UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K /A


(Amendment No.
1)




(Mark
one)




x
            Annual
      Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the fiscal year ended December 31, 2007,
  or




o
            Transition
      Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the transition period from
              ______________
      to _____________.




Commission
File No. 333-121660




nCoat,
Inc.


(Exact
name of registrant as specified in its charter)






Delaware
            3470
            98-0375406(State
      or jurisdiction of
              incorporation
      or organization)
            (Primary
      Standard Industrial
              Classification
      Code Number)
            (I.R.S.
      Employer
              Identification
      No.)




7237 Pace
Drive


P.O. Box
38


Whitsett,
NC 27377


(336)
447-2000


(Address
and telephone number of principal executive offices)




7237 Pace
Drive


P.O. Box
38


Whitsett,
NC 27377


(336)
447-2000


(Address
of principal place of business or intended


and
principal place of business)




Paul S
Clayson


7237 Pace
Drive


P.O. Box
38


Whitsett,
NC 27377


(336)
447-2000


(Name,
Address and telephone number of agent for service)




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


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




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


Yes o No x




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


Required
x Not Required
o









Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: Yes xNo o




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




The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 30, 2008 was approximately $688,397, calculated using
a closing price of $.013 per share on July 30, 2008.  For purposes of
this calculation, the registrant has included only the number of shares directly
held by its officers and directors as of July 30, 2008, in determining the
shares held by non-affiliates.




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company.  See definitions of
“large accelerated filer,” “accelerated filer,” and “smaller reporting company,”
in Rule 12b-2 of the Exchange Act.  (Check one.)




Large
accelerated filer o                                                                                                 Accelerated
filer o




Non-accelerated filer o (Do not check if a
smaller reporting
company)                           Smaller
reporting company þ




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.




As of
July 25, 2008, there were issued and outstanding 97,428,650 shares of our
common stock.







nCoat,
      Inc.2007
      FORM 10-K ANNUAL REPORT AMENDEDTABLE OF
      CONTENTSPart IPageItem 1.
              
              Business
              3Item 1A.
              
              Risk Factors
              10Item 2.
              
              Properties
              19Item 3.
              
              Legal Proceedings
              20Item 4.
              
              Submission of Matters to a Vote
      of Security Holders
              20Part IIItem 5.
              
              Market for Registrant's Common
      Equity, Related Stockholder Matters and IssuerPurchases of
      Equity Securities
              20Item 6.
              
              Selected Financial
      Data
              24Item 7.
              
              Management's Discussion and
      Analysis of Financial Condition andResults of
      Operations
              26Item 7A
              
              Quantitative and Qualitative
      Disclosures About Market RiskItem 8.
              
              Financial Statements and
      Supplementary Data
              39Item 9.
              
              Changes in and Disagreements with
      Accountants on Accounting andFinancial Disclosure
              40Item 9A.
              
              Controls and
      Procedures
              40Item 9B.
              
              Other Information
              43Part
IIIItem 10.
              
              Directors, Executive Officers and
      Corporate Governance
              43Item 11.
              
              Executive
      Compensation
              45Item 12.
              
              Security Ownership of Certain
      Beneficial Owners and Managementand Related Stockholder
      Matters
              48Item 13.
              
              Certain Relationships and Related
      Transactions, and Director Independence
              50Item 14.
              
              Principal Accountant Fees and
      Services
              51Part IVItem 15.
              
              Exhibits and Financial Statement
      Schedules
              52


2




PART
I




ITEM
1. BUSINESS




THIS
ANNUAL REPORT ON FORM 10-K /A CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES.  OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED BY nCOAT AND DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS.  FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES ARE DISCUSSED BELOW IN THE SECTION “MANAGEMENT’S DISCUSSION ANA
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” IN THE SECTION
ENTITLED “FORWARD-LOOKING STATEMENTS,” AND ELSEWHERE IN THIS ANNUAL
REPORT.  WE DISCLAIM ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE
ANY FORWARD-LOOKING STATEMENT, WHETHER AS A RESULTOF NEW INFORMATION, FUTURE
EVENTS, OR OTHERWISE.  THE FOLLOWING DISCUSSION SHOULD BE READ
TOGETHER WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS DOCUMENT.




nCoat
History




Overview




nCoat,
Inc., was incorporated as Tylerstone Ventures Corporation under the laws of the
state of Delaware on September 24, 1998, with authorized common stock of
25,000,000 shares at a par value of $.001. Tylerstone was formed to develop a
commercially profitable mining claim, including phases of data acquisition,
aerial photograph interpretation, base map preparation, prospecting and report
writing, as described in the appropriate periodic reports filed by the Company
with the United State Securities and Exchange Commission (the “SEC or
“Commission”).




In the
fall of 2006, the Tylerstone management began discussions with the management
of nCoat, Inc.  These discussions and eventual negotiations
considered the possible mutual interest between the parties for possible
economic business opportunities because by becoming a wholly owned subsidiary of
Tylerstone, our shareholders could get greater liquidity because Tylerstone’s
common stock is publicly traded on the OTC Bulletin Board and Tylerstone would
gain an operating subsidiary.




On
February 3, 2007, Tylerstone entered into Share Exchange Agreement (the
“Agreement”) with nCoat Auto (formerly known as nCoat, Inc.) for the purpose of
acquiring all of the issued and outstanding shares of common stock of nCoat
Auto, par value $0.001 per share (“nCoat Auto Common Stock”), in exchange for
new shares of  Tylerstone’s common stock, par value $0.0001 per share
(“Company Common Stock”).




On
February 14, 2007, the parties to the Agreement completed the final steps of
that Agreement (the “Closing”) as contemplated by the Agreement. Pursuant to the
terms of the Agreement, the Company acquired 11,554,545 shares of nCoat Auto’s
Common Stock from all shareholders of nCoat Auto which represented 100.0% of the
issued and outstanding shares of nCoat Auto’s Common Stock, in exchange for
2,542,000 pre-split shares of theCompany’s Common
Stock, which represented
57.75% of the issued and outstanding shares of Company Common
Stock.  As a part of the Agreement, our existing shareholders returned
750,000 outstanding pre-spilt shares of Company Common Stock for no
consideration which shares were canceled.  Within a few days of the
formal closing, our forward 20:1 split of the Common Stock was recognized
by NASDAQ.




In
connection with the Closing, Tylerstone changed its name to nCoat, Inc. As used
in this Report,the terms, “nCoat,” “Company,” and “Registrant” means nCoat, Inc., and
its subsidiaries, taken as a whole, unless the context indicates otherwise. The
historical financial information contained herein, prior to the Closing refers
to the historical financial information of the nCoat Auto.




Background
and History of nCoat Auto and its Operating Subsidiaries and
Affiliates




Following
the Closing, we changed our operations to those of nCoat Auto’s. As such, the
discussions of our business in this Reportinclude the new business focus as described below. Although we still hold
title to the mineral claim in which, we have suspended our previous business
activities and have determined that it is in our best interest to give up all
rights to the mining claims.




3




Through
our subsidiaries, we provide specialty coatings as well as traditional, surface
coatings, designed to provide heat management, corrosion resistance, friction
reduction, abrasion protection, enhanced appearance, and bond
strength.  Using nano-scale particles combined with proprietary
binding technology, chemistry, and processes, we have developed surface
treatment materials and processes that are used in a range of industries,
including automotive, diesel engine, trucking, recreational vehicle, motorcycle,
aerospace, and oil and gas industries.




As an
integral part of our strategic plan, we anticipate acquiring respected,
customer-rich, revenue-positive companies in the fragmented high performance
coatings industry and providing capital and nanotechnology-based product
innovation to foster their growth. We then will introduce our nano-coatings to
the acquired company’s enterprise customers as the next generation of coatings
technology. This acquisition process began in September 2005 with the
acquisition of High Performance Coatings, Inc. (“HPC”) and continues with the
recently announced acquisition of Metallic Ceramic Coatings, Inc. (“MCCI”),
which has been doing business under the brand name of Jet-Hot®.




We are
headquartered in Whitsett, North Carolina along with HPC’s newest and largest
plant launched there in October, 2006. HPC has additional plants in Oklahoma
City, Oklahoma; Chandler, Arizona; and Bluffdale, Utah. The recent acquisition
of MCCI brings three additional operational production facilities in Quakertown,
Pennsylvania, Pascagoula, Mississippi and Tempe, Arizona (the HPC plant will
integrate its operations with the Jet-Hot plant) that we will use to develop a
greater market breadth. In addition to the production and market penetration of
these two subsidiaries, we have also formed nTech, Inc. (“nTech”) designated to
develop and hold proprietary intellectual property and to focus on executing our
distributed production and licensing strategy. We have two facilities in Arizona
with the recent acquisition of MCCI, and we are working to consolidate these two
facilities into one operation.




Through
our
subsidiaries, including the most recent acquisition MCCI, nCoat currently
operates six production facilities in Pennsylvania, Mississippi,
Oklahoma, Utah and Arizona, as well as our new state of the art production
facility in North Carolina which opened in October, 2006.  In preparation
for our anticipated growth through acquisitions and internal growth of existing
operating entities, we have incurred a one-time set of expenses and capital
expenditures in 2006 as reflected in the financial statements included herein.
We have added facilities, personnel, systems and processes to support business
growth and acquisition activities. Details of these expenses are discussed in
the Management’s Discussion and Analysis Section below.




In
September 2005, we acquired HPC, a 23-year old Oklahoma company that has
specialized in thermal barrier, corrosion resistant, lubritic and appearance
high performance coatings for the motor sports and other industries. Building on
these race car roots, we have expanded HPC's market-base beyond coating
specialized engines and exhaust systems, to include corporate accounts of
manufacturers of commercial trucks, recreational vehicles, defense applications,
motorcycles, aerospace components, aviation parts, oil and gas industry
suppliers, energy producers and other sophisticated users, while continuing to
provide coatings and services to the after-market customer.




We have
over 9,000 customers presently being served by 148 employees.




In June
2007, we acquired Metallic Ceramic Coatings, Inc. (“MCCI”),
which was founded in 1981 and incorporated in 1983.  MCCI’s corporate
headquarters are located in King of Prussia, Pennsylvania. MCCI does
business under their market brand, Jet-Hot. Jet-Hot was developed by MCCI under
the trade name JET-HOT Coatings.  Now
in their third generation of performance enhancements, JET-HOT offers thermal
barrier and corrosion resistance coatings applied on autos and motorcyclesranging from street rods and dragsters to classics and
exotics,  snowmobiles and over-the-road trucks. Jet-Hot
also produces
and applies
coatings for improved durability, performance and appearance of manifolds, side
pipes and valve covers. In
accelerated salt-spray tests conducted in accordance with ASTM B117, JET-HOT
corrosion barrier coatings last over 14 times longer than chrome and more that
140 times longer than high-temperature paint, enduring more than 5,000
hours.




4




Jet-Hot’s  first
products and customers were in military applications on jet-fighter engines and
submarine parts subjected to high temperatures, cyclical stress loads and
corrosive environments. Jet-Hot  supplied proprietary coatings used to
protect parts on aircraft-carrier launch systems for the US Navy and armored
vehicles for the US Army. Shortly thereafter, Jet-Hot introduced automotive
products for performance racing and consumer applications.  Racing
teams began to use the coatings for safety factors by reducing header-surface
temperatures, quick cool down and horsepower enhancements. In the 1990s, JET-HOT
became the only coating company to support racers with contingency-award payouts
and continues to do so today.




Jet-Hot
continues to innovate new coatings to add to their intellectual property
portfolio of trade secret formulas, processes and equipment. Formulas include
proprietary micron particulate coatings primarily focused on ceramic/metallic
technology innovations. Jet-Hot operates three production factories in
Pennsylvania, Mississippi, and Arizona and has approximately 80
employees.




The
Coatings Industry




The
general global coatings industry is a long-established, $23 billion market with
multiple competitors. The commodity coatings market segment which encompasses
more than 85% of the market includes those coatings that are typically within
the paint, varnish, sizing, primers and other metal pre-treatments and the like.
This segment has been dominated by large multi-national companies. These
companies include Akzo Nobel Coatings, PPG Industries, Sherman-Williams, ICI
Paints, DuPont Coatings & Color Technologies Group, BASF Coatings AG,
SigmaKalon Group BV, Valspar Corp., Nippon Paint Co. Ltd., Kansai Paint Co., and
Ltd. RPM, Inc., making up the top ten in annual revenues. In the fragmented high
performance coatings sector, very few of these companies have developed and are
utilizing nanotechnology in their commercialized formulations and
processes. Our products incorporate traditional coatings with components
and processes that include micron-sized properties as well as nano-scale
formulations with additional properties. The relative size of this new scale
deals with particles and processes one thousand times smaller than the
traditional coatings on the market today, allowing for combinations, properties
and processes that provide additional protections and performance.




The
competition in the high performance coatings industry, a market segment of more
than $3.7 billion in annual revenues, is characterized by hundreds of small
privately owned coatings companies with market share in several market segments.
Most of the US firms are small, local or regional applicators, with many that
use supplied third-party coatings. No single company dominates the marketplace.
This is especially true in the automotive original equipment manufacturers
(“OEM”) and aftermarket industries. Resulting from the relative small size of
competitors in this market space, there is little product research and
innovation and even less production innovation. HPC excels because of its
research and engineering expertise. HPC and Jet-Hot are two of fewer than a
dozen companies that could be considered large enough to be known
nationally.




Our
Product and Service Focus




We have
multiple high performance coating products using proprietary chemical
formulations for coating metallic, ceramic, fabric and multiple other materials.
These coatings provide functionality that currently solves costly problems in
many industries that arise from technology advances. Key emerging problems to be
solved by these coatings include; (i) high heat generated by higher speeds of
machines, (ii) tensile strength and heat resistance of new composite materials,
(iii) corrosion and abrasion occurring in new areas of exploration (space, high
altitude, water, extreme temperature conditions, etc.), (iv) degradation of
common metals from high acidic and heat conditions to meet new, aggressive
federal pollution restrictions, (v) abrasion created by miniaturization through
computerization, and (vi) materials degradation from high speed manufacturing
systems causing heat and bonding.




5




Following
is a chart showing some of nTech’s proprietary high performance coatings, their
functionality and some of the markets in which these coatings are or can be
used:




HPC
      Product
            
            Functionality
            
            Markets(s)H-Series -Hi-Per Coat
            
            High
      temperature coatings engineered to provide outstanding corrosion
      protection.
            
            Automotive
      OEM, Automotive Aftermarket, Aerospace, Defense, Gas/Oil Production,
      Petro-Chemical Industry, Recreation, Vehicles, Heavy Trucking, Trucking
      Aftermarket, Racing, Medical , MarineR-Series
              Hi-Per
      Coat Extreme
            
            High
      temperature coatings designed specifically for the glass
      industry.
            
            Glass
      Industries, Medical, Marine, Communication/Computer, BeverageE-Series
              Hi-Per
      Coat Extreme
            
            High
      temperature coating engineered to provide thermal fatigue oxidation
      protection up to 2,200° F while reducing temperatures by
    48%.
            
            Automotive
      OEM, Automotive Aftermarket, Aerospace, Defense, Gas/Oil Production, Heavy
      Trucking, Racing, MarineHPC
      Series
              (Solid
      Dry Films)
            
            Coatings
      engineered to reduce friction.
            
            Automotive
      OEM, Automotive Aftermarket, Aerospace, Defense, Gas/Oil Production,
      Petro-Chemical




While we
will continue to sell our  traditional high performance coating
products, we will focus in the near term on disruptive  proprietary
nanotechnology products developed at nTech to create highly differentiated
market advantages and revenue from nano-formulated products.




We have
two fairly distinct markets and market distribution approaches for each of these
markets.  The “aftermarket” coatings segment of our business includes
smaller individual users of our products and services.  In most cases
these are the hobbyist, the small race car or performance automobile
owner.  Our marketing methods here are media presence: internet web
pages, advertising in trade journals and hobbyist periodicals, handling of plant
walk-in traffic, word of mouth, educational opportunities with trade schools and
organizations and other retail-oriented marketing.  The sale of
services, coating or accessories is mostly regional to each of the plant
locations. We generally receive the customer’s parts to be coated either by
direct walk-in delivery or by normal mail or freight services.  After
we complete the application process, we return the parts by the same
methods.  Our OEM marketplace marketing is conducted in a manner that
includes the media presence suggested above, however, we are much more involved
with technical meetings with engineering staffs of the larger
customer.  The main thrust of our activities here include direct
contact by sales personnel, personal relationships and referral from other large
companies.  With very few exceptions, the parts are truck shipped to
the plant that will undertake the work, in most cases the closest plant to the
customer.  Once the work is completed, the finished work is shipped
back the same way.  We sell our coatings and ship finished work
directly to customers, rather than through dealers or agents.




Sources
and Availability of Raw Materials





Our
proprietary blend of formulations begins with components that are readily
available from a series of raw material vendors, including Brenntag Chemicals,
Chemcentral Chemicals and Valimet, Inc. Our formulations include readily
available ingredients, there are a number of supply sources and we have a
diversified purchasing program. As a result, we are able to continually produce
our coatings on a regular and manageable scale. We are not materially dependent
on one or more suppliers and we do not have any agreement with any
supplier.





6




Our
Customers




Our
business was originally based on the small individual customer ranging from a
single automotive racing enthusiast building a race car, or rebuilding a classic
car or crafting a street rod on weekends.  During the last two years
we have expanded our market to include the regional tier one suppliers and OEM
customers.  We derive as much as 70 % of our revenues from our
OEM customer base of more than fifty separate accounts.  Currently, we
are not dependent on one or a few major customers and no single customer
represents more than 5% of our business. We acquired MCCI, with its business
emphasis in the aftermarket sector in order to help us diversify our revenue
base even further.




Sales
and Marketing Efforts




Our sales
efforts are focused on the auto-aftermarket industry, on the OEM industry and on
Distributed Production opportunities. OEM sales prospects may be candidates for
production at an HPC or MCCI plant or for on-site distributed production. Seven
of our employees are responsible for sales.




Marketing
efforts support all sales groups. Marketing activities include direct website
sales, direct mail, trade shows, print advertising, internet advertising, racing
sponsorships, public relations, collateral materials, and many others. Our
marketing department is also responsible for corporate, division and product
branding. Four of our employees are responsible for marketing.




In the
fiscal year ended December 31, 2006 we spent $1,004,341 on sales and marketing
efforts.  In the fiscal year ended December 31, 2007 we spent $856,565
on sales and marketing.




Our
Research and Development




nTech is
engaged in an active and extensive research and develop program focused both on
continual improvement of existing coatings and development of new coatings
products and binders, including nano-formulated coatings. Research is conducted
and testing performed at proprietary labs, outside third party labs and customer
facilities.    In the fiscal year ended December 31, 2007 we
spent $ 604,149 on research and development.  None of the
expenses in these two categories has been borne directly by a customer or
customers.  nTech is responsible for blending and mixing all coatings
for HPC and Jet-Hot.


Our
Intellectual Property




nTech
holds more than 30 proprietary coatings trade secrets, patent pending and
patents with the majority held as proprietary trade secret intellectual
properties. In addition, nTech has applied for five new patents on
nano-formulated coatings, the application processes and equipment used to
formulate and apply those coatings. nTech is also under exploration for patents
on additional nano-formulations, equipment and/or processes. nTech holds
additional engineering trade secrets on processes, procedures and equipment used
to formulate and apply non-nano coatings.




All key
employees have signed confidentiality and non-competition agreements with us. In
addition, all employees are obligated to protect our confidential information.
Where appropriate for our business strategy, management will continue to take
steps to protect intellectual property rights.




