materials     |  |      | 38,702  |      |   | 55,580  | 
| |                     |  |      |         |      |   |         | 
| | Total
  inventory   |  | $    | 106,957 |      | $ | 135,960 | 
| |                     |  |      |         |      |   |         | 

|   |                           
|-- | --------------------------
|4. | RELATED PARTY TRANSACTIONS

The
  Company had an amount due to Robert Seaman, a shareholder and former director
  of the Company. The amount due as of March 31, 2005 and 2004 is $244,141. This
  amount is unsecured, non-interest bearing and due upon demand.

Martin
Rappaport, a major shareholder and director of the Company, owns the property
from which United Energy leases the 9,600 square foot facility it occupies in
Secaucus, New Jersey. The Company pays $115,200 per year under the lease,
excluding real estate taxes.

During
January and February 2005, the Companys Chairman of the Board, Ron Wilen,
loaned the Company $133,600. The loan was unsecured, non interest bearing and
due upon demand. This loan was repaid in April 2005.

During
August 2005, the Chairman of the Board, Ron Wilen and the Chief Executive
Officer, Brian King, each loaned the Company $100,000. The loans were both
unsecured, non-interest bearing and due upon demand. These loans were repaid in
April 2006.

|   |                 
|-- | ----------------
|5. | CONVERTIBLE DEBT

On
March 24, 2004, the Company issued a secured convertible term note (the Term
Note) in the amount of $1,750,000, which has a term of three years and accrues
interest at the greater of the prime rate of interest, which was 5.75% per year
at March 31, 2005 (as published in the Wall Street Journal), or 4% per year.
Interest is payable monthly in arrears commencing on May 1, 2004, and on the
first day of each consecutive calendar month after that date. Monthly
amortization payments commenced on October 1, 2004, at the rate of $58,333.

The
holder of the Term Note has the option to convert all or a portion of the note
(including principal, interest and penalties) into shares of common stock at
any time, subject to specified limitations, at a fixed conversion price of
$1.00 per share. The conversion price is subject to adjustment for stock
splits, stock dividends and similar events. On March 18, 2005, in connection
with the financing discussed in Note 7, the fixed conversion price was adjusted
to $0.80. The Companys obligations under the Term Note are secured by a first
priority security interest in the Companys assets. As of March 31, 2005, the
holder of the Term Note converted $150,000 in principal into 150,000 shares of
common stock. In addition, the holder of the Term Note received $12,497 of
interest paid in shares of the Companys common

F-15

---



stock. During
the fiscal year ended March 31, 2006, the holder of the Term Note converted
$1,600,000 in principal and $492 of interest into 2,000,615 shares of common
stock and the note is no longer outstanding.

During
December 2004, the Company defaulted on the Term Note by failing to pay
principal of $24,999. The Company also failed to pay principal of $116,666 for
January and February 2005. On February 28, 2005, the Company entered into an
Amendment and Waiver agreement (the Amendment) with the holder of the Term
Note. The amendment included a waiver by the holder of the Term Note of all
Events of Default. In consideration for the waiver the Company, (i) paid the
holder unpaid interest, (ii) prepaid $37,777 of additional interest and (iii)
issued a seven year warrant to purchase 300,000 shares of Common Stock with an
exercise price ranging from $1.25 to $1.75. In addition, the holder agreed to
defer the principal payments scheduled to be paid from December 2004 through
May 2005 until the date of Maturity.