We have
submitted the following patent applications with the United States Patent and
Trademark Office:




1.
            High
      Temperature, Corrosion Resistant Nano-particulate Protective Coating
      Applied to Engine Valves.2.
            Methods
      For Coating Engine Valves with High Temperature Coatings3.
            Apparatus
      for Coating Engine Valves with High Temperature Coatings
              All
      such patents are presently pending4.
            The
      first three were combined and filed as an international patent application
              Such
      application is pending5.
            High
      Temperature Coatings Incorporating Nano-particles  (two claims
      in one patent)6.
            Heat
      Resistant Composite Materials Containing Nano-particulate Coatings and
      Binders




7




nTech
coatings are mixed in-house at facilities secured separately from application
production facilities. Formulations are kept in multiple secure facilities
off-site. nTech personnel working with coatings formulations sign stringent
non-disclosure, non-circumvention and assignment agreements with nTech. nTech
does not conduct customer tours of mixing facilities. A limited number of nTech
employees under non-disclosure and assignment agreements have access to and full
knowledge of proprietary formulations.




Our
Facilities




As of the
date of this Report,
nCoat and nTech employ people in both North Carolina and Utah. HPC has employees
at production facilities in North Carolina, Oklahoma, Arizona, and Utah. Jet-Hot
employs personnel in production facilities in Pennsylvania, Mississippi and
Arizona and has a separate company headquarters located in King of Prussia,
Pennsylvania.




Change
in Fiscal Year




We have
adopted nCoat Auto’s fiscal year ending December 31 and will prepare and file
financial reports and other reports based on the fiscal year end.




Competition




The
general coatings industry is a long-established market with multiple
competitors. The industry has grown from $9.2 billion in annual revenue 2000 to
over $23 billion at year end 2006. The commodity coatings market segment (paint,
varnish, sizing, metal pre-treatments, etc.) is dominated by large
multi-national companies, such as Akzo Nobel Coatings, PPG Industries,
Sherman-Williams, ICI Paints, DuPont Coatings & Color Technologies Group,
BASF Coatings AG, SigmaKalon Group BV, Valspar Corp., Nippon Paint Co. Ltd.,
Kansai Paint Co., and Ltd. RPM, Inc., making up the top ten in annual
revenues.




The high
performance coatings market segment had aggregate revenues of over $3.7 billion
in 2006 with annual growth of over 12%. Competition in the high performance
coatings industry (sometimes referred to as durable equipment coatings or
specialty coatings) is characterized by more than 600 small coatings companies
in the U.S. with average revenue under $3,000,000 annually and small market
share in several market segments. The European market has over 900 small
coatings companies. Many of these companies have one to several revenue accounts
with major multi-national companies who employ their services for performance
coatings. There are few large performance coatings companies operating in these
industries.




We
compete with others in our market segment through a continued media presence:
internet web pages, advertising in trade journals and hobbyist periodicals,
handling of plant walk-in traffic, word of mouth, educational opportunities with
trade schools and organizations and other retail-oriented
marketing.  The sale of services, coating or accessories is mostly
regional to each of the plant locations. We generally receive the customer’s
parts to be coated either by direct walk-in delivery or by normal mail or
freight services.  After we complete the application process, we
return the parts by the same methods.  Our OEM marketplace marketing
is conducted in a manner that includes the media presence suggested above,
however, we are much more involved with technical meetings with engineering
staffs of the larger customer.  The main thrust of our activities here
includes
direct contact by sales personnel, personal relationships and referral from
other large companies.  With very few exceptions, the parts are truck
shipped to the plant that will undertake the work, in most cases the closest
plant to the customer.  Once the work is completed, the finished work
is shipped back the same way.  We sell our coatings and ship finished
work directly to customers, rather than through dealers or agents.




8


Regulation




Governmental
regulations, particularly those in the U.S. have had a two-edged impact on the
coatings industry.  There have been increasing concerns for the
environment with the passage of regulations which restrict the amount of
volatile organic compounds (VOCs) which can be released with the manufacture and
application of both commodity and high performance coatings.  There
have been stricter regulations on the waste side of the coating manufacturing
and application.  This continuing upward pressure on the formulations
and applications of coatings has required the industry to seek “cleaner”
methods, and environmentally safer coatings.  We have recognized these
issues and is continually working to anticipate and adjust their proprietary
formulation to meet the changing regulatory landscape.  On the other
hand, it is because of the far-reaching effect of the very same environmental
issues that manufacturers of trucks, equipment, engines, and others including
nCoat’s present and potential customer base are seeking higher and better
performance from the coatings available in the
marketplace.  Recirculation of exhaust gases in internal combustion
engines in attempt to lower the release of pollutants as mandated, has engine
manufacturers seeking thermal and corrosion protection for the hotter-running
motors.




Our
operations are subject to the annual purchase and maintenance of permits
allowing us to generate small amounts of potentially hazardous
waste.  Any such waste is stored for a very short time at the
respective plant and picked up for disposal by professional waste
handlers.  The cost of the permits and the waste disposal for all of
our operations is less than $10,000.00 a year.




Employees




As of
March 31,
2008,we employed a total of approximately 148 persons in the United States.
The follow table sets out the location and number of those
employees:




Company
            
            Location
            
            TotalnCoat
            
            North
      Carolina
            
            13Utah
            
            5HPC
            
            North
      Carolina
            
            34Oklahoma
            
            20Utah
            
            13Arizona
            
            0*nTech
            
            North
      Carolina
            
            1Utah
            
            6MCCI
            
            Pennsylvania
            
            20Mississippi
            
            23Arizona
            
            12North
      Carolina
            
            1TOTALS
            
            
            
            148


* Note that HPC employees
in Arizona are now accounted for


as MCCI employees after
the consolidation of the two plants.




RECENT
DEVELOPMENTS




Since
the end of the 2007 fiscal year, the Company has reported a number of events
with its reports filed to date. It should be noted for purposes of this report,
there have been additional events and developments as of the date hereof that
should be reported as follows:
 
 1)On January 23,
2008, the Company entered into agreements with the holders of the Series A and
Series B convertible notes that allowed the Company to pay the interest on the
Notes, which was due and payable on January 1, 2008 in shares of the Company’s
common stock. As a result, the Company issued 1,554,198 shares of common stock
to the Series A and Series B note holders.
 
 In
February 2008, the Company entered into a Waiver Agreement with certain of the
holders of Series A Convertible Notes and Series B Convertible Notes, who
together were the holders of 75% of the Company’s Series A Notes and Series B
Notes.  The Waiver Agreement related to the incurrence by the Company
of debt without receiving the required approval.  Under the Waiver
Agreement, the Series A and Series B Note holders concurred to the incurrence by
the Company of up to $600,000 of debt and waive their rights to claim a default
under the Series A and Series B Notes.
 
 In
April 2008, the Company was in breach of the Series A and B Convertible Notes
Securities Purchase Agreement and the related Registration Agreement due to our
failure to have the registration of the underling shares effective, failure to
pay partial liquidating damages of $90,000 and failure to pay interest that was
due and payable on April 1, 2008.   As a result, the Notes are
redeemable at a redemption premium. No demand has been made for
redemption.
 
 On
February 20, 2008, Jeffrey Holm and Thunderchief Enterprises, LLC filed a
complaint against the nCoat in connection with a stock purchase agreement, a
consulting agreement, an escrow agreement, and other agreements between certain
of the parties. Jeffrey Holm and Thunderchief Enterprises, LLC is seeking
damages for approximately $740,000, plus the return of certain designated
personal property.  nCoat has filed motions against the complaint, but
no ruling on the motions have been issued as of today.  Because no
discovery has been commenced, there has been no opinion as to the
outcome.
 
 In May
2008, the Company sold certain of its operating equipment for $ 25,000 and
entered into an agreement to leaseback the equipment for payments of $1,000 per
month.





9




ITEM
1A.                           RISK
FACTORS
 
 The
short- and long-term success of nCoat is subject to certain risks, many of which
are substantial in nature and outside the control of nCoat or its
management.  You should consider carefully the following risk factors,
in addition to other information contained herein.  When used in this
Report, words such as “believes,” “expects,” “intends,” “plans,” “anticipates,”
“estimates,” and similar expressions are intended to identify forward-looking
statements, although there may be certain forward-looking statements not
accompanied by such expressions.  Additionally, statements that relate
to future business development, financial projections, capital raising, capital
requirements, growth of markets or customer bases, or future business
combinations may also include forward-looking statements.  You should
understand that several factors govern whether any forward-looking statement
contained herein will or can be achieved.  Any one of those factors
could cause actual results to differ materially from those projected
herein.  These forward-looking statements include plans and objectives
of management for future operations, including the strategies, plans and
objectives relating to the products and the future economic performance of nCoat
and its subsidiaries discussed above.  In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of any such statement should not be regarded as a representation by
nCoat or any other person that the objectives or plans of nCoat will be
achieved.  nCoat disclaims any intention or obligation to update any
forward-looking statement contained herein.
 
 RISKS
RELATED TO NCOAT BUSINESS
 
 nCoat,
nCoat Auto and HPC have a limited operating history.
 
 We are
company with limited operating history and experience. The original nCoat, Inc.
(now nCoat Auto), was also limited in its operating history prior to the merger.
It had acquired HPC, a company with a 23-year operating history with all but the
last seven years in performance automotive markets. While HPC’s operating
history in its historical primary market is very strong, commercial success in
the new OEM markets is limited and therefore both the Company and HPC have a
limited number of current customers in the new target markets. Further, both the
Company and HPC have experienced the need to refocus manufacturing to handle
increased volume of OEM orders, which has required significant corporate cash
resources and required significant management talent to accomplish. This change
led to reduced cash reserves for operations and management disruption to the
core after-market business. To meet its business plan, the Company will need to
keep focused on business prospects, develop structured management and personnel
responsibilities, and develop expansion plans for product development,
production and customer services that can remain ahead of the prospective
growth.  Although the acquisition of MCCI provides a greater customer
base and market share, the transition of ownership and the integration of the
merger will take a period of time to impact the operations of the
Company.
 
 We
will require substantial working capital to implement our business
plan.
 
 Projected
success and growth are dependent on sufficient working capital to fund
operations and product development. Management originally engaged investment
bankers to assist in raising $20,000,000, of which $14,250,000 has been
raised.  We will seek to raise an additional $3,000,000 to $6,000,000
within the next 12 months in order to sufficiently fund operations, fund
expansion of sales efforts, fund expansion of production capacity and
operations, fund the development and growth of our products mix, and an
additional $5,000,000 to $10,000,000 to allow us to acquire accretive
companies.  All of these efforts are a part of our business strategic plan
discussed herein.  There is no assurance that any such additional funds
will be available or available on terms and conditions acceptable to the
Company.  Further, if we are successful in raising such funds, there
can be no assurance that such funds will be sufficient or that such operational
activities will be successful within the anticipated timeframe. In such case, we
could be required to seek additional investment on terms available in the
marketplace, which could materially increase corporate indebtedness and subject
us to high interest rates and/or dilute shareholders’ ownership positions.
Furthermore, the failure to obtain additional working capital, if needed, could
prevent us from achieving our business objectives.
  We
have incurred continuing losses, and we may not be able to operate profitably in
the future
 
 Through December 31, 2007, nCoat
incurred losses totaling $ 36,085,141 and had negative shareholders’ equity
at December 31, 2007 of $ 13,634,828. If we are unable to
attain profitability we may need to cease operations.
 10
  We
are experiencing a significant liquidity crisis and we may not obtain sufficient
funding to continue operations.
 
 Since the
initial short-fall in the expected financing occurring in June and July, we are
experiencing a significant liquidity crisis. A number of our vendors have turned
our accounts over to collection agencies and at December 31, 2007, we had
accounts payable in excess of $1.5 million over 120 days past due. At December
31, 2007, we had cash of $ 295,961 and net trade receivables of $934,337.
We do not generate sufficient cash from our operations in any given month to
meet our expenses and fund our operations. We have an immediate need for
financing to pay such overdue accounts and fund our operations. Because we do
not generate enough income to support our operations, we need immediate
financing of approximately $2,500,000. There can be no assurance such financing
will be available, or available on terms acceptable to the Company. If we are
unable to obtain such financing, we will be unable to pay our liabilities, and
we may need to cease operations.
 Our
independent registered public accounting firm has included an explanatory
paragraph relating to our ability to continue as a going concern in its
report on our financial statements for the years ended December 31, 2006 and
2007.
 
 Because
we generated significant losses and required additional working capital to
continue operations, our independent registered accounting firm included in its
report for the year ended December 31, 2007 an explanatory paragraph to
the effect that these conditions raised substantial doubt about our ability to
continue as a going concern. If we continue to generate significant losses we
may not be able to continue as a going concern.
 Our business strategy
includes dependence on strategic partnerships with well-established
corporations for business growth and development.
 
 Our
business strategy includes, among other elements the development of long-term
strategic partnerships with well-established corporations.  These
companies include large original equipment manufacturers (OEM’s) that build
parts, engines, pistons, or other components in the automotive and marine fields
with which we could leverage our business using their book of business, or brand
identification in the industry.  We can not dictate to those companies
their business activities regarding our partnership ; however, we expect
to enter into agreements that will allow us to influence the partnership for
mutual success.   Our growth in that area of the business plan
may be limited if we are either unable to identify and partner with these larger
companies, or in the course of the partnership we are unable to execute our
business plans.
 Our
products and technologies are subject to technological change and
obsolescence.
 
 Our
products are subject to competitive technological advances and new competitive
product introductions. Current competitors or new market entrants could
introduce products with features that render products sold by the Company less
marketable or obsolete. In addition, some of our services to large accounts
provide products enabling customers’ technology to efficiently operate. There
can be no assurances that our customers will continue to utilize their current
technology innovations that require our products and services and new technology
innovations that do not require our products and services may be used. Our
future success will depend, to a certain extent, on the ability to adapt to
technological change and to address market needs. There can be no assurance that
we will be able to keep pace with technological change or the demands of the
marketplace.
 
 Many
of our competitors may have greater capitalization or be better positioned in
our markets.
 
 The
coatings industry includes large commodity coating providers, including BASF,
Pittsburg Paint & Glass, and Sherwin-Williams to name three of the
largest.  Although we are in a much smaller niche business portion
which includes a large number of small and regional providers, these larger
companies may elect to develop operations and marketing into our niche of high
performance coatings.  These competitors which possess greater
capitalization, market presence and sales and distribution channels then we do
could, if they elected to compete, eliminate any of our anticipated income and
consequently lead to our failure.
 
 11
  Certain
nCoat technologies are in the early stages of development.
 
 While we
do have marketable formulations that include formulas and coatings that we
presently employ in generating present revenues, we also have additional
technologies that are not yet incorporated in our present market
mix.  Our business plan is based, in part, on our ability to create
additional nanoparticle formulations that exceed the present performance of a
number of our coatings , as well as developing additional methods to improve the
application process.   We are working on coatings with greater
thermal protection capabilities, with methods that will allow us to create more
plant throughput for our OEM volume clients and direct development of new
materials that will provide higher levels of performance.  Some of our
technologies are in an early stage of development. These  technologies
have not been extensively marketed or laboratory tested. In order to fully
validate the commercial feasibility of the technologies, additional product
development and extensive testing must be done.. Any problems experienced by our
technologies while in product development could negatively impact our
performance and ability to achieve our business objectives.
 
 We
may experience difficulty integrating future acquisitions.
 
 One of
the elements of our business strategy is to continue to acquire other coatings
companies. The process we have elected to take with each of the potential
targets is to undertake extensive due diligence so we can understand all aspects
of the acquisition target, including its history, management, markets,
operations, marketing, sales, finance, personnel, assets, intellectual property,
risks, reputation, strengths, weaknesses, opportunities, threats, and synergies,
etc. of the domestic and international business of acquisition targets. This has
given us a greater chance to integrate both HPC and MCCI in our daily operations
and management.  At the same time we have discovered that it is
impossible to discover all of the issues that come up during the time from
acquisition to the time of total seamless operations between us and the acquired
company.  To this point in time we feel that we can look at the two
acquisitions with a view of success.  Despite this experience, we may,
in the course of our acquisition policy, meet unexpected difficulties in
integrating a new acquisition.  This may be because of a market in
which we are not as experienced, or with particular important personnel, or
after a period of time recognize that the core business of our company and the
acquisition are not as aligned as we had anticipated.  Any of these
issues may result in additional expenses, or decreased revenues, or other
matters which could negatively impact our performance.  One of the
steps that we have adopted in our acquisition policy is to negotiate a holdback
of a portion of the purchase money or other consideration for a period of time
as we undertake the integration and continue the operations of the acquisition
to develop real-time operational information.  The amount held back
may not be sufficient to offset the losses or expenses incurred as the
acquisition integration goes forward.
 
 Our
processes and equipment are subject to the risk of unexpected
failures.
 
 Our
manufacturing processes are extremely specialized and depend on critical pieces
of equipment, such as air compressors, ovens, application machinery, conveyor
systems, overhead cranes, vehicles, computer and communications systems and
other machinery that may have to be repaired or replaced. On occasion, equipment
may be out of service as a result of unanticipated failures which may result in
material plant shutdowns or periods of reduced production with significant
expense and time delay. Interruptions in production capabilities will inevitably
increase production costs and reduce nCoat sales and earnings. In addition to
equipment failures, our facilities are also subject to the risk of catastrophic
loss due to unanticipated events such as fires, explosions, floods, natural
disasters, adverse weather conditions, or other unforeseen conditions.
Furthermore, any interruption in production capability may require us to make
large capital expenditures to remedy the situation, which could have a negative
effect on our profitability and cash flows. Although we have business
interruption insurance, management cannot provide any assurance that the
insurance will cover all losses that could occur as a result of the equipment
failures. In addition, longer-term business disruption could result in a loss of
customers. If this were to occur, future sales levels, and therefore
profitability, could be adversely affected.
  There
is no guarantee that we will be able to protect our intellectual
property.
 
 As part
of our business strategy, we intend to accelerate investment in new technologies
in an effort to strengthen and differentiate the product portfolio and make our
manufacturing processes more efficient. As a result, we believe that the
protection of proprietary intellectual property will become increasingly
important to the business. Currently, we have patent applications pending. We
expect to rely on a combination of patents, trade secrets, trademarks and
copyrights to provide protection in this regard, but this protection might be
inadequate. For example, pending or future patent applications might not be
approved or, if allowed, the patents might not be of sufficient strength or
scope. Conversely, third parties might assert that technologies infringe their
proprietary rights. In either case, litigation could result in substantial costs
and diversion of our resources, and whether or not we are ultimately successful,
the litigation could hurt our business and financial condition.
 
 12
  If
we are not able to manage the growth of our business, our financial condition
and results of operations will be negatively affected.
 
 We have
included in our plans to grow both through internal organic growth as well as by
planned acquisitions. We have production lines to handle the work we now have in
the company; however we expect to put the following production lines into
operation over the next twenty-four months:  in our North Carolina
plant alone:
 
 •
              Our
      second OEM production line is planned to be operational 4th quarter 2008
      at an approximate cost of over $750,000 for its
      installation•
              Our
      third production line dedicated solely to our after market production is
      slated in 1st quarter of 2009 with an approximate cost
      of $250,000•
              Our
      fourth production line, again for OEM, is planned for 3rd quarter 2009
      with an approximate cost of $1,000,000•
              The
      costs and timing associated with these lines are our best estimates given
      the general nature of this risk factor.  The capacity,
      development schedule and cost may change dramatically in the future if a
      large OEM customer with specialized needs and sufficient volumes could
      commercially occupy the complete resources of a line or a
      plant.
 
 Such
planned business growth may place a significant strain on our personnel,
management, financial systems and other resources. Our business growth also
presents numerous risks and challenges, including:
  •
              The
      ability to successfully and rapidly expand sales to potential customers in
      response to potentially increasing demand;•
              The
      costs associated with such growth, which are difficult to quantify, but
      could be significant;•
              Capital
      acquisition costs;•
              Rapid
      technological change; and,•
              Transition
      and integration costs of new acquired
companies.
 
 To
accommodate this growth and compete effectively, we may need to obtain
additional $3,000,000 to $6,000,000 of funding to improve our information
systems, procedures and controls and expand, train, and manage existing and
additional employees. Funding may not be available in a sufficient amount or on
favorable terms, if at all. If we are not able to manage these activities and
implement these strategies successfully to expand to meet any increased demand,
our operating results could suffer.
 
 We
may incur significant costs to comply with the “controls and procedures”
requirements of the securities laws.
 
 As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 or “SOX 404”, the
Securities and Exchange Commission or “SEC” adopted rules requiring public
companies to include a report of management on the company’s internal controls
over financial reporting in their annual reports, including Form 10-KSB. In
addition, the independent registered public accounting firm auditing a company’s
financial statements must also attest to and report on management’s assessment
of the effectiveness of the company’s internal controls over financial reporting
as well as the operating effectiveness of the company’s internal controls. nCoat
Auto was not subject to these requirements until the Closing. Anticipating the
possible Agreement, both the Company and nCoat Auto have evaluated internal
control systems in order to allow management to report thereon, and independent
auditors to attest to, the Company’s internal controls as required by these
requirements of SOX 404. Under current law, the Company will be subject to these
requirements beginning with the management report for the annual report for the
fiscal year ending December 2007 and auditor attestation for the Company’s 2008
annual report. Management can provide no assurance that the Company will be able
to comply with all of the requirements imposed thereby. There can be no
assurance that the Company will receive a positive attestation from the
independent auditors. In the event nCoat identifies significant deficiencies or
material weaknesses in its internal controls that cannot remediated in a timely
manner or management is unable to receive a positive attestation from the
independent auditors with respect to the Company’s internal controls, investors
and others may lose confidence in the reliability of the Company’s financial
statements.
 
 13
  We rely heavily on Company
management.
 
 Our
ability to execute our business plan relies to a considerable extent on the
efforts of Paul Clayson and Terry Holmes. We have agreements with Messrs.
Clayson or Holmes prohibiting them from joining competitors, forming competing
companies, soliciting existing clients or disclosing information deemed
confidential to us, however, these agreements do not bind either of them in
seeking employment elsewhere in unrelated fields.  In the event that
the services of Mr. Clayson and Mr. Holmes become unavailable, we may not be
able to achieve our business objectives.
  Paul
Clayson, our Chief Executive Officer and Chairman of our Board and Terry R.
Holmes, our President and Chief Operating Officer are involved in other
businesses which may cause them to devote less time to our
business.
 
 Paul
Clayson, our Chief Executive Officer and Chairman of our Board and Terry R.
Holmes, our President and Chief Operating Officer, serve as
officers  for other companies.  In addition to serving as
our Chief Executive Officer and Chairman of our Board, Mr. Clayson also serves
as the President and Chief Operating  Officer and equity partner of
Sequoia Pacific Research Company, Inc. a nanotechnology company that presently
has no day-to-day operational activity.  Mr. Clayson devotes
approximately 100% of his professional time, to our business. Mr. Holmes serves
as Chief Executive Officer and Chairman of the Board of Telnetz, LLC, an ASP
telephony and web service company and as Chief Executive Officer and
Chairman of Sequoia Pacific Research Company, Inc. a nano-technology research,
development and technology licensing company. In addition, he is involved with
other minor business interests.  All of the businesses have little
involvement on a day-to-day business effort Mr. Holmes devotes
approximately 100% of his professional time to our business.  Messrs.
Clayson’s and Holme’s involvement with other businesses have been handled
after hours, and at time when there has been no conflict to date.  One
of the risks we face, however, may be the point in time where these outside
business involvement may cause them to allocate their time and services between
us and other entities. Consequently, they may give priority to other matters
over our needs which may materially cause us to lose their services temporarily
which could affect our operations and profitability.
 
 We
are dependent on the services
of our technical personnel.
 
 The loss
of any key personnel could have a material adverse impact on our business. Our
future success depends, to a significant extent, on its ability to attract,
train and retain technical and personnel. Recruiting and retaining capable
personnel, particularly those with expertise in the industry, are vital to
success. There is substantial competition for qualified technical personnel, and
there can be no assurance that we will be able to attract or retain such
personnel. If it is unable to attract and retain qualified employees, the
business may be materially and adversely affected.
  The
market price of our common stock likely will be volatile and beyond our
control.
  As we are
a new company in the public market, the market price for our shares is likely to
be highly volatile and subject to wide fluctuations in response to factors
including the following:
 
 •
              announcements
      of technological or competitive developments;•
              regulatory
      developments in target markets affecting the Company, customers or
      competitors;
 
 •
              announcements
      regarding patent litigation or the issuance of patents to the Company or
      its competitors;
 
 14
 
 •
              announcements
      regarding new financings, acquisitions or other financial
      transactions;•
              announcements
      of studies and reports relating to the conversion efficiencies of
      anticipated products of the Company or those of its
      competitors;•
              Actual
      or anticipated fluctuations in nCoat quarterly operating
  results;•
              Changes
      in financial estimates by securities research analysts;•
              Changes
      in the economic performance or market valuations of other high performance
      coating industry companies;•
              Addition
      or departure of the Company’s executive officers and key
    personnel;•
              release
      or expiry of resale restrictions on other outstanding common shares;
      and•
              sales
      or perceived sales of additional shares to raise working
  capital.
 
 In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also have a material
adverse effect on the market price of the Company’s shares.
 
 Our
ownership is highly concentrated in a few individuals.
 
 There is
a large portion of our stock owned by few individuals. As seen in the section
Security Ownership of Certain Beneficial Owners and Management, 45.5% of our
present outstanding voting securities are beneficially owned by a few
shareholders. As a result, they possess significant influence and can elect a
majority of our board of directors and to authorize or prevent proposed
significant corporate transactions. This concentrated ownership and control may
also have the effect of delaying or preventing a future change in control,
impeding a merger, consolidation, takeover or other business combination or
discourage a potential acquirer from making a tender offer. In addition, we
anticipate additional financing efforts in order to complete it business
strategy. Some or all of such financing may be acquired by a single person or a
relatively small group of persons that would have the effect of further
concentrating the ownership.
 
 Trading
in our common stock is limited.
 
 Our
common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is a
significantly more limited market than the New York Stock Exchange or NASDAQ
system. The quotation of our shares on the OTC Bulletin Board may result in a
less liquid market available for existing and potential stockholders to trade
shares of its common stock could depress the trading price of its common stock
and could have a long-term adverse impact on our ability to raise capital in the
future.
  Risks
Related to Our Current Secondary Offering
  We have
filed a registration statement on Form S-1 which is currently under review by
the United States Securities and Exchange Commission (“SEC”).  That
registration statement registers the resale by certain selling shareholders of
shares issuable to them upon exercise of warrants which we issued in
2007.  We will not receive any proceeds from the proceeds of the sale
of any shares under that registration statement, although we will receive any
exercise prices paid for the exercises of the warrants.
 
 In
addition to the risks discussed above, the following risks relate to that
secondary offering, as well as current holders of our common stock or potential
investors in the Company.
 
 Holders
of our common stock are subject to the risk of additional and substantial
dilution to their interests as a result of the issuances of common stock in
connection with the Series A Convertible Notes and Series A
Warrants.
 
 15
  The
following table describes the number of shares of common stock that were issued
in connection with the conversion of the Convertible Debentures, and that would
be issuable, assuming a full exercise of the Series A Warrants and assuming that
the full principal amount of the Series A Notes outstanding as of the date of
this Report (excluding any interest accrued) was converted into shares of our
common stock, irrespective of the availability of registered shares, and further
assuming that the applicable conversion or exercise prices at the time of such
conversion or exercise were the following amounts:
 
 Shares
      Issuable Upon
                Conversion
      of
                $9,000,000
      Principal
                Amount
      of Series A
                Notes
      having a
                conversion
      price
                of  $.25
      per share
              
              Shares
      Issuable Upon
                Exercise
      of Series A
                Warrants
      having an
                exercise
      of $1.00 per
                share
              
              Shares
      Issued Upon the
                Conversion
      of
                Previously
      issued
                Debentures
      having a
                conversion
      price of $.50
                per
      share
              
              Total
      Shares Issued or
                Issuable
      in Connection
                with
      Conversion or
                Exercise
      of Series A
                Notes,
      Warrants, and
                Convertible
      Debentures36,000,000
              
              22,500,000
              
              5,171,719
              
              63,671,719
  The table
assumes the hypothetical exercise of all of the Series A Warrants at an
exercise price of $1.00 per share, and a conversion of all of the principal of
the Series A Notes at a conversion price of $.25 per share.  As a
result, we would issue a total of 63,671,719 shares of our common stock, which
constitutes approximately 66% of the number of shares issued and outstanding
prior to such issuances.  In addition, there are shares underlying the
Series B Notes and Warrants.  The dilution factor of this additional
series increases the shares to 84,796,719 or 88% of the issued and
outstanding.  Although there can be no guarantee that the Selling
Shareholders will exercise the Series A Warrants or convert the Series A Notes,
or the other holders of the Series B Notes and Warrants will exercise their
warrants or convert their notes, should they choose to do so, holders of
our common stock would experience substantial dilution of their interests and
these factors may have a depressive effect upon the market price of our common
stock.    The impact of the exercise of the warrants in both
cases is less because the Company would receive additional capital in exchange
for the issuance of the shares, however the number of shares, the dilution and
the impact of per share earnings will be effected.  We have, for
purposes of the table, not included the interest shares that may be payable
under the terms of the Notes.   As it stands the agreements
provide for the payment of interest by share if and only if those shares are
registered.  To date the interest payments have been cash
only.
  There
is an increased potential for short sales of our common stock due to the sales
by the Selling Shareholders of shares issuable upon conversion or exercise of
the Series A Notes and the Series A Warrants, and the shares of common stock
that were issued upon conversion of the Convertible Debentures, which could
materially affect the market price of our stock.
 
 Downward
pressure on the market price of our common stock that likely will result from
sales by the Selling Shareholders of our common stock issuable upon conversion
of the Series A Notes or exercise of the Series A Warrants, or the shares of
common stock that were issued upon exercise of the Convertible Debentures, could
encourage short sales of common stock by the Selling Shareholders or
others.  A "short sale" is defined as the sale of stock by an investor
that the investor does not own.  Typically, investors who sell short
believe that the price of the stock will fall, and anticipate selling at a price
higher than the price at which they will buy the stock.  Significant
amounts of such short selling could place further downward pressure on the
market price of our common stock, which could make it more difficult for
existing shareholders to sell their shares.
 
 The
restrictions on the number of shares issued upon exercise of the Series A
Warrants and conversion of the Series A Notes may have little if any effect on
the adverse impact of our issuance of shares in connection with exercise of the
Series A Warrants and conversion of the Series A Notes, and as such, the Series
A Selling Shareholders may sell a large number of shares, resulting in
substantial dilution to the value of shares held by our existing
shareholders.
 
 The
holders of Series A Notes and Series A Warrants (collectively, the “Series A
Selling Shareholders”) are prohibited, except in certain circumstances, from
exercising the Series A Warrants and converting amounts of the Series A Notes to
the extent that the issuance of shares would cause any Series A Selling
Shareholder to beneficially own more than 4.99% of our then outstanding common
stock.  These restrictions, however, do not prevent any Series A
Selling Shareholder from selling shares of common stock received in connection
with an exercise or conversion, and then receiving additional shares of common
stock in connection with a subsequent exercise or conversion.  In this
way, a Series A Selling Shareholder could sell more than 4.99% of the
outstanding common stock in a relatively short time frame while never holding
more than 4.99% at one time.  As a result, existing shareholders and
new investors could experience substantial dilution in the value of their shares
of our common stock.
 
 16
  The
trading market for our common stock is limited, and investors who purchase
shares from the Selling Shareholders may have difficulty selling their
shares.
 
 The
public trading market for our common stock is limited.  As of the date
of this Report, our common stock was listed on the OTC Bulletin
Board.  Nevertheless, an established public trading market for our
common stock may never develop or, if developed, it may not be able to be
sustained.  The OTCBB is an unorganized, inter-dealer,
over-the-counter market that provides significantly less liquidity than other
markets.  Purchasers of our common stock therefore may have difficulty
selling their shares should they desire to do so.
 
 It
may be more difficult for us to raise funds in subsequent stock offerings as a
result of the sales by the Selling Shareholders of our common stock issuable
upon exercise or conversion of the Series A Notes and the Series A Warrants, and
our common stock that was issued upon conversion of the Convertible
Debentures.
 
 As noted
above, sales by the Selling Shareholders of common stock issuable upon
conversion or exercise of the Series Notes or Series A Warrants, or of the
common stock that was issued to the Selling Stockholders upon conversion of the
Convertible Debentures, likely will result in substantial dilution to the
holdings and interest of current and new shareholders.  Additionally,
as noted above, the volume of shares sold by the Selling Shareholders could
depress the market price of our stock.  These factors could make it
more difficult for us to raise additional capital through subsequent offerings
of our common stock, which could have a material adverse effect on our
operations.
  Our
common stock is considered a penny stock.  Penny stocks are subject to
special regulations, which may make them more difficult to trade on the open
market.
 
 Securities
in the OTC market are generally more difficult to trade than those on the Nasdaq
National Market, the Nasdaq SmallCap Market or the major stock exchanges. In
addition, accurate price quotations are also more difficult to
obtain.  The trading market for our common stock is subject to special
regulations governing the sale of penny stock.
 
 A "penny
stock," is defined by regulations of the Securities and Exchange Commission as
an equity security with a market price of less than $5.00 per share. However, an
equity security with a market price under $5.00 will not be considered a penny
stock if it fits within any of the following exceptions:
 
 •
              the
      equity security is listed on Nasdaq or a national securities
      exchange;•
              the
      issuer of the equity security has been in continuous operation for less
      than three years, and either has (a) net tangible assets of at least
      $5,000,000, or (b) average annual revenue of at least $6,000,000;
      or
 
 •
              the
      issuer of the equity security has been in continuous operation for more
      than three years, and has net tangible assets of at least
      $2,000,000.
 
 If you
buy or sell a penny stock, these regulations require that you receive, prior to
the transaction, a disclosure explaining the penny stock market and associated
risks. Furthermore, trading in our common stock would be subject to Rule 15g-9
of the Exchange Act, which relates to non-Nasdaq and non-exchange listed
securities. Under this rule, broker-dealers who recommend our securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if their market price is at least $5.00 per
share.
 
 17
  Penny
stock regulations will tend to reduce market liquidity of our common stock,
because they limit the broker-dealers' ability to trade, and a purchaser's
ability to sell the stock in the secondary market. The low price of our common
stock will have a negative effect on the amount and percentage of transaction
costs paid by individual shareholders. The low price of our common stock may
also limit our ability to raise additional capital by issuing additional shares.
There are several reasons for these effects. First, the internal policies of
many institutional investors prohibit the purchase of low-priced stocks. Second,
many brokerage houses do not permit low-priced stocks to be used as collateral
for margin accounts or to be purchased on margin. Third, some brokerage house
policies and practices tend to discourage individual brokers from dealing in
low-priced stocks. Finally, broker's commissions on low-priced stocks usually
represent a higher percentage of the stock price than commissions on higher
priced stocks. As a result, our shareholders will pay transaction costs that are
a higher percentage of their total share value than if our share price were
substantially higher.
 
 We
may face penalties if the registration process is delayed.
 
 As a
portion of our obligations under the sale of the Series A Notes and Warrants, we
are required to file for registration for the underlying Shares and to have the
registration deemed effective by the SEC within certain time
frames.  There is no assurance that we will meet those deadlines,
despite all our efforts.  In the event of delay, we will incur
financial penalties in accordance with the transactional
documents.  The use of resources to cover these obligations will take
them from other plans and needs within the Company.
 
 Forward-looking
statements
 
 Certain
of the statements contained in this Report (other than the historical financial
data and other statements of historical fact) are forward-looking
statements.  These statements include, but are not limited to our
expectations with respect to the development of a new offices or divisions; the
achievement of certain revenue goals; the receipt of new business and contracts;
and our intentions with respect to financing our operations in the
future.  Additional forward-looking statements may be found in the
“Risk Factors” Section of this Report, together with accompanying explanations
of the potential risks associated with such statements.
 
 Forward-looking
statements made in this Report are made based upon management’s good faith
expectations and beliefs concerning future developments and their potential
effect upon the Company.  There can be no assurance that future
developments will be in accordance with such expectations, or that the effect of
future developments on nCoat will be those anticipated by
management.  Forward-looking statements may be identified by the use
of words such as “believe,” “expect,” “plans,” “strategy,” “prospects,”
“estimate,” “project,” “anticipate,” “intends” and other words of similar
meaning in connection with a discussion of future operating or financial
performance.
 
 You are
cautioned not to place undue reliance on these forward looking statements, which
are current only as of the date of this Report.  We disclaim any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or
otherwise.  Many important factors could cause actual results to
differ materially from management’s expectations, including those listed in the
“Risk Factors” Section, as well as the following:
 
 •
              unpredictable
      difficulties or delays in the development of new products and
      technologies;•
              changes
      in U.S.  or international economic conditions, such as
      inflation, interest rate fluctuations, foreign exchange rate fluctuations
      or recessions in nCoat’s markets;
 
 •
              pricing
      changes to our supplies or products or those of our competitors, and other
      competitive pressures on pricing and
sales;
 
 •
              difficulties
      in obtaining or retaining the management, engineering, and other human
      resource competencies that we need to achieve our business
      objectives;
 
 •
              the
      impact on nCoat or a subsidiary from the loss of a significant customer or
      a few customers;
 
 •
              risks
      generally relating to our international operations, including
      governmental, regulatory or political
changes;
  18
  •
              transactions
      or other events affecting the need for, timing and extent of our capital
      expenditures; and•
              the
      extent to which we reduce outstanding
debt.
 
 ITEM
      2.
              PROPERTIES
 
 We
lease 63,600 square feet of office and production space in Whitsett, North
Carolina which houses our corporate headquarters and largest production
facility. Our monthly lease payment is $20,728 until March 31, 2011, at which
time we have the option to renew the lease from April 1, 2011 through March 31,
2016 at $23,728 per month.
 We lease
5,000 square feet of office space in King of Prussia, Pennsylvania which was
formerly the corporate headquarters of MCCI.  Since the acquisition of
MCCI we have used this space as our primary sales office.  We vacated
this space March 31, 2008 and subsequently subleased the space.
 
 We lease
14,000 square feet of office and production space in Bluffdale, Utah. Our
monthly lease payment is $7,200.  The terms of this lease expires on
June 30, 2008.
 
 We lease
9,830 square feet of office and production space in Quaker Town,
Pennsylvania.  Our monthly lease payment is $7,896.  The
terms of this lease expires on January 30, 2010.
 
 We rent,
on a month-to-month basis, property in Pascagula, Mississippi, with a monthly
payment of $2,425; Mesa Arizona, with a monthly payment of $6,502; and Oklahoma
City, Oklahoma, with a monthly payment of $1,250.
 
 We
believe that our current leased and rented space is sufficient to meet our needs
for the next 12 months and that the property is currently in acceptable
condition.
 
 The
following table set forth a summary of these leases:
 
 Company
              Location
              
              Office
                Space
              
              
              Production
                Space
              
              
              Total
              
              
              Annual
                Rent
                expense
              
              Expiration
                DatenCoat
              North
      Carolina
              
              
              12,000
              
              
              
              
              
              
              12,000
              
              
              $
              204,338
              
              3/31/11Utah
              
              
              7500
              
              
              
              
              
              
              7500
              
              
              $
              88,992
              
              6/30/08HPC
              North
      Carolina
              
              
              *
              
              
              
              51600
              
              
              
              51600
              
              
              
              **
              
              3/31/11Utah
              
              
              *
              
              
              
              8500
              
              
              
              8500
              
              
              
              ***
              
              6/30/08Oklahoma
              
              
              *
              
              
              
              17000
              
              
              
              17000
              
              
              $
              15,000
              
              N/A
      (month-to-month)Arizona
              
              
              *
              
              
              
              2800
              
              
              
              2800
              
              
              $
              28,800
              
              N/A
      (month-to-month)nTech
              North
      Carolina
              
              
              ****
              
              
              
              
              
              
              
              0
              
              
              
              **
              
              3/31/11Utah
              
              
              ****
              
              
              
              
              
              
              
              0
              
              
              
              ***
              
              6/30/08MCCI
              Pennsylvania
              
              
              5,000
              
              
              
              
              
              
              
              5,000
              
              
              $
              65,000
              
              12/31/10Pennsylvania
              
              
              *
              
              
              
              9,840
              
              
              
              
              
              
              $
              34,949
              
              1/30/10Mississippi
              
              
              *
              
              
              
              30000
              
              
              
              30000
              
              
              $
              28,980
              
              N/A
      (month-to-month)Arizona
              
              
              *
              
              
              
              15000
              
              
              
              15000
              
              
              $
              78,024
              
              N/A
      (month-to-month)TOTALS
              
              
              
              22,000
              
              
              
              55000
              
              
              
              156,900
              
              
              $
              544,083
  19
  *Although
the table does not show office space in a number of the facilities, operational
management personnel are officed within the site and the square footage set
forth as production space includes these amounts.
 