|   |                              
|-- | -----------------------------
|6. | COMMITMENTS AND CONTINGENCIES

Litigation

Sales Commission Claim

In
July 2002, an action was commenced against us in the Court of Common Pleas of
South Carolina, Pickens County, brought by Quantum International Technology,
LLC and Richard J. Barrett. Plaintiffs allege that they were retained as a
sales representative of ours and in that capacity made sales of our products to
the United States government and to commercial entities. Plaintiffs further
allege that we failed to pay to plaintiffs agreed commissions at the rate of
20% of gross sales of our products made by plaintiffs. The complaint seeks an
accounting, compensatory damages in the amount of all unpaid commissions plus
interest thereon, punitive damages in an amount treble the compensatory
damages, plus legal fees and costs. Plaintiffs maintain that they are entitled
to receive an aggregate of approximately $350,000 in compensatory and punitive
damages, interest and costs. In June 2003, the action was transferred from the
court in Pickens County to a Master in Equity sitting in Greenville, South
Carolina and was removed from the trial docket. The action, if tried, will be
tried without a jury. No trial date has yet been scheduled. We believe we have
meritorious defenses to the claims asserted in the action and intend to
vigorously defend the case. The outcome of this matter cannot be determined at
this time.

Lease Commitments

The
Company leases office facilities, equipment and autos under operating leases
expiring on various dates through 2010. Certain leases contain renewal options.
The following is a schedule of future minimum lease payments under operating
leases having remaining terms in excess of one year as of March 31, 2006

| |                                |  |                    |         | 
| | ------------------------------ |  | ------------------ | ------- | 
| | Year                           |  | Operating
  Leases |        
| |                                |  |                    |        
| | 2007                           |  | $                  | 129,592 | 
| | 2008                           |  |                    | 129,105 | 
| | 2009                           |  |                    | 132,610 | 
| | 2010                           |  |                    | 152,037 | 
| |                                |  |                    |        
| | Total
  minimum lease payments |  | $                  | 543,344 | 
| |                                |  |                    |        

Operating
lease expense was $136,606 and $129,806 for the years ended March 31, 2006 and
2005, respectively.

|   |                     
|-- | --------------------
|7. | STOCKHOLDERS EQUITY

Laurus
Master Fund, Ltd.

On
February 28, 2005, the Company entered into an amended agreement on the
convertible term note (see note 5). The Company issued warrants to purchase up
to 300,000 shares of the Companys common stock at an exercise price per share
ranging from $1.25 to $1.75. The warrants are fully exercisable for seven years
from the date of issuance. The estimated fair value of the warrants of $165,210
was recorded as a discount to the convertible term note and was amortized to
interest expense over the life of the note. The unamortized amount as of March
31, 2005 was $158,423.

F-16

---



Consulting Agreement with C.C.R.I. Corporation

On
May 17, 2004, The Company entered into a consulting agreement with C.C.R.I.
Corporation for certain investor relations and development services. As
consideration for these services, the Company issued 75,000 shares of the
Companys common stock and warrants to purchase 100,000 shares of the Companys
common stock with an exercise price of $2.00 per share.

Series A and Series B Units

On
March 18, 2005, the Company entered into a securities purchase agreement (the
Agreement) with two private investors to issue shares of our common stock and
warrants. The Agreement provides for two types of units, designated as Series A
and Series B.

The
Series A Units each consist of 100,000 shares of the Companys common stock and
a Series A Warrant to purchase 50,000 shares of the Companys common stock at
$1.00 per share, subject to adjustment. The Series A Warrants expire five (5)
years from the date they are issued. The purchase price for each Series A Unit
is $80,000. The Agreement provides for the sale of up to twenty (20) Series A
Units.

The Series B Units each consist of ten (10) shares of a new class of preferred
stock that are convertible into 80,000 shares of the Companys common stock in
the aggregate, subject to adjustment, and a Series B Warrant to purchase 40,000
shares of the Companys common stock at $1.50 per share. The Series B Warrants
expire five (5) years from the date they are issued. The purchase price for
each Series B Unit is $80,000. The securities purchase agreement provides for
the sale of up to forty-two (42) Series B Units.

On March 18, 2005, the contract date, the Company issued 8 Series A Units or
800,000 shares of the Companys common stock and Series A Warrants to purchase
400,000 shares of the Companys common stock for a purchase price of $640,000.
In connection with issuance of such Series A Units, 37,500 shares of common
stock were issued to the investors counsel as reimbursement for their
expenses.