 ** The
North Carolina location lease encompasses nCoat, HPC and nTech under a single
lease with an annual rent expense of $279,073.
 
 *** The
Utah location lease encompasses nCoat, HPC and nTech under a single lease with
an annual rent expense of $88,992.
 
 ****
nTech’s office personnel are presently sharing office space within the nCoat
office space listed.
 
 We
believe that the facilities are well maintained, and are generally suitable and
adequate for our current and projected operating needs.
  ITEM
      3.
              LEGAL
      PROCEEDINGS
 
 From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. Litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from
time to time that may harm our business.  As of the date of this
Report, with the exception of the case cited below,we were not aware of any such
legal proceedings or claims against the Company or its subsidiaries that
management believes will have a material adverse affect on business development,
financial condition or operating results.
 
 Jeffrey
C. Holm et al. v. High Performance Coatings, Inc., Civil No. 080903021, Third
Judicial District Court, Salt Lake County, State of Utah.  On February
20, 2008, Jeffrey Holm and Thunderchief Enterprises, LLC (collectively, the
“Plaintiffs”) filed a complaint against High Performance Coatings, Inc.,
Nanocoat, Inc., Terry R. Holmes, Paul S. Clayson (collectively, the “nCoat
Defendants”), and others, in connection with a stock purchase agreement, a
consulting agreement, an escrow agreement, and other agreements between certain
of the parties.  The Complaint brings claims for relief against the
nCoat Defendants for breach of the consulting agreement, slander, tortious
interference with economic relations, breach of the stock purchase agreement,
declaratory relief relating to a non-compete agreement, and
conversion.  The Plaintiffs seek damages from the nCoat Defendants of
approximately $740,000, plus the return of certain designated personal property,
together with damages to be proven at trial, punitive damages, fees, costs, and
such other relief as the court deems appropriate.  The nCoat
Defendants filed motions to quash service of the complaint, but no ruling on the
motions had been issued as of the date of this report.  The Company
intends to defend vigorously against these claims.
 
 ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 None.
 
 PART
II
 
 ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
 
 Market
information
 
 Our
common stock trades on the NASD Over-the-Counter Electronic Bulletin Board under
the symbol NCOA.  The following table sets forth the prices of our
common stock as reported and summarized on the OTC BB since February 22,
2007.  These prices are based on inter-dealer bid and asked prices,
without markup, markdown, commissions, or adjustments and may not represent
actual transactions.
 
 20
 
 Calendar
      Quarter Ended
              
              High
      Bid
              
              
              Low
      Bid2007
      First Quarter
              
              $
              1.09
              
              
              $
              0.592007
      Second Quarter
              
              $
              1.05
              
              
              $
              0.652007
      Third Quarter
              
              $
              0.73
              
              
              $
              0.362007
      Fourth Quarter
              
              $
              0.525
              
              
              $
              0.10Calendar
      Quarter Ended2008
      First Quarter
              
              $
              0.23
              
              
              $
              0.052008
      Second Quarter*
              
              $
              0.03
              
              
              $
              0.027
  * As of
May 16, 2008.
 
 As of May
16, 2008, we had approximately 97 shareholders of holding 97,428,650 shares of
common stock.
 
 We have
not paid, nor declared, any dividends on our common stock since our inception
and do not intend to declare any such dividends in the foreseeable future. Our
ability to pay dividends is subject to limitations imposed by Delaware law.
Under Delaware law, dividends may be paid to the extent the corporation's assets
exceed its liabilities and it is able to pay its debts as they become due in the
usual course of business.
 
 Penny
Stock Rules
 
 Our
shares of common stock are subject to the "penny stock" rules of the Securities
Exchange Act of 1934 and various rules under this Act. In general terms, "penny
stock" is defined as any equity security that has a market price less than $5.00
per share, subject to certain exceptions. The rules provide that any equity
security is considered to be a penny stock unless that security is registered
and traded on a national securities exchange meeting specified criteria set by
the SEC, authorized for quotation from the NASDAQ stock market, issued by a
registered investment company, and excluded from the definition on the basis of
price (at least $5.00 per share), or based on the issuer's net tangible assets
or revenues. In the last case, the issuer's net tangible assets must exceed
$3,000,000 if in continuous operation for at least three years or $5,000,000 if
in operation for less than three years, or the issuer's average revenues for
each of the past three years must exceed $6,000,000.
 
 Trading
in shares of penny stock is subject to additional sales practice requirements
for broker-dealers who sell penny stocks to persons other than established
customers and accredited investors. Accredited investors, in general, include
individuals with assets in excess of $1,000,000 or annual income exceeding
$200,000 (or $300,000 together with their spouse), and certain institutional
investors. For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of the security and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, the rules
require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
 
 
 Recent
Sales of Unregistered Equity Securities
 
 On
October 24, 2006, we closed the sale of a convertible debenture (the “October
Debenture”) in the principal amount of $500,000, to Maxum Fund Overseas (the
“Debenture Holder”). The October Debenture is convertible into shares of our
common stock at a conversion price of $0.50, subject to adjustment, and is due
and payable on October 23, 2007. Interest accrues on the outstanding principal
at the rate of 0.5 percent above the prime interest rate as reported by the Wall
Street Journal’s bank survey, and the interest is also convertible into shares
of the Registrant’s common stock.
  21
  On
November 9, 2006, we closed the sale of another convertible debenture (the
“November Debenture”) in the principal amount of $500,000, to the Debenture
Holder. The November Debenture is convertible into shares of our common stock at
a conversion price of $0.50, subject to adjustment, and is due and payable on
November 8, 2007. Interest accrues on the outstanding principal at the rate of
0.5 percent above the prime interest rate as reported by the Wall Street
Journal’s bank survey, and the interest is also convertible into shares of the
Registrant’s common stock.
 
 Additionally,
on November 28, 2006, we closed the sale of another convertible debenture (the
“December Debenture”) in the principal amount of $1,000,000, to the Debenture
Holder. The December Debenture is convertible into shares of our common stock at
a conversion price of $0.50, subject to adjustment, and is due and payable on
November 27, 2007. Interest accrues on the outstanding principal at the rate of
0.5 percent above the prime interest rate as reported by the Wall Street
Journal’s bank survey, and the interest is also convertible into shares of the
Registrant’s common stock.
  On
February 6, 2007, we closed the sale of another convertible debenture (the
“February Debenture”) in the principal amount of $250,000, to Coach Capital
(“Coach”).  The February Debenture is convertible into shares of our
common stock at a conversion price of $0.50, subject to adjustment, and is due
and payable on February 6, 2008. Interest accrues on the outstanding principal
at the rate of 0.5 percent above the prime interest rate as reported by the Wall
Street Journal’s bank survey, and the interest is also convertible into shares
of the Registrant’s common stock.
 
 On May
14, 2007, we closed the sale of another convertible debenture (the “May
Debenture”) in the principal amount of $250,000, to Coach.  The May
Debenture is convertible into shares of our common stock at a conversion price
of $0.50, subject to adjustment, and is due and payable on May 14, 2008.
Interest accrues on the outstanding principal at the rate of 0.5 percent above
the prime interest rate as reported by the Wall Street Journal’s bank survey,
and the interest is also convertible into shares of the Registrant’s common
stock.
  On May
25, 2007, pursuant to a private offering of our securities (the “Offering”), we
entered into a securities purchase agreement (the “Purchase Agreement”) with
certain investors relating to the sale by us of $550,000 principal amount of our
Series A 6% Convertible Notes (the “Series A Notes”), and warrants (the “Series
A Warrants”) to purchase up to an additional 1,375,000 shares of the Company’s
common stock (the “Series A Warrant Shares”).
 
 On May
31, 2007, pursuant to the Offering, we entered into Purchase Agreements with
institutional and accredited investors for an additional $10.3 million, which
includes $800,000 of outstanding indebtedness converted into the
Offering.  The securities sold by us in the May 31, 2007, closing
consisted of $8,300,000 principal amount of Series A Notes; $2,000,000 principal
amount of Series B 6% Convertible Notes (the “Series B Notes,” and together with
the Series A Notes, the “Convertible Notes”); 22,125,000 Series A Warrants; and
5,000,000 Series B Warrants.
 
 On June
12, 2007, pursuant to the Offering, we entered into a Purchase Agreement with an
investor relating to the sale by us of $500,000 principal amount of Series B
Notes and 1,250,000 Series B Warrants.
 
 On June
18, 2007, pursuant to the Offering, we entered into a Purchase Agreement with
certain investors relating to the sale by us of $150,000 principal amount of our
Series A Notes and Warrants (the “Series A Warrants”) to purchase up to an
additional 375,000 shares of our common stock (the “Series A Warrant
Shares”).
 
 On June
22, 2007, pursuant to the Offering, we entered into a Purchase Agreement with an
investor relating to the sale by us of $500,000 principal amount of our Series B
Notes, and 1,250,000 Series B Warrants.
 
 On July
9, 2007, pursuant to the Offering, we entered into a Purchase Agreement with
certain investors relating to the sale by us of $250,000 principal amount of our
Series B Notes and Warrants to purchase up to an additional 625,000 shares of
our common stock.  In addition to the formal closing, we received
directly from an individual a subscription agreement for $100,000 for a purchase
of our Series B Notes and Series B Warrants.
 
 22
  The
Company received $10,618,916 of proceeds from the issuance of the Series A and
Series B convertible notes, net of the $700,000 of advances previously
recognized and net of cash offering costs of $931,064.
 
 The Debentures, the Series A Notes,
the Series B Notes, the Series A Warrants, the Series B Warrants, and the shares
discussed above were issued without registration under the 1933 Act in reliance
on Section 4(2) of the 1933 Act and the rules and regulations promulgated
thereunder.
 
 There have been no repurchases of
equity securities by nCoat during the years ended December 31, 2007 or
2006.
  23
  ITEM
      6.
              SELECTED
      FINANCIAL DATA
 
 The
selected consolidated financial information set forth below is derived from our
consolidated balance sheets and statements of operations as of and for the years
ended December 31, 2007 and December 31, 2006    The data
set forth below should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and related notes thereto included in this
Report.
     
 24
 nCOAT,
      INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETSDecember
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006ASSETSCurrent
      AssetsCash
                  
                  $
                  295,961
                  
                  
                  $
                  63,437Trade
      receivables, net
                  
                  
                  934,337
                  
                  
                  
                  964,281Inventory
                  
                  
                  172,477
                  
                  
                  
                  88,965Other
      current assets
                  
                  
                  62,449
                  
                  
                  
                  7,852Deferred
      income tax assets
                  
                  
                  151,600
                  
                  
                  
                  222,501Total
      Current Assets
                  
                  
                  1,616,824
                  
                  
                  
                  1,347,036Property and Equipment,
      net
                  
                  
                  2,233,189
                  
                  
                  
                  1,649,491Intangible Assets,
      net
                  
                  
                  2,968,864
                  
                  
                  
                  3,231,042Total
      Assets
                  
                  $
                  6,818,877
                  
                  
                  $
                  6,227,569LIABILITIES
      AND STOCKHOLDERS'EQUITY (DEFICIT)Current
      LiabilitiesAccounts
      payable
                  
                  $
                  2,212,663
                  
                  
                  $
                  1,383,629Accrued
      liabilities
                  
                  
                  2,464,931
                  
                  
                  
                  1,102,458Current
      portion of notes payable
                  
                  
                  1,987,966
                  
                  
                  
                  5,305,021Accrued
      consulting obligation
                  
                  
                  500,000
                  
                  
                  
                  500,000Current
      portion of obligations under capital leases
                  
                  
                  153,540
                  
                  
                  
                  130,895Total
      Current Liabilities
                  
                  
                  7,210,125
                  
                  
                  
                  8,422,003Long-Term
      LiabilitiesNotes
      payable, net of current portion
                  
                  
                  12,654,812
                  
                  
                  
                  220,909Obligations
      under capital leases , net of current portion
                  
                  
                  328,193
                  
                  
                  
                  471,905Deferred
      income taxes
                  
                  
                  151,600
                  
                  
                  
                  222,501Total
      Long-Term Liabilities
                  
                  
                  13,243,580
                  
                  
                  
                  915,315Stockholders'
      Equity (Deficit)Common
      stock - $0.0001 par value; 500,000,000 shares
    authorized;96,650,451
      shares and 33,660,000 shares outstanding, respectively
                  
                  
                  9,644
                  
                  
                  
                  3,366Additional
      paid-in capital
                  
                  
                  22,440,669
                  
                  
                  
                  5,272,619Accumulated
      deficit
                  
                  
                  (36,085,141
                  )
                  
                  
                  (8,385,734
                  )Total
      Stockholders' Equity (Deficit)
                  
                  
                  (13,634,828
                  )
                  
                  
                  (3,109,749
                  )Total
      Liabilities and Stockholders' Equity (Deficit)
                  
                  $
                  6,818,877
                  
                  
                  $
                  6,227,569
  25
 n
      COAT, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONSFor
      the Twelve Months EndedDecember
      312007
                    
                    
                    2006Net
      Sales
                    
                    $
                    7,765,309
                    
                    
                    $
                    5,572,621Cost
      of Goods Sold
                    
                    
                    6,148,138
                    
                    
                    
                    5,331,181Gross
      Profit (Loss)
                    
                    
                    1,617,171
                    
                    
                    
                    241,440Operating
      ExpensesGeneral
      and Administrative Expense
                    
                    
                    8,438,137
                    
                    
                    
                    4,627,171Sales
      and Marketing Expenses
                    
                    
                    856,565
                    
                    
                    
                    1,004,341Research
      and Development
                    
                    
                    604,149
                    
                    
                    
                    -Impairment
      of Intangibles
                    
                    
                    4,618,392
                    
                    
                    
                    -Total
      Operating Expenses
                    
                    
                    14,517,243
                    
                    
                    
                    5,631,512Loss
      From Operations
                    
                    
                    (12,900,072
                    )
                    
                    
                    (5,390,072
                    )Interest
      Expense
                    
                    
                    14,799,335
                    
                    
                    
                    2,080,502Loss
      Before Income Taxes
                    
                    
                    (27,699,407
                    )
                    
                    
                    (7,470,574
                    )Benefit
      From Income Taxes
                    
                    
                    -
                    
                    
                    
                    751,619Net
      Loss
                    
                    $
                    (27,699,407
                    )
                    
                    $
                    (6,718,955
                    )Basic
      and Diluted Loss per Share
                    
                    $
                    (0.34
                    )
                    
                    $
                    (0.21
                    )Basic
      and Diluted Weighted-AverageShares
      Outstanding
                    
                    
                    78,618,770
                    
                    
                    
                    31,284,657
 ITEM
      7.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 THIS
REPORT ON FORM 10-K/A CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES.   ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED BY NCOAT AND DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS.  WHEN USED IN THIS ANNUAL REPORT, WORDS SUCH AS
"BELIEVES," "EXPECTS," "INTENDS," "PLANS," "ANTICIPATES," "ESTIMATES," AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS,
ALTHOUGH THERE MAY BE CERTAIN FORWARD-LOOKING STATEMENTS NOT ACCOMPANIED BY SUCH
EXPRESSIONS.   ADDITIONALLY, STATEMENTS THAT RELATE TO THE FUTURE
BUSINESS DEVELOPMENT, FINANCIAL PROJECTIONS, CAPITAL RAISING, CAPITAL
REQUIREMENTS, GROWTH OF MARKETS OR CUSTOMER BASES, OR FUTURE BUSINESS
COMBINATIONS MAY ALSO INCLUDE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED BELOW IN THE SECTION
ENTITLED "INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS" AND UNDER THE
HEADING "CERTAIN SIGNIFICANT RISK FACTORS," ABOVE.  NCOAT, INC.,
SPECIFICALLY DISCLAIMS ANY OBLIGATION OR INTENTION TO UPDATE ANY FORWARD LOOKING
STATEMENT.
 The following Management’s discussion
and Analysis of financial Condition and Results of Operations (“MD&A”) is
intended to help the reader understand nCoat, Inc., our operations and our
present business environment.  MD&A is provided as a supplement
to, and should be read in conjunction with, our consolidated financial
statements and the accompanying notes thereto contained in Item 8 of this
report.  This overview summarizes MD&A, which includes the
following sections:
 
 ·
              Overview – a general
      description of our business and the markets in which we operate; our
      objective; our areas of focus; and challenges and risks of our
      business.
  26
 
 ·
              Significant Accounting
      Policies– a discussion of accounting policies that require
      critical judgments and estimates.
 
 ·
              Results of Operations–
      an analysis of our Company’s consolidated results of operations for the
      three years presented in our consolidated financial
      statements.  Except to the extent that differences among our
      operating segments are material to an understanding of our business as a
      whole, we present the discussion in the MD&A on a consolidated
      basis.
 
 ·
              Liquidity and Capital
      Resources– an analysis of cash flows; off-balance sheet
      arrangements and aggregate contractual obligations; the impact of
      foregoing exchange; an overview of financial position; and the impact of
      inflation and changing prices.
 
 We intend
for this discussion to provide the reader with information that will assist in
understanding our financial statements, the changes in certain key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles affect
our financial statements.  The discussion also provides information
about the financial results of the various segments of our business to provide a
better understanding of how those segments and their results affect the
financial condition and results of operations of the Company as a
whole.  This discussion should be read in conjunction with our
financial statements as of December 31, 2007, and the year then ended and the
notes accompanying those financial statements.
 
 Overview
 
 Our
principal business strategy includes the following components:
 
 Acquisitions.  We
completed the acquisition of HPC and MCCI which have given us a base of
operations and market presence.  During the next three years, we will
identify additional specific target companies for acquisition.  The
high performance coating industry includes a number of “sub-niche” sectors, such
as piston manufacturing and protection, lubritic dry film coatings, coating for
weapons and military applications, gas and oil tools, valves and pipelines,
marine applications, both in engine parts and anti-fouling technologies to name
just a few.  The fragmentation of the industry provides us with a
large number of small to medium size companies that we will investigate to
determine our best additions to our first two acquisitions.
 
 Internal Organic Growth. We
have already taken the existing “book of business” of our two subsidiaries and
introduced into it additional products, both as cross sales from the sister
company’s product lines as well as the introduction of nano-formulated
coatings.  Our emphasis on the after-market retail customer is one of
the two major sectors of our business.  In additional to the
aftermarket sector, we have already developed and are presently developing
additional customers in the OEM sector.  One of our strongest sources
for internal organic growth in the next three years is an emphasis by the
manufacturers of diesel, gasoline and hybrid fueled engines to meet demanding
environmental requirements imposed on their respective industries as we seek to
improve emissions, fuel economy and safety.
 
 Distributed Model
Development. The “distributed” business model is our establishment of
on-site coatings application as part of the assembly-line process within the
manufacturing and/or assembly process of a large customer.  We have
already undertaken this approach with one of our OEM customers and are presently
in discussion with others.  The savings on handling, shipping,
inventory, logistics management and other similar expenses that comes from
having the on-site “plant” is the main element of interest for our larger
customers.  We are presently in discussion with other customers to
increase the awareness of the benefits of this approach.
  Licensing Intellectual
Property.  Within the next twelve months, we intend to enter
into protective “field of use” licensing with some of the manufacturers that may
be tier-one suppliers of large OEM companies or who deploy a distributed
production model described above. However, unlike the distributed model where
application expertise and management control are inherent elements of the model,
our “field of use” license agreements supply proprietary coatings to third
parties already applying coating at their plants.  The license agreements
will be limited to targeted applications and industries and structured as joint
ventures to avoid creating competition in our own current market
space.
  27
  Strengthen nTech's research and
development efforts. We have entered into a series of discussions with
outside research and development groups, including technology transfer offices
of universities, private laboratories and other small start-up technology
companies for the express purpose of continuing to strengthen and exploit our
research and development capacities.  We expect to formalize these
discussions prior to the end of the fourth quarter of this year.  All of
nTech’s research activities are focused on projects that can show
commercialization within three to six months, rather than long term R&D
projects. Many research projects are driven by direct requests from customers
seeking immediate solutions to present critical problems.
 
 Acquisitions
 
 Management
believes that there is a strategic acquisition opportunity resulting from the
market dynamics of the high performance coatings markets. Acquisitions of HPC
and Jet-Hot have further validated our strategic research. We expect to search
for, complete due diligence on and acquire other coatings companies that (i)
have a customer base that includes enterprise level customers in a mature
market, (ii) enjoy strong and stable market presence in our targeted primary
markets, (iii) are profitable, (iv) have a brand presence similar to HPC, and
(v) have an existing product mix whose performance and functionality can be
significantly improved by the integration of nanotechnology
know-how.
 
 Acquisition
of Jet-Hot
 
 With
respect to the acquisition of Jet-Hot, we believe key synergies to our business
plan include:
 
 1.        
Jet-Hot has a plant in Arizona as does HPC. The plants are about 10 miles apart.
 2.        
Jet-Hot plants are built for high through-put and packaging of individual
aftermarket production. HPC plants are built for high volume of OEM parts
production.
 3.        
We have acquired sufficient market and operational experience to realize that a
single coating entity has a competitive disadvantage in attempting to create
high volume productions of both aftermarket parts and OEM parts.  The
addition of MCCI allows us to create focused plants for each of our major market
sectors.
 4.        
Competition between MCCI and HPC for stand-alone coatings sales (no applications
services) will be eliminated and we will carry one “best of breed” coating from
each area in which we have needs.
 5.         JET-HOT
has more thermal barrier customers than HPC. HPC has more corrosion resistance
and lubritic coatings customers than JET-HOT. Cross selling can occur to each
company’s customer base to raise same-customer revenue. In addition, JET-HOT
does not currently sell internal engine coatings. Their product line is for
coatings on external parts only. HPC internal engine coatings can now be offered
to all of JET-HOT’s approximate 9000 annual individual aftermarket
customers.
 
 Explanatory
Note: Financial Statements ending December 31, 2007 together with the
following management discussion and analysis relates to the original nCoat,
Inc., the privately held company that changed its name to nCoat Automotive
Group, Inc. (nCoat Auto) as part of its entry into a share exchange agreement
with Tylerstone Ventures Corporation (“Tylerstone”) in February 2007. Any
references in the financial statements or in this section that refer to “the
Company” refer to nCoat Auto for periods prior to the reorganization and to
the consolidated companies there after , not to the later merged
Tylerstone/nCoat, Inc.
 
 28
  There is
limited historical financial information about us upon which to base an
evaluation of our performance. nCoat Auto has been in existence since September
2004 and incorporated in early 2005. In September of 2005, it purchased High
Performance Coatings, Inc. (HPC), an operational coatings company which is
responsible for the majority of the nCoat-consolidated revenues. nCoat Auto also
created in 2006 an intellectual property and development group, nTech, Inc.
(nTech) that, at December 31, 2006, had generated minimal revenue reported in
the consolidated financials. We merged with nCoat Auto in February of 2007 and
adopted its fiscal year, its operations and its financial history.
 
 Our
continued existence and plans for future growth depend on our ability to obtain
the capital necessary, either through the issuance of additional debt or equity
instruments, to operate until the profitability occurs through the generation of
revenue. We will need to raise this capital to fund both the normal operating
costs and expansion efforts. If we are not able to generate sufficient revenues
and cash flows or obtain the necessary funding, we will be unable to continue as
a going concern. Our recurring losses and negative cash flows from operations
raises substantial doubt about our ability to continue as a going concern. Our
working capital deficiency as at December 31, 2007 was $5,593,301 with
accumulated losses from the date of inception of $36,085,141 through December
31, 2007. We entered into a share exchange agreement in February 2007; have
engaged an investment banking firm to assist in raising new capital; have
increased operating activities focused on the marketing of our products and have
been negotiating sales agreements all to enable us to generate sufficient cash
flow for us to continue as a going concern. If we does not receive sufficient
funds to settle amounts owed to creditors and pay future expenses, there is the
possibility that we would be unable to continue.
  At
December 31, 2007, we had assets of $6,818,877 and liabilities of
$20,453,705. Amounts owed to related parties have no specific terms of
repayment and bear no interest.
  Off-Balance
Sheet Arrangements
 
 Our
off-balance sheet arrangements include operating leases for production
facilities and office space.
 
 Our
Operating Results
 
 Performance
at December 31, 2007 Compared to December 31, 2006
  Performance
Overview
 
 Revenues
 
 The 2007
year increase in revenue of approximately $ 2.2 million was attributable
mainly to the June 29, 2007 acquisition of MCCI. HPC revenues were less than
those in the same period in 2006 and continue to be impacted by changes being
implemented by our diesel engine manufacturing customers. According to industry
sources, heavy-duty truck sales have fallen 42.5% for 2007.  One major
truck manufacture reported a 71% decrease in year to year unit sales. Beginning
in January 2007, our diesel engine manufacturing customers were required to
introduce new engine platforms to meet new Environmental Protection Agency (EPA)
requirements to lower harmful particulates in engine emissions in order to
comply with Federal clean air standards. nCoat sells and applies coatings that
aide diesel emissions systems to meet these new standards. Our customers’
introduction of the new engine platform created increased sales of engines
manufactured in the 2006 model year prior to introduction of the new 2007
engines.
  29
  Cost of
Sales.
 
 Cost of
sales as a percentage of sales decreased from 96% in 2006 to 79% for 2007. With
the acquisition of MCCI, we have increased the percentage of our business
related to after market products, which typically have a higher margin than our
OEM products. Costs in 2006 were inflated due to the use of temporary labor,
excessive overtime, high transportation costs and the associated costs related
to the ramp up in production.  The increase in 2007 also reflects a
managerial effort to focus on labor to revenue parameters.
 
 General
and Administrative Expenses .
 
 General
and administrative expenses for the year ended December 31, 2007 increased
almost $3,900,000 and increased as a percentage of sales from 83% to
108 % for the same period in 2006. The 2007 general and administrative
expenses include costs related to: our first year operating as a public company
and the associated costs of nCoat, which reflect the costs related to the
infrastructure created to support the aggressive acquisition and growth plan for
the Company, together with the completion of the acquisition of MCCI and its
related costs,
 Sales and
Marketing Expense.
 
 Sales and
marketing expense for the year ended December 31, 2007, decreased by
approximately $148,000 and decreased to 11% of sales compared to 18% for the
same period in 2006.  This decrease in 2007, when compared to the same
period in 2006, is attributable to both a consolidation of marketing expenses
with the acquisition of MCCI as well as the management efforts to reduce
expenses overall.
  Research
and Development.
 
 Although
not set forth in our 2006 reporting as a separate line-item, our research and
development costs were reduced in 2007 to 8% as compared with 2006 percentage of
12%.  The percentage reflects the increase of sales rather than a
decrease of costs attributable to ongoing improvement of our
coatings.
 Interest
Expense.
 
 The
increase in interest expense reflects the impact of the write-off of all
remaining debt discount and deferred loan costs related to acceleration of
the maturity date for the Series A and Series B Convertible Notes.  In
the year ended December 31, 2007 a total of $13,225,786 was charged to interest
related to this acceleration, consisting of $12,250,000 of debt discount
and $975,786 of deferred loan costs.
 
 Earnings
per Share.
 
 As a result of the share exchange
transaction discussed in the filing, exercise of warrants, and conversion of
debt, the number of outstanding shares have increased to 96,439,452 at December
31, 2007 and the weighted average shares outstanding have increased from
31,284,657 shares for the year ended December 31, 2006 to 81,574,257 for the year
endedDecember 31,
2007.
  The Company incurred losses of
$27,699,407 and $6,718,955 during the periods ended December 31,
2007, and December 31, 2006, respectively.
  30
   Financial
Statements, One-Time Charges and Capital Expenditures
 
 We
continued to feel the effects of and experience higher costs related to
preparing for accelerated growth through acquisitions and organic internal
growth of existing operating entities. In 2006, we added facilities, personnel,
systems and processes to support business growth and acquisition activities.
These expenditures we discussed in the Company’s current report on Form 8K filed
on May 18, 2007.
  1.           Facilities
- We incurred additional expenses related to the opening a facility closer to
our customer base in North Carolina, tooling and prototyping for new accounts,
aftermarket finishing equipment, staging and cleaning equipment were
added.  Additionally, we transferred additional production of high
volume “H Series” and “S Series” OEM accounts from the HPC Utah facility to the
North Carolina facility. HPC continued to retool the Utah facility to meet
production requirements for high volume “E-Series” production for new customers
in the diesel engine trucking industry.
 
 2.           Headquarters
Relocation - Corporate headquarters was moved from Utah to North
Carolina  This relocation began in 2006 and has continued through
2007. Key employees have been relocated to North Carolina and new offices were
established at the North Carolina production facilities.
 
 3.           Personnel
- The Company hired personnel in 2006 to ramp production, prepare for
acquisition, transition and integration and to prepare for registration with the
Securities and Exchange Commission. We have focused on completion of Standard
Operating Procedure documentation, preparation of information systems,
accounting, human resource, production, communications, mixing and blending,
strategic finance and other systems to accommodate rapid growth from internal
and acquisition growth..
 
 31
  4.           Public
Company Preparation - In the first quarter of 2007 one-time expenses were
incurred in connection with preparation for merger with a publicly traded
entity.  Additional expenses were taken to close the shell acquisition
transaction and affect the merger, prepare for application for public trading,
meet SEC requirements, hire trading support entities and launch the
public trading of the newly acquired shell.  Expenses
include:
 
 i.            
Legal;
 ii.           
Accounting, review and audit;
 iii.           Contracts
with transfer agent;
 iv.           Printing
and delivery of original stock certificates;
 v.          
 Retention and compensation of investment banking firm; and
 vi.           Public
filings
 
 5.            Research
and Development - In 2006, research and development expenses were not
material.  Research and development expense in 2007 was $604,149 and
focused on development of new coatings, exploring the viability of exclusively
licensing non-proprietary coatings, prototyping and testing new coatings for
customer parts and exploring new patents for further coating
development.
 
 6.           Non-recurring
Marketing and Sales Costs - Marketing and sales set-up costs were realized in
2006 to establish systems and process to capture and track data and develop
collateral materials and an internet presence for business development. Expenses
in 2007 include development of sample materials demonstrating the efficacy of
nCoat proprietary coatings, documentation supporting rapid account
sign-up and terms of business and market research to target key
prospects.
 
 7.           Financing
- The Company realized one-time expenses in 2006 for financing the purchase of
HPC. Amortization expenses and note extension fees were included in interest
expenses. Expenses in 2007 include fees relating to engaging advisors to assist
the Company in future financings and expenses related to creating the strategic
relationships necessary to successfully execute the business plan.
 
 Liquidity
and Capital Resources
 
 nCoat is
a company with limited operating history and experience upon which to base an
evaluation of its performance. In September of 2005, we acquired High
Performance Coatings, Inc. (“HPC”), an operational coatings company, which was
responsible for the majority of our consolidated revenues. In 2006, we formed an
intellectual property and development entity, nTech, Inc. (“nTech”), and in June
2007, we acquired all of the common stock of Metallic Ceramic Coatings, Inc.
(“MCCI”), a primary competitor of HPC with 26 years of coatings experience and
historical revenues similar to HPC.
  On April
13, 2007, we converted $2,000,000 of convertible debentures and $67,752 of
accrued interest into 4,135,503 shares of our common stock at $0.50 per share.
The remaining $500,000 of convertible debentures, along with accrued interest of
$18,107, was converted to 1,036,215 shares of common stock at $0.50 per share on
August 24, 2007.
 
 From May
25, 2007, through July 9, 2007, we issued $9,000,000 of Series A 6% convertible
promissory notes (the “Series A Notes”) and warrants to purchase 22,500,000
shares of common stock, exercisable at $1.00 per share through May 31, 2007. The
Series A Notes had an initial conversion price of $0.40 per share and a maturity
date of May 31, 2010, when the Series A Notes are due. From May 31, 2007 through
July 9, 2007, the Company issued $3,250,000 of Series B 6% convertible
promissory notes (the “Series B Notes”) and warrants to purchase 8,125,000
shares of common stock at $0.80 per share exercisable through May 31, 2007. The
Series B Notes had an initial conversion price of $0.40 per share and a maturity
date of May 31, 2010 when the Series B Notes are due. The Series A and B private
placement offerings included the conversion of $800,000 of advances from
investors of which $700,000 had been received prior to March 31, 2007. The
Company received $10,618,916 of proceeds from the issuance of the Series A and
Series B convertible notes, net of the $700,000 of advances previously
recognized and net of cash offering costs of $931,064.
 
 32
  In the
final stages of the offering, after we had closed on the purchase of MCCI,
and subscribed investor did not fund its portion of
offering.  Our intended use of proceeds included retirement of debt
and related accrued interest of $3,677,286, $5,000,000 for the acquisition of
MCCI, payment of significant pre-offering liabilities and establishing a working
capital reserve. The retirement of pre-offering liabilities and the working
capital portion of the offering did not get raised prior to our contractual
obligation to close the offering.  This deficiency of the expected
$3,500,000 in funding, combined with the seasonal lull in aftermarket and OEM
revenues, has caused us to experience a significant liquidity
crisis.  A number of our vendors have turned our  accounts
over to collection agencies and at December 31, 2007, we had accounts payable in
excess of $1.5 million over 120 days past due.
 
 At
September 30, 2007, we were in technical breach of the Securities Purchase
Agreement and the related Series A and B Convertible Notes and Registration
Agreement (collectively the “Note Agreement”). This technical breach was
due to our failure to respond to SEC comments within 15 days following receipt,
failure to have the registration of the underling shares effective within 75
days of the required filing date, failure to pay partial liquidating damages of
$90,000 and issuing $200,000 of unauthorized debt.
  Series A
Amendment Agreement
 
 In
December 2007, the Company entered into an Amendment and Waiver of Registration
Rights Agreement and 6% Series A Convertible Notes dated as of November 30, 2007
(the “Series A Amendment Agreement”), with Enable Growth Partners LP; Enable
Opportunity Partners LP; Pierce Diversified Strategy Master Fund LLC, Ena;
Capital Ventures International; Edward A Bugniazet; and Scott Lyman
(collectively, the “Series A Noteholders”) who together were the holders of 75%
of the Company’s Series A 6% Convertible Notes (the “Series A
Notes”).
 
 Pursuant
to the terms of the Series A Amendment Agreement, the Series A Noteholders
agreed to waive certain “Trigger Events” as that term is defined in the Series A
Notes, in exchange for certain amendments to the terms of the Series A Notes and
the related registration rights agreement (the “Registration Rights Agreement”)
between the Company and the Series A Noteholders.  The Registration
Rights Agreement was amended by adding the following language to the end of
Section 2(b) of the Registration Rights Agreement:
 
 “Notwithstanding
anything to the contrary in this Section 2(b), the Company shall only be
obligated to pay partial liquidated damages to the Holders for Events occurring
after the earlier to occur of (i) the effective date of the Registration
Statement and (ii) February 29, 2008.  Further, notwithstanding
anything to the contrary in this Section 2(b), in the event that the Company is
not permitted to include all of the Registrable Securities in the Registration
Statement due solely to SEC Guidance, the Company shall not be liable for
liquidated damages as to any such Registrable Securities which are not permitted
to be so included if, as of February 29, 2008, such Registrable Securities may
be transferred by the Holders pursuant to Rule 144.”
 
 Additionally,
the Company and the Series A Noteholders agreed that the Conversion price of the
Series A Notes would be adjusted from $ 0.36 to $0.25, subject to further
adjustment as set forth in the Series A Notes.  Moreover, the
following new subsection was added to Section 4(a) of the Series A
Notes:
 
 33
  “(xv)  any
quarterly reports on Form 10-Q or Form 10-QSB filed by the Company with the
Commission for the three months ending on the following dates which disclose
“Net Cash Used in Operating Activities” in excess of the numbers set forth next
to each:
   March 31, 2008:
              
              $
              850,000.00June 30, 2008:
              
              $
              700,000.00September 30, 2008 – March 31,
    2010:
              
              $
              450,000.00
   Series B
Amendment Agreement
 
 Additionally,
the Company, entered into an Amendment and Waiver of 6% Series B Convertible
Notes, dated as of November 30, 2007 (the “Series B Amendment Agreement”), with
Avendale Equity, LLC; Knight Capital Group; and GGR II, LLC (collectively, the
“Series B Noteholders”), who together are the holders of at least 75% of the
Company’s Series B 6% Convertible Notes (the “Series B Notes”).
 
 Pursuant
to the terms of the Series B Amendment Agreement, the Series B Noteholders
agreed to waive certain “Trigger Events” as that term is defined in the Series B
Notes, in exchange for certain amendments to the terms of the Series B
Notes.
 
 The
Company and the Series B Noteholders agreed that the Conversion price of the
Series B Notes would be adjusted from $0.40 to $0.25, subject to further
adjustment as set forth in the Series B Notes.  Moreover, the
following new subsection was added to Section 4(a) of the Series B
Notes:
 
 “(xiv)  any
quarterly reports on Form 10-Q or Form 10-QSB filed by the Company with the
Commission for the three months ending on the following dates which disclose
“Net Cash Used in Operating Activities” in excess of the numbers set forth next
to each:
   March 31, 2008:
              
              $
              850,000.00June 30, 2008:
              
              $
              700,000.00September 30, 2008 – March 31,
      2010:
              
              $
              450,000.00
 
 Accounting
standards allowed us, as a result of these waivers, to recapture the 25%
redemption premium interest expense and to return the notes to long term
liability status.  Both of these benefits are reflected on our
Consolidated Balance Sheet and Statement of Operations.
 
 In
January 2008, the Company entered into a Series A Amendment and Interest Shares
Agreement dated as of January 7, 2008 (the “Series A Amendment Agreement”), with
Scott Lyman;Edward Bugniazet III;Capital Ventures International;Enable Growth
Partners LP;Enable Opportunity Partners LP;and Pierce Diversified Strategy
Master Fund, LLC ena, (collectively, the “Series A Noteholders”) who together
are the holders of 75% of the Company’s Series A 6% Convertible Notes (the
“Series A Notes”).  The Company received the final signatures on the
Series A Amendment Agreement on January 23, 2008.
 
 Pursuant
to the terms of the Series A Amendment Agreement, the Company and the Series A
Noteholders agreed to amend the Series A Notes by adding the following Section
(2)(a) to Section (2) of the Series A Notes:
 
 "
(a)      Solely with respect to the interest to be
paid on January 1, 2008, the following terms and conditions shall
apply:
 
 (i)             The
Company shall pay the interest due on January 1, 2008, by issuing Interest
Shares (the "January 2008 Interest Shares").
 
 (ii)            The
January 2008 Interest Shares to be issued will be “restricted securities” as
defined in Rule 144 under the Securities Act of 1933, as amended.
 