On
August 25, 2005, the Company entered into an Amendment and Waiver Agreement
with the investors providing, among other things, that the investors would
waive certain defaults under the securities purchase agreement in exchange for
a reduction in the price of the shares issuable upon exercise of the Series B
Warrants from $1.50 to $1.00 per share.

During
the year ended March 31, 2006, the Company issued the remaining 12 Series A
Units or 1,200,000 shares of its common stock for a purchase price of $960,000
as per the securities agreement dated March 18, 2005.

On
January 26, 2006, the Company entered into the first amendment to the
securities purchase agreement dated March 18, 2005, which extended the term of
the agreement from March 18, 2006 to the earlier of March 18, 2008 or thirty
days notice of termination from the holder of a majority of the shares issued
under the agreement. In addition, the Company agreed to certain restrictions.

On
March 9, 2006, the Company entered into the Second Amendment to Securities
Purchase Agreement with the investors. Pursuant to the Second Amendment, one of
the investors agreed to purchase three-tenths of one Series B unit, consisting
of 3 shares of preferred stock and warrants to purchase 12,000 shares of the
Companys common stock (the Series B Warrant), for an aggregate purchase
price of $24,000. The preferred stock pays a dividend at a rate of 6% of the
stated value per annum. In addition, the investors have agreed to waive all existing
defaults under the purchase agreement, including the Companys failure to
timely file a Certificate of Designations for the preferred stock and to timely
issue common stock certificates and warrants. The Company and the investors
also agreed to terminate all further obligations of the investors to purchase
and the Companys obligation to sell any remaining Series B units. The
remaining Series B units would have consisted of 417 shares of preferred stock
convertible into an aggregate of 3,336,000 shares of common stock at a
conversion price of $1.00 and of warrants to purchase 1,668,000 shares of
common stock at an exercise price of $1.00 per share. Instead thereof, the
Company agreed to issue to one of the investors warrants to purchase 5,004,000
shares of the Companys common stock at an exercise price of $1.00 (the Series
C Warrant). These warrants have been valued at $6,810,444 and recorded as
Non-cash equity financing costs in the Consolidated Statements of Operations.
The Series C Warrant, as well as the preferred stock and the Series B Warrant,
are subject to anti-dilution provisions in the event that the

F-17

---



Company issue shares of
common stock at a price less than the conversion price or the exercise price
and contain provisions limiting the holders right to convert or exercise if
doing so would cause such holder and its affiliates to beneficially own more than
9.99% of the outstanding common stock.

For
so long as the investors hold 1,500,000 shares of common stock equivalents
(meaning shares of common stock and other securities convertible to or
exercisable for common stock), the majority holder shall have the right to
designate a majority of the members of the Companys Board of Directors in the
event of any of the following, referred to as triggering events:

| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) if the Company fails
  to have gross revenue of at least $5,000,000 for the six months ending
  September 30, 2006; or                                                             
| |                                                                                                                                                                                        
| | (ii) if the Company
  breaches any of our representations, warranties, agreements, covenants, terms
  or obligations under the securities purchase agreement or ancillary
  agreements.

Consulting Agreement

On
April 27, 2005, the Company entered into a consulting agreement for the
provision of certain advisory and business development services. As
consideration for these services, the Company issued warrants to purchase
1,000,000 shares of the Companys common stock. The first 500,000 shares have
an exercise price of $1.34 and the second 500,000 shares have an exercise price
of $2.00 per share. The warrants have been valued at $129,720 and have been
recorded as a selling, general and administrative expense in the consolidated
statement of operations.