 (iii)           On
or after February 15, 2008, the Company will cause its counsel to issue legal
opinions relating to the sale of the January 2008 Interest Shares pursuant to
Rule 144, upon (A) the request of the Holder, and (B) receipt by the Company or
its counsel of the usual and customary paperwork (including representation
letters, broker representations, and Form 144) relating to sales under Rule
144.  The Holder and the Company acknowledge and agree that counsel
for the Company cannot issue opinions under Rule 144 prior to February 15, 2008,
because such date is the effective date of amendments to Rule 144 which will
shorten the holding period of restricted securities.
 
 34
  (iv)           The
issuance price of the January 2008 Interest Shares will be 90% of the 5-day
Weighted Average Price of the Common Stock ending on December 31,
2007.
 
 (v)            With
respect to the January 1, 2008, interest payment, no other conditions (including
but not limited to those set forth above in Section (2)) shall be
applicable."
 
 Additionally,
the Series A Noteholders agreed that the payment by the Company of the interest
due on January 1, 2008, pursuant to the terms of the Series A Amendment would
not constitute a Trigger Event under the Note, and that by entering into the
Series A Amendment, the Series A Noteholders were waiving any right to claim a
Trigger Event with respect to the January 1, 2008, interest
payment.
 
 Series B
Amendment and Interest Shares Agreement
 
 Additionally,
the Company entered into a Series B Amendment and Interest Shares Agreement
dated as of January 7, 2008 (the “Series B Amendment Agreement”), with GGR II,
LLC; Knight Capital Group; Avendale Equity LLC; Thomas Joyce; and Gregory
Voetsch (collectively, the “Series B Noteholders”) who together are the holders
of 75% of the Company’s Series B 6% Convertible Notes (the “Series B
Notes”).  The Company received the final signatures on the Series B
Amendment Agreement on January 28, 2008.
 
 Pursuant
to the terms of the Series B Amendment Agreement, the Company and the Series B
Noteholders agreed to amend the Series B Notes by adding the following Section
(2)(a) to Section (2) of the Series B Notes:
 
 "(a)       Solely
with respect to the interest to be paid on January 1, 2008, the following terms
and conditions shall apply:
 
 (i)            The
Company shall pay the interest due on January 1, 2008, by issuing Interest
Shares (the "January 2008 Interest Shares").
 
 (ii)            The
January 2008 Interest Shares to be issued will be “restricted securities” as
defined in Rule 144 under the Securities Act of 1933, as amended.
 
 (iii)           On
or after February 15, 2008, the Company will cause its counsel to issue legal
opinions relating to the sale of the January 2008 Interest Shares pursuant to
Rule 144, upon (A) the request of the Holder, and (B) receipt by the Company or
its counsel of the usual and customary paperwork (including representation
letters, broker representations, and Form 144) relating to sales under Rule
144.  The Holder and the Company acknowledge and agree that counsel
for the Company cannot issue opinions under Rule 144 prior to February 15, 2008,
because such date is the effective date of amendments to Rule 144 which will
shorten the holding period of restricted securities.
 
 (iv)           The
issuance price of the January 2008 Interest Shares will be 90% of the 5-day
Weighted Average Price of the Common Stock ending on December 31,
2007.
 
 (v)            With
respect to the January 1, 2008, interest payment, no other conditions (including
but not limited to those set forth above in Section (2)) shall be
applicable."
 
 Additionally,
the Series B Noteholders agreed that the payment by the Company of the interest
due on January 1, 2008, pursuant to the terms of the Series B Amendment would
not constitute a Trigger Event under the Note, and that by entering into the
Series B Amendment, the Series B Noteholders were waiving any right to claim a
Trigger Event with respect to the January 1, 2008, interest
payment.
 
 35
  In
February 2008, the Company entered into a Waiver Agreement with certain of the
holders of Series A Convertible Notes and Series B Convertible Notes, who
together were the holders of 75% of the Company’s Series A Notes and Series B
Notes.  The Waiver Agreement related to the incurrence by the Company
of debt without receiving the required approval.  Under the Waiver
Agreement, the Series A and Series B Noteholders concurred to the incurrence by
the Company of up to $600,000 and waive their rights to claim a default under
the Series A and Series B Notes.
 
 Any
changes to the agreement or to accounting treatment described above occurring
after December 31, 2008 will be reflected in subsequent periods.
 
 We have
been active in our attempt to reduce our losses and conserve cash.  We
have had a reduction in work force and reduced head count by 40
employees.  Following the acquisition of MCCI we consolidated our two
Arizona facilities.  On August 31, 2007 and September 14, 2007 certain
salaried employees elected to defer all or a portion of their salaries totaling
$143,473.  On November 9, 2007 all salaried employees’ compensation,
totaling $89,193, was deferred.  To date none of the deferrals have
been paid.
 
 The
Company’s continued existence and plans for future growth depend on its ability
to continue to obtain the capital necessary, either through the issuance of
additional debt or equity instruments, to operate until the profitability occurs
through the generation of increased revenue and cost containment. We will need
to continue to raise this capital to fund both the normal operating costs and
expansion efforts. If we are not able to generate sufficient revenues and cash
flows or obtain the necessary funding, we will be unable to continue as a going
concern. As disclosed in the May 17, 2007, report of the independent auditors
related to the Company’s financial statements for the fiscal year ended December
31, 2006, the Company’s recurring losses and negative cash flows from operations
raises substantial doubt about the Company’s ability to continue as a going
concern. Cash used for operating activities was $4,646,621for 2007. The Company’s
working capital deficiency at December 31, 2007 was $13,634,828with accumulated losses
from the date of inception of $ 36,085,141.
 As
discussed above, we have taken, and continue to take, steps that will allow us
to continue as a going concern.  For example we have entered into a
share exchange agreement with Tylerstone in February 2007; have engaged an
investment banking firm to assist in raising new capital; have converted
existing debt into equity; raised new capital; purchased a major competitor;
consolidated facilities; strengthened the management team; increased operating
activities focused on marketing our products; and negotiated sales agreements to
enable us to generate sufficient cash flow to continue as a going concern.
Nevertheless, if we do not receive sufficient funds to settle amounts owed to
creditors and pay future expenses, there is the possibility that the Company
would be unable to continue.
 
 At December 31, 2007, we had assets of
$ 6,818,877 and
liabilities of $20,453,705. Amounts owed to related parties have no specific
terms of repayment and bear no interest.
 36
  Financial
Statements, One-Time Charges and Capital Expenditures
 
 The
Company had a high level of one-time expense and capital expenditures in 2006.
In preparation for achieving rapid growth through acquisitions and internal
growth of existing operating entities, nCoat the Company added facilities,
personnel, systems and processes to support business growth and acquisition
activities. Capital expenditures and one-time expenses were taken in the
following areas:
 
 1. Facilities
- HPC added a new 55,000 square foot production facility in North Carolina with
high volume, high through-put production equipment. Initial production began
with one operating line. With future additions, the facility can accommodate
five full simultaneously operating production lines. Our plans call for a
second OEM production line in late 2008 at a cost of approximately $750,000 for
its installation. Another production line dedicated solely to our after market
production is slated in 1st quarter of 2009 at a cost of approximately $250,000
and a fourth production line, again for OEM is planned for 3rd quarter 2009 with
a cost of approximately $1,000,000 . The costs and timing associated with
these lines are our best estimates given the general nature of future planning.
The capacity, development schedule and cost may change dramatically in the
future if a large OEM customer with specialized needs and sufficient volumes
could commercially occupy the complete resources of a line or a
plant.
  The
Company transferred production of most high volume “H Series” and “S Series” OEM
accounts from the HPC Utah facility to the North Carolina facility. This
strategy moved production closer to customer manufacturing and assembly
facilities, allows expansion of production lines to meet customer
specifications, and focused production on new nano-coatings formulations and
eliminated archaic production systems centralized in the Utah facility. This
also significantly reduced increasing expedited and normal delivery
transportation costs to OEM customers.
 
 After
transfer of production from Utah to North Carolina, HPC re-tooled the Utah
facility to meeting production requirements for high volume “E-Series”
production for new customers in the diesel engine trucking industry. This
strategy eliminated the need for use of higher wage temporary employees in the
Utah facility to meet production requirements.
 
 HPC added
additional equipment and facilities to the Oklahoma production facility to
support higher volume motorcycle and recreational vehicle parts
production.
 
 37
  The
Company moved corporate headquarters for nCoat, nTech and HPC to 11,000 square
feet of office space attached to the new North Carolina production
facility.
 
 2.           Headquarters
Relocation - The Company determined in 2006 that establishing corporate
headquarters in North Carolina from Utah for nCoat, nTech and HPC was necessary
for the rapid growth of all companies and the to better serve key enterprise
customer demands. Several key employees were relocated to North Carolina and new
offices were established at the North Carolina production facilities. Key
one-time 2006 operating and capital expenses included:
 
 a.           Utah
facility rent write-down
 b.           Employee
relocation
 c.           Equipment
relocation
 d.           New
office equipment and furniture
 e.           Lease
improvements
 
 3.           Personnel
- The Company hired personnel in 2006 to ramp production, acquisition
preparation, transition and integration and prepare for introduction of public
trading. Personnel were added in the following general categories:
 
 a.           General
and administration
 b.           Sales
and marketing
 c.           IS/IT
 d.           Production
management operations
 e.           Strategic
finance, mergers and acquisitions and acquisition integration
 
 In
addition, a one-time charge was established for a paid time-off capital pool for
employees’ absentee days.
 
 4.           Public
Company - One-time expenses were realized in connection with preparation for
merging with a publicly traded entity. Expenses included:
 
 a.           Legal
 b.           Accounting
and audit
 c.           Shell
identification
 d.           Selection
and retention of investment banking and capital finance firms
 e.           Shell
acquisition
 f.         
  Public filings
 
 5.           Information
Technology and Systems - In preparation for rapid expansion and tracking of high
volume production, large increase in number of customers, prospect and vendor
contacts, integrated accounting, and logistics management, the Company increased
computer technology and enterprise software integration throughout all operating
entities. One-time 2006 expenses included:
 
 a.           Acquisition
of new enterprise software
 b.           Integration
and training of new software program
 c.           Abandoned
software write-down
 d.           New
computer hardware
 e.           Software
engineering for code integration
 f.         
  Consulting services
 
 6.           Consulting
- The Company utilized consulting from a few entities as one-time expenses to
advise the company on transition and integration of HPC and other operating
functions. Expenses to retain the founder of HPC to advise as to market,
production, technology and operating issues were realized in 2006.
 
 7.           Research
and Development (“R&D”) - The Company and its operating entities realized in
2006 one-time research and development expenses nearly double the expected
future R&D burden. Over 20% of 2006 revenue was spent to complete initial
formulations of nano-formulated coatings, complete testing and commercialize the
coatings with multiple customers. One-time R&D expenses
included:
 
 38
  a.           Corrosion
resistant nano-coating formulation and testing
 b.           Heat
resistant nano-coating formulation and testing
 c.           Nano-coatings
application preparation, production, curing and shipping processes
 d. Development,
specification and engineering of equipment for application of
nano-coatings
 
 Among
assets developed from this extensive R&D activity are:
 
 a.           High
volume production equipment nano-coating application
 b. Process
manuals for mixing, blending, preparation, application, curing and shipping of
nano-coated parts
 c.           Five
filed patents
 d.           Six
additional patents under exploration
 e.           Multiple
trade secret technologies
 
 8.           Non-recurring
Marketing and Sales Costs - Certain marketing and sales set-up costs were
realized in 2006 to establish systems and process to capture and track data and
develop collateral materials and web presence for business development. Key
expenses included:
 
 a.           CRM
software and database development
 b.           Computer
hardware to support field sales and graphics production
 c.           Collateral
materials development for aftermarket and OEM sales
 d.           Development
and launch of sales friendly website for HPC
 
 In
addition, certain marketing expenditures were paid on advice of former HPC
ownership that proved ineffective or where the ROI was below expected level for
efficient marketing procedures. These expenses will not be repeated beyond 2006.
Discontinued marketing expenses include:
 
 a.           Broad
magazine advertising
 b.           Trade
shows focused solely on branding
 c.           National
race sponsorships
 
 9.           Financing
- The Company realized one-time expenses in 2006 for financing the purchase of
HPC. Amortization expenses and note extension fees were included in financing
expenses.
 
 ITEM
8.          FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
  Index
      to Consolidated Financial Statements:Report
      of Independent Registered Public Accounting Firm
                
                F-2CONSOLIDATED FINANCIAL
      STATEMENTS:Consolidated
      Balance Sheets as of December 31, 2007 and 2006
                
                F-3Consolidated
      Statements of Operations and Comprehensive Loss for the Years
      EndedDecember
      31, 2007, 2006
                
                F-4Consolidated
      Statements of Stockholders’ Equity (Deficit) for the Years
      EndedDecember
      31, 2006 and 2007
                
                F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007,
      2006
                
                F-6Notes
      to Consolidated Financial Statements
                
                F- 7
 
 39
  ITEM
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
  None.
  ITEM
9A.       CONTROLS AND
PROCEDURES
  Management’s
Report On Internal Control Over Financial Reporting
  Management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the
Exchange Act. This rule defines internal control over financial reporting as a
process designed by, or under the supervision of, the Company’s Chief Executive
Officer and Chief Financial Officer, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. GAAP. Ourinternal control over financial reporting includes those policies and
procedures that:
  •
                Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;
  •
                Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. GAAP, and that
      receipts and expenditures of the Company are being made only in accordance
      with authorizations of management and directors of the Company;
      and
  •
                Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  With the
participation of the Chief Executive Officer, who is currently also acting as
the Company’s Chief Financial Officer, our management conducted an evaluation of
the effectiveness of our internal control over financial
reporting.   Based on this evaluation, our management has
concluded that our internal control over financial reporting was not effective
as of December 31, 2007, as the result of control deficiencies, material
weaknesses and significant deficiencies.   Some of the material
weaknesses found result from significant deficiencies in internal control that
collectively constitute a material weakness.
  An
internal control deficiency exists when the design or operation of a control
does not allow management or employees, in the normal course of performing their
assigned duties, to prevent or detect misstatements on a timely basis. The
Company has not established a formal audit committee forcing the Board to rely
solely on the Chief Financial Officer for guidance and control
compliance.  The Company has not established a formal Audit Standard
embodied in a series of preventative and detective control processes, again
relying on the Chief Financial Officer during the course of daily accounting
routines to establish policies and procedures that are tested forensically at
the end of the period by the external auditors.
  A
material weakness is a significant deficiency or combination of significant
deficiencies that results in a more
than remote likelihood that a material misstatement in the annual or
interim financial statements will not be prevented or detected.  A
significant deficiency is a single deficiency or combination of deficiencies
that results in a more
than remote likelihoodthat a misstatement of the annual or interim
financial statements that is more
than inconsequential will not be prevented or detected. A significant
deficiency is a deficiency, or combination of deficiencies, in internal control
over financial reporting that is less severe than a material weakness, yet
important enough to merit attention by those responsible for oversight of the
registrant’s financial reporting.   The Company had the following
material weaknesses and significant deficiencies at December 31,
2007:
  40
  •
                The
      monthly, quarterly and annual financial statement completion and closing
      processes lacked adequate preventative controls including timely general
      ledger account reconciliation and statement
  generation.
 •           Subsidiary
inventory records lacked recorded detail and information.
 •           Stock
transfer records, tracking and control lacked adequate controls
 •           Point
of Sales procedures lacked control in verification of services
rendered.
 •           Safeguarding
of cash lacked adequate preventative controls including overnight
safekeeping
 •           Acquisition
integration lacked consistent controls enabling the rapid incorporation of
existing accounting systems and procedures.
  Despite
all of these shortcomings with internal controls over financial reporting,
management has reasonable assurance that there was no negative material effect
on of the financial statements of the Company.
  Remediation
of Control Deficiencies, Material Weaknesses and Significant
Deficiencies
  We have
implemented and will continue to implement changes to our processes to improve
our internal control over financial reporting. The following steps have been
taken subsequent to December 31, 2007, or are planned for the first half of
2008, to remediate the conditions leading to the above stated deficiencies and
weaknesses:
  Remediation
Efforts on Control Deficiencies
  •
                Management
      is presently seeking a Chief Financial Officer to replace James Dodd who
      retired on April 18, 2008.  The successful candidate will have
      the knowledge and training to undertake the development of an overall
      policy, procedure and governance document for Internal Control
      Standards
 •           Once
the new Chief Financial Officer is named, he will be tasked by management to
form a formal Audit Committee which will meet formally to implement and monitor
the Standards created.
 •           Management
will work directly with its external auditors in evaluating and refining the
Standards to meet current requirements.
 •           Management
will undertake training to better understand their responsibility for effective
controls
  Remediation
Efforts on the Internal Controls Surrounding the Financial Statement Closing
Process
  •           Use
of standard general ledger entries.
 •           Creation
of procedures for subsidiary accounting system cut-off.
 •           Use
of a disclosure control checklist.
 •           Completion
of timely general ledger reconciliations in standard form.
 •           Establish
reporting deadlines for each period.
  Remediation
Efforts on Subsidiary
inventory records
  •           Inventory
records for MMCI have already been redone, creating the basis for recording
monthly changes.
 •           Inventory
records for nTech have already been redone, creating the basis for recording
monthly changes
 •           Specific
personnel have been designated to maintain these records
  Remediation
Efforts on Stock Transfer records
  •           At
the time a new CFO shall be named, management will establish a specific
procedure for tracking the need to issue new certificates.
  Remediation
Efforts on Point of sales
  •
                Formalization
      of appropriate documentation, including original purchase orders, plant
      tracking processes, shipping and invoicing shall be established at the
      time the new CFO is
      hired.
  41
  •           Separation
of accounting processes to include separate individuals to handle intake,
processing, invoicing and collecting on coating service
fees.
  Remediation
Efforts on Cash and other Company Asset safekeeping
  •           Cash
on hand in any of the Company’s offices shall be limited to reasonable amounts
necessary for petty cash purposes only.
 •           Regular
bank deposits are required at each location.
  Remediation
Efforts on Acquisition Accounting Integration
  •
                Financial
      recording delays and inaccuracies has been reduced by the Company’s use of
      a new integrated accounting software system that was implemented
      on January 1,
      2008
  Changes
In Internal Control Over Financial Reporting
  The
following changes in internal control over financial reporting occurred during
the fourth quarter of 2007:
  •
                  Improvements
      in documentation of accounting transactions were
    implemented.•
                  A
      new accounting software was implemented Company-wide starting January 1,
      2008•
                  Certain
      steps to further the segregation of duties were
    implemented.
  Evaluation
of Disclosure Controls and Procedures.  Our Chief Executive
Officer, who is currently acting as our Chief Financial Officer, after
evaluating the effectiveness of the Company’s “disclosure controls and
procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act)
Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this
annual  report, has concluded that our disclosure controls and
procedures are effective based on their evaluation of these controls and
procedures required by paragraph (b) of Exchange Act Rules 13a-15 or
15d-15.
  Changes
in Internal Control Over Financial Reporting.  Except as
discussed above, there were no changes in our internal control over financial
reporting identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
  Section
404 Assessment.  Section 404 of the Sarbanes-Oxley Act of 2002
requires management’s annual review and evaluation of our internal controls
beginning with our Form 10-K for the fiscal year ending December 31, 2007, and
an attestation of the effectiveness of these controls by our independent
registered public accounting firm beginning with our Form 10-K for the fiscal
year ending on December 31, 2008.  We are dedicating significant
resources, including management time and effort, and incurring substantial costs
in connection with our ongoing Section 404 assessment.  We are
currently documenting and testing our internal controls and considering whether
any improvements are necessary for maintaining an effective control environment
at our company.  The evaluation of our internal controls is being
conducted under the direction of our senior management.  In addition,
our management is regularly discussing the results of our testing and any
proposed improvements to our control environment with our Audit
Committee.  We will continue to work to improve our controls and
procedures, and to educate and train our employees on our existing controls and
procedures in connection with our efforts to maintain an effective controls
infrastructure at our Company.
  Limitations
on Effectiveness of Controls.  A system of controls, however
well designed and operated, can provide only reasonable, and not absolute,
assurance that the system will meet its objectives.  The design of a
control system is based, in part, upon the benefits of the control system
relative to its costs.  Control systems can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control.  In addition, over time, controls
may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.  In
addition, the design of any control system is based in part upon assumptions
about the likelihood of future events.
  42
  ITEM
9B.       OTHER INFORMATION
  None.
 PART
III
  ITEM
10.        Directors, Executive
Officers, Promoters and Control Persons
  Directors
      and Executive Officers
                
                
                
                Position
                Served
      SincePaul
      S. Clayson
                
                
                51
                
                CEO
      and Chairman of the Board of Directors.
                February
      2007Director
                October
      2006Terry
      R. Holmes
                
                
                61
                
                President,
      COO
                  Director
                February
      2007
                  October
      2006Bert
      Wonnacott
                
                
                57
                
                Vice
      President, Chief Development Officer
                March
      2007James
      C. Dodd*
                
                
                65
                
                Vice
      President, Chief Financial Officer*
                March
      2007Dr.
      Thomas Buckley
                
                
                58
                
                Director
                March
      2007*  Mr.
      Dodd retired from the Company on April 18, 2008.
   Paul
S. Clayson
 Mr.
Clayson is the founder, chairman, and chief executive officer of nCoat. He has
been a business owner, global strategic planning expert, financial and
investment strategist and political advisor for the past 25 years. Since 2003 he
has served  as President and Chief Operating Officer and equity
partner of Sequoia Pacific Research, Inc., which is a diversified nanotechnology
company. From 1998 to 2003 Mr. Clayson was Vice President, Corporate Strategy,
Sales, Marketing and Corporate Development for Fonix Corporation, a software
technology company where he developed global marketing, business, product
development and finance strategies and grew the company from a no-revenue
R&D company to a globally commercialized firm with customers worldwide and
development contracts with many of the world's dominant computer, semiconductor,
telecom and consumer electronics companies.  From 1988 to 1998, Mr.
Clayson managed congressional campaigns and served as Chief of Staff to two U.S.
Congressmen and as a lead advance agent to two U.S. Presidents. From 1982 to
1986,  Mr. Clayson served as senior management and operations officer
for three prominent institutional investment advisory and research firms in
Portland, Oregon, growing assets under management from $400 million to over $2
billion in under four years. Mr. Clayson has served as the Chairman of the
Economic Development Committee for the campaign of Governor Jon Huntsman of Utah
and was appointed by the Governor to serve as the Chairman of the Utah
Nanotechnology Initiative. Mr. Clayson devotes over 60 hours per week to our
business.
  Terry
R. Holmes
 Since
2001, Mr. Holmes has served as CEO and Chairman of Sequoia Pacific Research,
Inc.a nano-technology research, development and technology licensing company,
which he founded.  Mr. Holmes has 35 years of high level business
experience as a serial entrepreneur successfully starting numerous profitable
technology enterprises, primarily in the telephony, software development and
interactive voice response (IVR) industries. Mr. Holmes has incubated numerous
software applications and commercialized many into companies.   Mr.
Holmes founded the first ASP voice mail bureau in the United Stated of America
and developed a total of 3 voice mail bureaus, then sold his interest to develop
systems for the IVR industry. Mr. Holmes has founded and been CEO and Chairman
of several telephony software companies, including; a telephony interconnect
company, a telecom consulting company, an MLM ASP software development and
licensing company and a health benefit eligibility and enrollment ASP software
development and licensing company. Currently, he serves as CEO and Chairman of
the Board of TeeNetz, Inc., an ASP telephony and web services company. Mr. Holms
currently serves as the Vice Chairman of the Utah Nanotechnology
Initiative and as a member of the Utah Digital Health Commission. Mr.
Holmes  devotes over 60 hours per week to our business.
  43
  Bert
Wonnacott
 From
October 2005 to March 2007 Mr. Wonnacott was our Vice President and General
Counsel. From 1985 to October 2005 Mr. Wonnacott was a solo practitioner with a
corporate law practice. Prior to that he was a partner at Williams, Wonnacott
& George, which merged into Tanner, Kesler, Rust & Williams. He earned
an MBA and JD degree in a combined program from the University of Utah following
an undergraduate degree in business management and accounting from the same
institution. For more than thirty years, he has worked in corporate law,
business management and strategic advisory of multiple individuals and business
entities. He has been a small business owner and officer in several ventures.
Mr. Wonnacott has previously worked in corporate and private law practice
focusing on business start-ups, venture capital portfolio management, capital
funding, mergers, acquisitions and international taxation. He worked for a
venture capital firm in charge of portfolio selection, due diligence,
documentation, federal compliance and investment management. He also formed an
investment advisory company focusing on specialized global currency trading and
investing. He has volunteered his professional services for several 501(c)(3)
charitable organizations.
  James
Dodd
 From 2002
to March 2007 Mr. Dodd was Vice President of Finance (chief financial
officer) for P&J Brands, Inc.  Following 20 years of public
accounting experience, including nine years as a partner with a leading
international CPA firm, Mr. Dodd has 20 years experience as a senior corporate
officer and Chief Financial Officer ranging in scope from a large multinational
concern to a new product startup company. His experience in finance, accounting,
administration, analysis and planning, mergers and acquisitions and business
development have included two public companies with domestic and international
operations. Mr. Dodd has served as the CFO of companies engaged in manufacturing
and distribution in the food, defense, automotive, investment research and
publishing and recreation sectors. Mr. Dodd has a degree in business from
Montana State University and is a CPA.  Mr. Dodd retired
from the Company on April 18, 2008.
  Dr.
Thomas F. Buckley
 Since
1996, Dr. Buckley has served on the staff of Chevron Texaco providing counsel
and product management strategies to assure coordinated and timely technical
outcomes consistent with regulatory compliance obligations and internal
corporate policy. To this end, among other duties, he serves as lead new
substance notification negotiator in most discussions with the major global
Competent Authorities. Currently, he also serves as a lead lubricant industry
group contributor to the ongoing debate to develop reasoned and scientifically
sound draft directives and regulations, thus minimizing any potentially adverse
impacts upon the chemical industry at large. For over 27 years, Dr. Buckley has
enjoyed career success as a research and development chemist, staff scientist,
and global chemical product compliance specialist providing market support for
existing and emerging lubricant and fuel additive technologies, novel minerals
applications and alternative fuel sources for both large and small corporations
and affiliated university research departments. Dr. Buckley has specific
expertise in synthetic organic chemistry, related commercial process and product
development, the protection of Intellectual Property Rights, and associated
global new chemical regulatory affairs. Dr. Buckley received both his Bachelor
of Science degree in Chemistry and his Master of Science degree in Organic
Chemistry from the University of New Hampshire (Durham) in the early 70s,
beginning his professional career as a medicinal chemist. He later completed his
Doctor of Philosophy degree in Synthetic Organic Chemistry from the University
of California (Berkeley). He is the inventor of record for over 45 U.S. and
International patents, has published in several research, business trade, and
technical journals over his career including numerous technical conference
venues to date, and has served as Chairperson of numerous lubricant additive
trade associations sector groups having impact upon the uniform interpretation,
reconciliation, and implementation of regional chemical regulations in a global
chemicals economy.
   Audit
Committee Financial Expert
  The Board of Directors has
determined that we do not have an audit committee financial
expert.  We have been seeking to add an individual with these
qualifications to our Board of Directors but have been unable to find a suitable
individual.  We continue to search for someone who meets the
qualifications of an audit committee financial expert.
  44
  Compliance
With Section 16(a) of the Exchange Act
  Section 16(a) of the
Securities Exchange Act of 1934 requires our officers and directors, and persons
who beneficially own more than 10% of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission.  Officers, directors and greater
than 10% shareholders are required by regulation of the Securities and Exchange
Commission to furnish us with copies of all Section 16(a) forms which they
file.  Based solely on its review of the copies of such forms
furnished to us during the fiscal year ended December 31, 2007, we are aware of
the following untimely filings:
  As of the date of this
report, Messrs. Clayson and Holmes had not filed Forms 5.
  Code
of Ethics Disclosure
  Code of
Ethics.  The Company has not yet adopted a code of
ethics.  The Board of Directors anticipates that it will adopt a code
of ethics during the second or third quarter of 2008, and that we will file the
code of ethics as an exhibit to the quarterly report following the adoption of
the code of ethics.
   ITEM
      11.
                EXECUTIVE
      COMPENSATION
  Compensation
Discussion and Analysis
  The following is a
discussion of the Company’s program for compensation of its named executive
officers and directors.  As of the date of this Report, the
compensation committee of the Board of Directors was responsible for determining
the Company’s compensation program.
  Compensation
Program Objectives
  The
Company’s compensation program is designed to encompass several factors in
determining the compensation of the Company’s named executive
officers.  The following are the main objectives of the compensation
program for the Company’s named executive officers:
  -           Retain
qualified officers.
 -
                Provide
      overall corporate direction for the officers and also to provide direction
      that is specific to officer’s respective areas of
      authority.  The level of compensation amongst the officer group,
      in relation to one another, is also considered in order to maintain a high
      level of satisfaction within the leadership group. We consider the
      relationship that the officers maintain to be one of the most important
      elements of the leadership group.
 -           Provide
a performance incentive for the officers.
  The
Company’s compensation program is designed to reward the officers in the
following areas:
  -           achievement
of specific goals;
 -           professional
education and development;
 -
                creativity
      in the form of innovative ideas and analysis for new programs and
      projects;
 -           new
program implementation;
 -           attainment
of company goals, budgets, and objectives;
 -           results
oriented determination and organization;
 -           positive
and supportive direction for company personnel; and
 -           community
involvement.
  As of the
date of this Report, there were four principal elements of named executive
officer compensation.  The Board of Directors determines the portion
of compensation allocated to each element for each individual named executive
officer.  The discussions of compensation practices and policies are
of historical practices and policies.  Our Compensation Board of
Directors is expected to continue these policies and practices, but will
reevaluate the practices and policies as it considers advisable.
  45
  The elements of the
compensation program include:
  -           Base
salary;
 -           Stock
options and stock awards;
 -           Employee
benefits in the form of:
 -           health
and dental insurance;
 -           auto
reimbursement
 -           Other
de minimis benefits.
  Base
salary
  Base
salary is intended to provide competitive compensation for job performance and
to attract and retain qualified named executive officers.  The base
salary level is determined by considering several factors inherent in the market
place such as: the size of the company; the prevailing salary levels for the
particular office or position; prevailing salary levels in a given geographic
locale; and the qualifications and experience of the named executive
officer.
  Stock
options and stock awards
  Stock
ownership is provided to enable named executive officers and directors to
participate in the success of the Company.  The direct or potential
ownership of stock will also provide the incentive to expand the involvement of
the named executive officer to include, and therefore be mindful of, the
perspective of stockholders of the Company.
  Employee
benefits
  Several
of the employee benefits for the named executive officers are selected to
provide security for the named executive officers.  Most notably,
health insurance coverage is intended to provide a level of protection to that
will enable the named executive officers to function without having the
distraction of having to manage undue risk.  The health insurance also
provides access to preventative medical care which will help the named executive
officers function at a high energy level, to manage job related stress, and
contribute to the overall well being of the named executive officers, all of
which contribute to an enhanced job performance.
  Other de minimis
benefits
  Other de
minimis employee benefits such as cell phones and auto usage reimbursements are
directly related to job functions but contain a personal use element which is
considered to be a goodwill gesture that contributes to enhanced job
performance.
  As
discussed above, the Board of Directors determines the portion of compensation
allocated to each element for each individual named executive
officer.  As a general rule, base salary is competitively based while
giving consideration to employee retention, qualifications, performance, and
general market conditions.  Typically, stock options are based on the
current market value of the option and how that will contribute to the overall
compensation of the named executive officer.  Consideration is also
given to the fact that the option has the potential for an appreciated future
value.  As such this future value may in fact be the most significant
factor of the option, but it is also more difficult to quantify as a benefit to
the named executive officer.
  Accordingly,
in determining the compensation program for the Company, as well as setting the
compensation for each named executive officer, the Board of Directors
attempts to attract the interest of the named executive officer
within   the constraints of a compensation package that is fair and
equitable to all parties involved.
   SUMMARY
COMPENSATION TABLE
  The
following executive compensation disclosure reflects all compensation awarded
to, earned by or paid to the executive officers below. The following table
summarizes all compensation projected for 2007.  Note that the
individuals listed below were neither paid employees or compensated board
members of nCoat until after its merger in February.  The salary
amounts are projected for the 2007 fiscal year.  No other officers or
directors received annual compensation in excess of $100,000 during the last two
fiscal years.
  46
  Name
      and Principal Position
                Year
                
                Salary *
                
                
                Bonus
                
                
                Stock
                  Awards
                
                Option
                  Awards
                Non-Equity
      Incentive Plan Compensation
                Nonqualified
      Deferred Compensation Earnings
                All
      Other Compensation
                
                TotalPaul
      Clayson
                2007
                
                $
                250,000
                
                
                
                (1
                )
                
                
                
                
                
                
                
                
                $
                250,000TerryHolmes
                2007
                
                $
                250,000
                
                
                
                (1
                )
                
                
                
                
                
                
                
                
                $
                250,000James
      Dodd
                2007
                
                $
                120,000
                
                
                
                (1
                )
                
                $
                350,000
                (2)
                
                
                
                
                
                $
                420,000BertWonnacott
                2007
                
                $
                120,000
                
                
                
                (1
                )
                
                
                
                
                
                
                
                
                
                $
                120,000
  * Note
that the salaries set forth above are listed prior to any deferrals which
occurred in 2007 for the purpose of extending cash flow to
operations.  Such deferrals are combined as a portion of
liabilities.
  (1)  Annual
bonuses, if any, are established by the Board or its compensation committee, as
applicable, which will establish potential bonus amounts, criteria and
milestones in consultation with the Employee. Bonuses will be based on factors
such as (i) revenue growth, (ii) EBITDA, (iii) new product introduction, (iv)
customer base growth, (v) customer retention, (vi) completion of target M&A
activities, and (vii) successful integration of acquired companies or assets
(each such area adopted by the board or Compensation Committee being a
“Performance Evaluation Category”). For each Performance Evaluation Category,
there will be a baseline performance level, the achievement of which entitles
the Employee to bonus consideration, and a level which will qualify for one
hundred percent (100%) of the maximum annual bonus amount determined by the
Board or its compensation committee (“Target”), which Target amount may be as
much as two hundred percent (200%) of the Employee’s Annual Base
Salary.
  (2)  Upon
the expiration of a 90-day probationary employee period, the stock was issued,
subject to vesting and Rule 144 restrictions.  The amount shown
in the table represents the award (500,000) at the average market value of $.70
per share on the day of the expiration of the 90-day period (June 1, 2007). The
shares included a vesting schedule.  When Mr. Dodd retired from the
Company on April 18, 2008, 60% of the shares issued were forfeited.
  There are
no stock options outstanding as of October 4, 2007 and no options have been
granted in 2007, but it is contemplated in the future the Company may issue
stock options in the future to officers, directors, advisers and future
employees.
  Director
Compensation
  We have
not paid any compensation to our directors in 2007.
  Stock
Option Plans
  There
is no stock option plan in effect as of July 25, 2008.  This does not
preclude any such plans in the future.
  47
  Board
of Directors Meetings, Committees and Director Compensation
  Our board of directors
took action at five noticed meetings during
2007.
  ITEM
12.        SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
   The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 2008, by:
  •
                each
      person known by us to be a beneficial owner of more than 5.0% of our
      outstanding common stock;•
                each
      of our directors;•
                each
      of our named executive officers; and•
                all
      directors and executive officers as a
group.
 
 The
number and percentage of shares beneficially owned is determined under rules of
the SEC and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the individual has sole or shared voting power or
investment power and also any shares which the individual has the right to
acquire beneficial ownership of within 60 days of November 19, 2007 through the
exercise of any stock option or other right. Unless otherwise indicated in the
footnotes, each person has sole voting and investment power with respect to the
shares shown as beneficially owned. A total of 97,428,650 shares of our common
stock were issued and outstanding as of July 25, 2008.
  Unless
provided for otherwise, the address for each of the beneficial owners named
below is the Company's business address 7237 Pace Dr. PO Box 38 Whitsett,
NC 2737-9118.
  48
 Name
      of Beneficial Owner
                
                Shares
                
                
                Percent
      of Class5%
      Stock Holders
                
                
                16,058,600
                
                
                
                16.7%Mark
      Willes Family Trust3561
      North 100 EastSuite
      300Provo,
      UT 84604Directors
      and Named Executive OfficersPaul
      Clayson
                
                
                13,451,880
                
                
                
                13.9%Terry
      Holmes
                
                
                13,976,880
                *
                
                
                13.9%Bert
      Wonnacott
                
                
                350,000
                
                
                
                0.4%James
      Dodd**
                
                
                500,000
                
                
                
                0.5%Dr.
      Thomas F. Buckley
                
                
                -
                
                
                
                -Mr.
      Geoffrey D. Lewis***
                
                
                -
                
                
                
                -All
      directors and executive officers as a group. (4 persons)
                
                
                28,278,760
                
                
                
                28.8%
  49
  *  Includes
525,000 shares owned by Marcine Holmes, Spouse
 **  Mr.
Dodd retired as the Company’s Chief Financial Officer on April 18,
2008.  60% of these shares were forfeited
 *** Mr.
Lewis resigned as director effective December 31, 2007 .
  ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
  From
October 1, 2005 to July 31, 2007, we leased executive office space in Salt Lake
City, from Mr. Holmes our Chief Operating Officer and a member of our board of
directors. Since that time we have consolidated our operations in Salt Lake and
moved personnel to North Carolina so the need for the space has ended. Since
October 1, 2005, we have leased telephone and computer equipment and purchased
long distance telephone service from Telnetz, Inc., a Utah Company which is
owned by Mr. Holmes. Both transactions were on terms not less favorable to us
than what we would have paid to any unrelated or unaffiliated party. In 2006,
Holmes was reimbursed for funds advanced related to the formation of the Company
and the acquisitions of HPC. Payments were $103,013 and $258,232, including
expense reimbursements, respectively, for years ended December 31, 2006 and
December 31, 2005.
  During
the year ended December 31, 2006, we entered into a Revolving Line of Credit
agreement with three companies controlled by our officers and directors. Total
interest paid under this agreement was $1,661. This line of credit expired on
December 31, 2006.
  Certain
officers and key employees of ours received consulting fees in lieu of, or in
addition to, their annual salary, prior to the merger. Payments for the years
ended December 31, 2006 and December 31, 2005 totaled $354,000 and $322,000,
respectively for Clayson, Holmes and Wonnacott. Effective January 1 2007, all
payment are reflected as salaries rather than consulting fees.
  Director
Independence
  As of the
date of this Report, our common stock is traded on the OTC Bulletin Board
(the “Bulletin Board”).  The Bulletin Board does not impose on us
standards relating to director independence or the makeup of committees with
independent directors, or provide definitions of
independence.  Nevertheless, we have undertaken to appoint to our
Board of Directors Dr. Thomas Buckley, who is independent under the NASDAQ
Marketplace Rules and those standards applicable to companies trading on
NASDAQ.
  Specifically,
Dr. Buckley:
  -           has
not been any time during the past three years, employed by us or by any parent
or subsidiary of ours;
  -
                has
      not accepted or had a family member who accepted any compensation from us
      in excess of $60,000 during any period of twelve consecutive months within
      the three years preceding the determination of
    independence.
 -
                is
      not a family member of an individual who is, or at any time during the
      past three years was, employed by us as an executive
    officer;
 -
                is
      not, and does not have a Family Member who is, a partner in, or a
      controlling shareholder or an executive officer of, any organization to
      which we made, or from which the company received, payments for property
      or services in the current or any of the past three fiscal years that
      exceed 5% of the recipient's consolidated gross revenues for that year, or
      $200,000.
 -
                is
      not, and does not have a family member who is, employed as an executive
      officer of another entity where at any time during the past three years
      any of the executive officers of ours serve on the compensation committee
      of such other entity; or
 -
                is
      not, and does not have a family member who is, a current partner of our
      outside auditor, or was a partner or employee of our outside auditor who
      worked on our audit at any time during any of the past three
      years.
  50
   ITEM
14.       PRINCIPAL
ACCOUNTANT FEES AND SERVICES - The company
incurred the following fees from Hansen, Barnett and Maxwell, P.C. for the years
ended December 31, 2007 and 2006:
  2007
                