March 2006 Private Placement

On
March 24, 2006, the Company entered into Securities Purchase Agreement and a
First Amendment to Securities Purchase Agreement and Registration Rights
Agreement pursuant to which the Company raised $5,100,000 in gross cash
proceeds from the sale to the purchasers of 4,250,000 shares of common stock at
a price of $1.20 per share.

|   |             
|-- | ------------
|8. | INCOME TAXES

Deferred
income taxes are provided for the temporary difference between the financial
reporting basis and tax basis of the Companys assets and liabilities including
those assets and liabilities recorded in connection with acquisitions. Deferred
tax assets and liabilities result principally from recording certain expenses
or income in the financial statements in a different period from recognition
for income tax purposes. As of March 31, 2006, the Company had a net operating
loss carryforward for tax purposes of approximately $13,715,000, which is
available to reduce its future taxable income, and expires at various dates
through 2025. $106,000 is expiring in 2015, $820,000 expiring in 2016, $889,000
expiring in 2017, $736,000 expiring in 2018, $100,000 expiring in 2020,
$782,000 expiring in 2021, $2,692,000 expiring in 2022, $2,404,000 expiring in
2023, $1,709,000 expiring in 2024 and $3,477,000 expiring in 2025. A full
valuation allowance has been established against the deferred tax assets, which
are mainly related to the net loss carryforward, due to the uncertainties
surrounding the utilization of the carryforward and limitations resulting from
a change in control. There are no other significant timing differences.

Utilization
of the net operating loss carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. The annual limitation may result in
the expiration of net operating loss carryforwards before utilization.

|   |                       
|-- | ----------------------
|9. | EMPLOYEE BENEFITS PLAN

Stock Option Plans

In
August 2001, the Companys stockholders approved, the 2001 Equity Incentive
Plan (the 2001 Plan), which provides for the grant of stock options to
purchase up to 2,000,000 shares of common stock to any employee, non-employee
director, or consultant at the Boards discretion. Under the 2001 Plan, these
options may be exercised for a period up to ten years from the date of grant.
Options issued to employees are exercisable upon vesting, which can range
between the dates of the grant to up to 5 years.

F-18

---



An
amendment and restatement of the 2001 Equity Incentive Plan increasing the
number of shares for a total of 4,000,000 was approved by the Board of
Directors on May 29, 2002 and was approved by the shareholders at the annual
meeting.

Under
the 2001 Plan, options are granted to non-employee directors upon election at
the annual meeting of stockholders at a purchase price equal to the fair market
value on the date of grant. In addition, the non-employee director stock
options shall be exercisable in full twelve months after the date of grant
unless determined otherwise by the compensation committee.

There
were stock options to purchase 265,000 shares of common stock for future grant
as of March 31, 2006 under the 2001 equity incentive plan.

Fair Value of Stock Options

For
disclosure purposes under SFAS No. 123 and SFAS No. 123(R), the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option valuation model with the following weighted-average assumptions:

|                           |  |      |        |      |  |        |  
|-------------------------- |  | ---- | ------ | ---- |  | ------ | -
|                           |  | 2006 |        | 2005 | 
|                           |  |      |        |      | 
|Expected
  life (in years) |  |      | 10     |      |  | 10     |  
|Risk-free
  interest rate  |  |      | 4.54   | %    |  | 4.54   | %
|Volatility                 |  |      | 127.05 |      |  | 135.00 |  
|Dividend
  yield           |  |      | 0      | %    |  | 0      | %

Utilizing these assumptions, the weighted average fair value of
  options granted with an exercise price equal to their fair market value at the
  date of the grant is $1.11 and $1.20 for the years ended March 31, 2006 and
  2005, respectively.

Summary Stock Option Activity

The
  following table summarizes stock option information with respect to all stock
  options for the years ended March 31, 2006 and 2005:

| |                                                 |  |                          |           |                                                          |  |                                                                                     |                                         |  |  |  |  |      |  |  |  |   |           | 
| | ----------------------------------------------- |  | ------------------------ | --------- | -------------------------------------------------------- |  | ----------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  | ---- |  |  |  | - | --------- | 
| |                                                 |  | Number of
        Shares |           | Weighted
        Average 
        Exercise
        Price |  | Weighted
        Average
        Remaining
        Contractual
        Life (Years) | Average
        Intrinsic
        Value | 
| |                                                 |  |                          |           |                                                          |  |                                                                                     |                                         |  | 
| | Options outstanding March
        31, 2004      |  |                          | 2,205,000 |                                                          |  | $                                                                                   | 1.32                                    |  |  |  |  | 8.32 |  |  |  |   |           | 
| |                                                 |  |                          |           |                                                          |  |                                                                                     |                                         |  |  |  |  |      |  |  |  |   |           | 
| | Cancelled                                       |  |                          | (635,000  | )                                                        |  |                                                                                     |                                         |  |  |  |  |      |  |  |  |   |           | 
| | Granted                                         |  |                          | 1,375,000 |                                                          |  | $                                                                                   | 1.00                                    |  |  |  |  |      |  |  |  |   |           | 
| |                                                 |  |                          |           |                                                          |  |                                                                                     |                                         |  |  |  |  |      |  |  |  |   |           | 
| | Options outstanding March 31, 2005              |  |                          | 2,945,000 |                                                          |  | $                                                                                   | 1.20                                    |  |  |  |  | 8.53 |  |  |  |   |           | 
| |                                                 |  |                          |           |                                                          |  |                                                                                     |                                         |  |  |  |  |      |  |  |  |   |           | 
| | Granted                                         |  |                          | 540,000   |                                                          |  | $                                                                                   | 1.10                                    |  |  |  |  |      |  |  |  |   |           | 
| | Exercised                                       |  |                          | (300,000  | )                                                        |  |                                                                                     |                                         |  |  |  |  |      |  |  |  |   |           | 
| |                                                 |  |                          |           |                                                          |  |                                                                                     |                                         |  |  |  |  |      |  |  |  |   |           | 
| | Options outstanding March
        31, 2006      |  |                          | 3,185,000 |                                                          |  | $                                                                                   | 1.11                                    |  |  |  |  | 8.48 |  |  |  |   |           | 
| |                                                 |  |                          |           |                                                          |  |                                                                                     |                                         |  |  |  |  |      |  |  |  |   |           | 
| | Vested and expected to
        vestend of year |  |                          | 3,185,000 |                                                          |  | $                                                                                   | 1.11                                    |  |  |  |  | 8.48 |  |  |  | $ | 2,991,750 | 
| | Exercisableend of year                         |  |                          | 2,633,507 |                                                          |  | $                                                                                   | 1.12                                    |  |  |  |  | 8.01 |  |  |  | $ | 2,443,994 | 

Options
  outstanding at March 31, 2006 have an exercise price ranging between $0.70 to
  $1.80.

The
  aggregate intrinsic value in the table above represents the total intrinsic
  value (the difference between United Energys closing stock price on March
  31, 2006 and the exercise price, multiplied by the number of in-the-money options)
  that would have been received by the option holders had vested option holders
  exercised their options on March 31, 2006. This amount changes based upon changes
  in the fair market value of United Energys stock. As of March 31, 2006,
  $297,332 of the total unrecognized compensation costs related to stock options
  is expected to be recognized over a period of approximately two years.

|    |                  
|--- | -----------------
|10. | SEGMENT REPORTING

SFAS
  No. 131, Disclosures about Segments of an Enterprise and Related Information,
  establishes standards for the way that public companies report information about
  operating segments in annual financial statements and requires reporting of
  selected information about operating segments in interim financial statements
  issued to the public. It also establishes standards for disclosures regarding
  products and services, geographic areas and major customers. SFAS No. 131 defines
  operating segments as components of a company about which separate financial
  information is available that is evaluated regularly by management in deciding
  how to allocate resources and in assessing performance.

F-19

---



The
Companys total revenues, income from operations and identifiable assets by
segment for the year ended March 31, 2006, are as follows:

|                                           |  |                |          |                       |   |            |   |       |            |   |   |             |  
|------------------------------------------ |  | -------------- | -------- | --------------------- | - | ---------- | - | ----- | ---------- | - | - | ----------- | -
|                                           |  | Graphic
  Arts |          | Specialty
  Chemicals |   | Corporate  |   | Total |           
|                                           |  |                |          |                       |   |            |   |       |           
|                                          
|Revenues                                   |  | $              | 106,861  |                       | $ | 385,374    |   | $     |           |   | $ | 492,235     |  
|                                           |  |                |          |                       |   |            |   |       |            |   |   |             |  
|                                          
|Gross profit                               |  | $              | 44,961   |                       | $ | 145,632    |   | $     |           |   | $ | 190,593     |  
|Sales, general and administrative expenses |  |                | 151,948  |                       |   | 1,747,331  |   |       | 1,685,374  |   |   | 3,584,653   |  
|Non-cash equity financing expense          |  |                |         |                       |   |           |   |       | 6,810,444  |   |   | 6,810,444   |  
|Depreciation, amortization and depletion   |  |                |         |                       |   | 61,994     |   |       | 8,067      |   |   | 70,061      |  
|Impairment loss                            |  |                |         |                       |   |           |   |       |           |   |   |            |  
|Interest expense                           |  |                |         |                       |   |           |   |       | 562,079    |   |   | 562,079     |  
|                                           |  |                |          |                       |   |            |   |       |            |   |   |             |  
|Loss from continuing operations            |  | $              | (106,987 | )                     | $ | (1,663,693 | ) | $     | (9,065,964 | ) | $ | (10,836,644 | )
|                                           |  |                |          |                       |   |            |   |       |            |   |   |             |  
|                                          
|Cash and cash equivalents                  |  | $              |         |                       | $ |           |   | $     | 5,194,748  |   | $ | 5,194,748   |  
|Accounts receivable                        |  |                |         |                       |   | 91,557     |   |       |           |   |   | 91,557      |  
|Inventory                                  |  |                | 7,620    |                       |   | 99,337     |   |       |           |   |   | 106,957     |  
|Note receivable                            |  |                | 19,476   |                       |   |           |   |       |           |   |   | 19,476      |  
|Loan receivable                            |  |                |         |                       |   |           |   |       | 364        |   |   | 364         |  
|Prepaid expenses                           |  |                |         |                       |   |           |   |       | 84,657     |   |   | 84,657      |  
|Fixed assets                               |  |                |         |                       |   | 109,546    |   |       | 37,448     |   |   | 146,994     |  
|Goodwill                                   |  |                |         |                       |   | 15,499     |   |       |           |   |   | 15,499      |  
|Patent                                     |  |                |         |                       |   | 327,572    |   |       |           |   |   | 327,572     |  
|Deferred financing costs                   |  |                |         |                       |   |           |   |       |           |   |   |            |  
|Deposits                                   |  |                |         |                       |   |           |   |       | 1,385      |   |   | 1,385       |  
|                                           |  |                |          |                       |   |            |   |       |            |   |   |             |  
|Total assets                               |  | $              | 27,096   |                       | $ | 643,511    |   | $     | 5,318,602  |   | $ | 5,989,209   |  
|                                           |  |                |          |                       |   |            |   |       |            |   |   |             |  
|Capital expenditures                       |  | $              |         |                       | $ | 31,793     |   | $     | 17,110     |   | $ | 48,903      |  
|                                           |  |                |          |                       |   |            |   |       |            |   |   |             |  

The
Companys total revenues, income from operations and identifiable assets by
segment for the year ended March 31, 2005 are as follows:

|                                             |  |                |         |                       |   |           |   |       |            |   |   |            |  
|-------------------------------------------- |  | -------------- | ------- | --------------------- | - | --------- | - | ----- | ---------- | - | - | ---------- | -
|                                             |  | Graphic
  Arts |         | Specialty
  Chemicals |   | Corporate |   | Total |           
|                                             |  |                |         |                       |   |           |   |       |           
|                                            
|Revenues                                     |  | $              | 549,462 |                       | $ | 1,301,492 |   | $     |           |   | $ | 1,850,954  |  
|                                             |  |                |         |                       |   |           |   |       |            |   |   |            |  
|                                            
|Gross profit                                 |  | $              | 238,146 |                       | $ | 853,744   |   | $     |           |   | $ | 1,091,890  |  
|Sales,
  general and administrative expenses |  |                | 143,942 |                       |   | 1,431,225 |   |       | 1,005,866  |   |   | 2,581,033  |  
|Depreciation,
  amortization and depletion   |  |                |        |                       |   | 74,535    |   |       | 9,866      |   |   | 84,401     |  
|Impairment
  loss                            |  |                |        |                       |   | 2,010     |   |       |           |   |   | 2,010      |  
|Interest expense                             |  |                |        |                       |   |          |   |       | 279,322    |   |   | 279,322    |  
|                                             |  |                |         |                       |   |           |   |       |            |   |   |            |  
|Income
  (loss) from continuing operations   |  | $              | 94,204  |                       | $ | (654,026  | ) | $     | (1,295,054 | ) | $ | (1,854,876 | )
|                                             |  |                |         |                       |   |           |   |       |            |   |   |            |  
|                                            
|Cash and
  cash equivalents                  |  | $              |        |                       | $ |          |   | $     | 365,610    |   | $ | 365,610    |  
|Accounts receivable                          |  |                | 140,617 |                       |   | 642,387   |   |       |           |   |   | 783,004    |  
|Inventory                                    |  |                | 20,080  |                       |   | 115,880   |   |       |           |   |   | 135,960    |  
|Note
  receivable                            |  |                | 28,650  |                       |   |          |   |       |           |   |   | 28,650     |  
|Loan
  receivable                            |  |                |        |                       |   |          |   |       | 137        |   |   | 137        |  
|Prepaid
  expenses                           |  |                |        |                       |   |          |   |       | 120,574    |   |   | 120,574    |  
|Fixed assets                                 |  |                |        |                       |   | 143,633   |   |       | 21,954     |   |   | 165,587    |  
|Goodwill                                     |  |                |        |                       |   | 15,499    |   |       |           |   |   | 15,499     |  
|Patent                                       |  |                |        |                       |   | 295,603   |   |       |           |   |   | 295,603    |  
|Deferred
  financing costs                   |  |                |        |                       |   |          |   |       | 206,590    |   |   | 206,590    |  
|Deposits                                     |  |                |        |                       |   |          |   |       | 1,385      |   |   | 1,385      |  
|                                             |  |                |         |                       |   |           |   |       |            |   |   |            |  
|Total assets                                 |  | $              | 189,347 |                       | $ | 1,213,002 |   | $     | 716,250    |   | $ | 2,118,599  |  
|                                             |  |                |         |                       |   |           |   |       |            |   |   |            |  
|Capital
  expenditures                       |  | $              |        |                       | $ | 23,018    |   | $     | 6,451      |   | $ | 29,469     |  
|                                             |  |                |         |                       |   |           |   |       |            |   |   |            |  

F-20

---



Geographic
Information

|            |  |      |         |      |   |           | 
|----------- |  | ---- | ------- | ---- | - | --------- | 
|            |  | 2006 |         | 2005 |  
|            |  |      |         |      |  
|U.S.        |  | $    | 425,550 |      | $ | 938,504   | 
|           
|Venezuela   |  |      |        |      |   | 729,575   | 
|           
|Netherlands |  |      |        |      |   | 50,200    | 
|           
|Other       |  |      | 66,685  |      |   | 132,675   | 
|            |  |      |         |      |   |           | 
|           
|Totals      |  | $    | 492,235 |      | $ | 1,850,954 | 
|            |  |      |         |      |   |           | 

F-21

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