                
                2006(1) Audit
      Fees
                
                $
                103,658
                
                
                $
                134,858(2) Audit -
      related fees
                
                
                -
                
                
                
                -(3)
      Tax Fees
                
                
                3,371
                
                
                
                -(4) All other
      fees
                
                
                -
                
                
                
                -
 51
 
 PART
IV
  ITEM
      15.
                EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
  (A)
                Documents
      filed as part of this Form 10-K:
  1.
                Consolidated
      Financial Statements (included in Part II, Item
  8)
  Consolidated Balance
Sheets as of December 31, 2007 and 2006
  Consolidated
Statements of Operations for the Years Ended December 31, 2007,
2006
  Consolidated
Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31,
2007 and 2006
  Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007 and
2006
  Notes to Consolidated
Financial Statements
   2.
                Financial
      Statement Schedules: None
   3.
                Exhibits:
      The following Exhibits are filed with this Form 10-K pursuant to Item
      601(a) of Regulation S-K:
  Exhibit
      No.
                Description
      of Exhibit
   3.1
                Certificate
      of Incorporation (previously filed as an exhibit to a registration
      statement on Form SB-2, filed with the Commission on December 27, 2004,
      and incorporated herein by this
reference).
  3.2
                Certificate
      of Amendment to Certificate of Incorporation (previously filed as an
      exhibit to a Current Report on Form 8-K, filed with the Commission on
      February 8, 2007, and incorporated herein by this
    reference).
  3.3
                Bylaws
      (previously filed as an exhibit to a registration statement on Form SB-2,
      filed with the Commission on December 27, 2004, and incorporated herein by
      this reference).
  4.1
                Convertible
      Debenture, dated October 24, 2006 (previously filed as an exhibit to a
      Current Report on Form 8-K, filed with the Commission on November 3, 2006,
      and incorporated herein by this
reference).
  4.2
                Convertible
      Debenture, dated November 9, 2006 (previously filed as an exhibit to a
      Quarterly Report on Form 10-QSB, filed with the Commission on January 17,
      2007, and incorporated herein by this
  reference).
  4.3
                Convertible
      Debenture, dated November 28, 2006 (previously filed as an exhibit to a
      Quarterly Report on Form 10-QSB, filed with the Commission on January 17,
      2007, and incorporated herein by this
  reference).
  4.4
                Convertible
      Debenture, dated February 6, 2007 (previously filed as an exhibit to
      Registration Statement on Form SB-2, filed with the Commission on July 12,
      2007, and incorporated herein by
reference).
  4.5
                Convertible
      Debenture, dated May 14, 2007 (previously filed as an exhibit to
      Registration Statement on Form SB-2, filed with the Commission on July 12,
      2007, and incorporated herein by
reference).
  52
  10.1
                Form
      of Securities Purchase Agreement (previously filed as an exhibit to the
      Company’s Current Report on Form 8-K, filed with the Commission on June 1,
      2007, and incorporated herein by this
  reference).
  10.2
                Form
      of Series A Notes (previously filed as an exhibit to the Company’s Current
      Report on Form 8-K, filed with the Commission on June 1, 2007, and
      incorporated herein by this
reference).
  10.3
                Form
      of Series A Warrants (previously filed as an exhibit to the Company’s
      Current Report on Form 8-K, filed with the Commission on June 1, 2007, and
      incorporated herein by this
reference).
  10.4
                Form
      of Series B Notes (previously filed as an exhibit to the Company’s Current
      Report on Form 8-K, filed with the Commission on June 1, 2007, and
      incorporated herein by this
reference).
  10.5
                Form
      of Series B Warrants (previously filed as an exhibit to the Company’s
      Current Report on Form 8-K, filed with the Commission on June 1, 2007, and
      incorporated herein by this
reference).
  10.6
                Form
      of Registration Rights Agreement (previously filed as an exhibit to the
      Company’s Current Report on Form 8-K, filed with the Commission on June 1,
      2007, and incorporated herein by this
  reference).
  10.7
                Form
      of Escrow Agreement (previously filed as an exhibit to the Company’s
      Current Report on Form 8-K, filed with the Commission on June 1, 2007, and
      incorporated herein by this
reference).
  10.8
                Form
      of Amendment to Escrow Agreement (previously filed as an exhibit to the
      Company’s Current Report on Form 8-K, filed with the Commission on June 1,
      2007, and incorporated herein by this
  reference).
  10.9
                Form
      of Lockup Agreement (previously filed as an exhibit to the Company’s
      Current Report on Form 8-K, filed with the Commission on June 1, 2007, and
      incorporated herein by this
reference).
  10.10
                Stock
      Purchase Agreement by and among nCoat, Inc., MCC, Inc., and Michael
      Novakovic and Phebe Novakovic, dated June 19, 2007 (previously filed as an
      exhibit to the Company’s Current Report on Form 8-K, filed with the
      Commission on June 22, 2007, and incorporated herein by this
      reference).
  10.11
                Lease
      Agreement, dated May 15, 2001, between Remco Management Company, LLC, and
      HPC (previously filed as an exhibit to the Company’s Registration
      Statement on Form SB-2, filed with the Commission on October 12, 2007, and
      incorporated herein by reference).
  10.12
                Lease
      Extension Agreement, dated June 1, 2006, between Remco Management Company,
      LLC, and HPC (previously filed as an exhibit to the Company’s Registration
      Statement on Form SB-2, filed with the Commission on October 12, 2007, and
      incorporated herein by reference).
  10.13
                Industrial
      Lease, dated October 15, 2005, between Ralf LLC, and HPC (previously filed
      as an exhibit to the Company’s Registration Statement on Form SB-2, filed
      with the Commission on October 12, 2007, and incorporated herein by
      reference).
  10.14
                Lease
      Agreement, dated February 21, 2006, between Mebane Warehouse, LLC, and HPC
      (previously filed as an exhibit to the Company’s Registration Statement on
      Form SB-2, filed with the Commission on October 12, 2007, and incorporated
      herein by reference).
  10.15
                Memorandum
      of Sublease, dated November 1, 2005, between Heritage One, L.L.C., Rocky
      Mountain Seed and Grain, and HPC (previously filed as an exhibit to the
      Company’s Registration Statement on Form SB-2, filed with the Commission
      on October 12, 2007, and incorporated herein by
  reference).
  10.16
                Commercial
      Lease Agreement, dated October 13, 2005, between Philadelphia Suburban
      Development Corporation and MCCI (previously filed as an exhibit to the
      Company’s Registration Statement on Form SB-2, filed with the Commission
      on October 12, 2007, and incorporated herein by
  reference).
  10.17
                Lease
      Agreement, dated January 22, 2007, between Milford Business Centre and
      MCCI (previously filed as an exhibit to the Company’s Registration
      Statement on Form SB-2, filed with the Commission on October 12, 2007, and
      incorporated herein by reference).
  53
  10.18
                Amendment
      and Waiver of Registration Rights Agreement and 6% Series A Convertible
      Notes, dated as of November 30, 2007 (previously filed as an exhibit to
      the Company’s Current Report on Form 8-K, filed with the Commission on
      December 6, 2007, and  incorporated herein by
      reference).
  10.19
                Amendment
      and Waiver of 6% Series B Convertible Notes, dated as of November 30, 2007
      (previously filed as an exhibit to the Company’s Current Report on Form
      8-K, filed with the Commission on December 6, 2007,
      and  incorporated herein by
  reference).
  10.20
                Series
      A Amendment and Interest Shares Agreement, dated as of January 7, 2008
      (previously filed as an exhibit to the Company’s Current Report on Form
      8-K, filed with the Commission on January 29, 2008,
      and  incorporated herein by
  reference).
  10.21
                Series
      B Amendment and Interest Shares Agreement, dated as of January 7, 2008
      (previously filed as an exhibit to the Company’s Current Report on Form
      8-K, filed with the Commission on January 29, 2008,
      and  incorporated herein by
  reference).
 10.22
                February’s
      waivers
  31
                Certifications
      of President and Chief Financial Officer32
                Certification of President and Chief Financial Officer Pursuant to
      Section 906 of the

                  Sarbanes-Oxley
      Act of 2002.
  54
  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.
  nCOAT,
      INC.A
      Delaware corporationJuly
      30, 2008
                By:
                /s/
      Paul S.
      ClaysonPaul
      S. ClaysonIts:
                CEO
      and Chairman(Principal
      Executive Officer)July
      30, 2008
                By:
                /s/
      Paul S.
      ClaysonPaul
      S. ClaysonIts:
                Chief
      Financial Officer(Principal
      Financial Officer, and PrincipalAccounting
      Officer)
   Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed below by the following person in the capacities and on the dates
indicated.
  /s/
      Terry R.
      Holmes
                July
      30 , 2008Terry
      HolmesIts:     President,
      COO and DirectorJuly
      30 , 2008/s/
      Paul S. ClaysonChief
      Financial Officer(Principal
      Financial Officer, andPrincipal
      Accounting Officer)/s/
      Thomas
      Buckley
                July
      30 , 2008Thomas
      BuckleyDirector
  55


NCOAT,
INC. AND SUBSIDIARIES
 
 INDEX
TO FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting
      Firm
                F-2Consolidated Balance Sheets, December 31, 2007 and
      2006
                F-3Consolidated Statements of Operations for the Years Ended
      December 31, 2007 and 2006
                F-4Consolidated Statements of Stockholders’ Deficit for the Years
      Ended December 31, 2006 and 2007
                F-5Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2007 and 2006
                F-6Notes to Consolidated Financial
      Statements
                F-7
  
  F-1
  HANSEN,BARNETT& MAXWELL, P.C.A
      Professional Corporation

                  CERTIFIED PUBLIC
      ACCOUNTANTS

                    5 Triad Center,
      Suite 750

                      Salt Lake City,
      UT 84180-1128

                        Phone: (801)
      532-2200

                          Fax: (801)
      532-7944

                            www.hbmcpas.com
              
              Registered with
      the Public Company

                  Accounting
      Oversight Board
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and the Stockholders
 nCoat,
Inc.
 
 We
have audited the accompanying consolidated balance sheets of nCoat, Inc. and
subsidiaries as of December 31, 2007 and 2006 and the related consolidated
statements of operations, stockholders’ deficit, and cash flows 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
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 nCoat, Inc. and
subsidiaries as of December 31, 2007 and 2006 and the results of their
operations and their cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company suffered losses from operations
and had negative cash flows from operating activities during the years ended
December 31, 2007 and 2006 and, as of December 31, 2007, the Company had a
working capital deficit and a stockholders’ deficit. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 
 HANSEN,
BARNETT & MAXWELL, P.C.
 Salt
Lake City, Utah
 July
22, 2008
 
 F-2
 
 NCOAT,
INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 December
      31,
                
                2007
                
                
                2006ASSETSCurrent
      AssetsCash
                
                $
                295,961
                
                
                $
                63,437Trade
      receivables, net
                
                
                934,337
                
                
                
                964,281Inventory
                
                
                172,477
                
                
                
                88,965Prepaid
      expenses
                
                
                62,449
                
                
                
                7,852Deferred
      income tax assets
                
                
                151,600
                
                
                
                222,501Total
      Current Assets
                
                
                1,616,824
                
                
                
                1,347,036Property and Equipment,
      net
                
                
                2,233,189
                
                
                
                1,649,491Intangible Assets,
      net
                
                
                2,968,864
                
                
                
                3,231,042Total
      Assets
                
                $
                6,818,877
                
                
                $
                6,227,569LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesAccounts
      payable
                
                $
                2,212,663
                
                
                $
                1,383,629Accrued
      liabilities
                
                
                2,464,931
                
                
                
                1,102,458Accrued
      consulting obligation
                
                
                500,000
                
                
                
                500,000Current
      portion of notes payable
                
                
                1,987,966
                
                
                
                5,305,021Current
      portion of obligations under capital leases
                
                
                153,540
                
                
                
                130,895Total
      Current Liabilities
                
                
                7,210,125
                
                
                
                8,422,003Long-Term
      LiabilitiesNotes
      payable, net of current portion
                
                
                12,654,812
                
                
                
                220,909Obligations
      under capital leases , net of current portion
                
                
                328,193
                
                
                
                471,905Deferred
      income taxes
                
                
                151,600
                
                
                
                222,501Total
      Long-Term Liabilities
                
                
                13,243,580
                
                
                
                915,315Stockholders'
      DeficitCommon
      stock - $0.0001 par value; 500,000,000 shares
    authorized;96,439,452
      shares and 33,660,000 shares outstanding, respectively
                
                
                9,644
                
                
                
                3,366Additional
      paid-in capital
                
                
                22,440,669
                
                
                
                5,272,619Accumulated
      deficit
                
                
                (36,085,141
                )
                
                
                (8,385,734
                )Total
      Stockholders' Deficit
                
                
                (13,634,828
                )
                
                
                (3,109,749
                )Total
      Liabilities and Stockholders' Deficit
                
                $
                6,818,877
                
                
                $
                6,227,569
   See the
accompanying notes to the consolidated financial statements.
  F-3
 
 NCOAT,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 
 For
      the Years Ended December 31,
                
                2007
                
                
                2006Net
      Sales
                
                $
                7,765,309
                
                
                $
                5,572,621Cost
      of Goods Sold
                
                
                6,148,138
                
                
                
                5,331,181Gross
      Profit
                
                
                1,617,171
                
                
                
                241,440Operating
      ExpensesGeneral
      and administrative
                
                
                8,438,137
                
                
                
                4,627,171Sales
      and marketing
                
                
                856,565
                
                
                
                1,004,341Research
      and development
                
                
                604,149
                
                
                
                -Impairment
      loss on intangible assets
                
                
                4,618,392
                
                
                
                -Total
      Operating Expenses
                
                
                14,517,243
                
                
                
                5,631,512Loss
      from Operations
                
                
                (12,900,072
                )
                
                
                (5,390,072
                )Interest
      Expense
                
                
                14,799,335
                
                
                
                2,080,502Loss
      Before Income Taxes
                
                
                (27,699,407
                )
                
                
                (7,470,574
                )Benefit
      from Income Taxes
                
                
                -
                
                
                
                751,619Net
      Loss
                
                $
                (27,699,407
                )
                
                $
                (6,718,955
                )Basic
      and Diluted Loss per Share
                
                $
                (0.34
                )
                
                $
                (0.21
                )Basic
      and Diluted Weighted-AverageShares
      Outstanding
                
                
                81,574,257
                
                
                
                31,284,657
  See the
accompanying notes to the consolidated financial statements.
 
 F-4
 
 NCOAT,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
 FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2007
 
 Additional
                
                
                
                
                
                TotalCommon
      Stock
                
                
                Paid-in
                
                
                Accumulated
                
                
                Stockholders'Shares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                EquityBalance
      - December 31, 2005
                
                
                27,993,332
                
                
                $
                2,799
                
                
                $
                3,773,186
                
                
                $
                (1,666,779
                )
                
                $
                2,109,206Shares
      issued for cash, $0.26 per share
                
                
                5,666,668
                
                
                
                567
                
                
                
                1,499,433
                
                
                
                -
                
                
                
                1,500,000Net
      Loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6,718,955
                )
                
                
                (6,718,955
                )Balance
      - December 31, 2006
                
                
                33,660,000
                
                
                
                3,366
                
                
                
                5,272,619
                
                
                
                (8,385,734
                )
                
                
                (3,109,749
                )Shares
      issued to investor
                
                
                1,130,910
                
                
                
                113
                
                
                
                (113
                )
                
                
                -
                
                
                
                -Vested
      and nonvested shares issued toemployees
      and consultants as compensation,net
      of forfeitures
                
                
                13,074,090
                
                
                
                1,307
                
                
                
                1,421,103
                
                
                
                -
                
                
                
                1,422,410Shares
      issued upon the exercise of warrants
                
                
                3,740,000
                
                
                
                374
                
                
                
                (204
                )
                
                
                -
                
                
                
                170Shares
      issued to the former shareholders ofTylerstone
      Venture Corporation
                
                
                37,200,000
                
                
                
                3,720
                
                
                
                (3,720
                )
                
                
                -
                
                
                
                -Shares
      issued upon conversion of debenturesand
      related accrued interest
                
                
                5,170,719
                
                
                
                518
                
                
                
                2,584,842
                
                
                
                -
                
                
                
                2,585,360Beneficial
      debt conversion rights
                
                
                -
                
                
                
                -
                
                
                
                5,391,986
                
                
                
                -
                
                
                
                5,391,986Warrants
      issued with convertible debt
                
                
                -
                
                
                
                -
                
                
                
                5,656,056
                
                
                
                -
                
                
                
                5,656,056Convertible
      debt placement agent warrants
                
                
                -
                
                
                
                -
                
                
                
                998,108
                
                
                
                -
                
                
                
                998,108Shares
      issued to convertible debt placementagent
                
                
                880,400
                
                
                
                88
                
                
                
                113,484
                
                
                
                -
                
                
                
                113,572Shares
      issued in acquisition of MCC, Inc.
                
                
                1,333,333
                
                
                
                133
                
                
                
                906,533
                
                
                
                -
                
                
                
                906,666Shares
      issued upon conversion of liabilitypayable
      to former owner of MCC, Inc.
                
                
                250,000
                
                
                
                25
                
                
                
                99,975
                
                
                
                -
                
                
                
                100,000Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (27,699,407
                )
                
                
                (27,699,407
                )Balance
      - December 31, 2007
                
                
                96,439,452
                
                
                $
                9,644
                
                
                $
                22,440,669
                
                
                $
                (36,085,141
                )
                
                $
                (13,634,828
                )
  See the
accompanying notes to the consolidated financial statements.
  F-5
 
 NCOAT,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 For
      the Years Ended December 31,
                
                2007
                
                
                2006Cash
      Flows From Operating ActivitiesNet
      loss
                
                $
                (27,699,407
                )
                
                $
                (6,718,955
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                492,357
                
                
                
                245,283Amortization
      of intangible assets
                
                
                1,035,715
                
                
                
                574,510Impairment
      loss on intangible assets
                
                
                4,618,391
                
                
                
                -Amortization
      of discount on notes payable and deferred loan costs
                
                
                13,380,786
                
                
                
                1,235,379Stock-based
      compensation
                
                
                1,422,410
                
                
                
                -Accrued
      interest paid by the issuance of a note payable
                
                
                150,000
                
                
                
                -Loss
      on abandoned assets, net
                
                
                -
                
                
                
                22,668Deferred
      income tax benefit
                
                
                -
                
                
                
                (751,619
                )Changes
      in assets and liabilities, net of effects from purchase of MCC,
      Inc.:Accounts
      receivable
                
                
                435,687
                
                
                
                (519,862
                )Inventory
                
                
                36,557
                
                
                
                25,174Prepaid
      expenses
                
                
                151,202
                
                
                
                3,499Accounts
      payable
                
                
                595,532
                
                
                
                1,068,059Accrued
      liabilities
                
                
                734,149
                
                
                
                1,102,458Net
      Cash Used in Operating Activities
                
                
                (4,646,621
                )
                
                
                (3,713,406
                )Cash
      Flows From Investing ActivitiesPayment
      for the purchase of property and equipment
                
                
                (42,391
                )
                
                
                (211,734
                )Payment
      for purchase MCC, Inc., net of cash acquired
                
                
                (4,931,220
                )
                
                
                -Net
      Cash Used in Investing Activities
                
                
                (4,973,611
                )
                
                
                (211,734
                )Cash
      Flows From Financing ActivitiesProceeds
      from issuance of notes payable, net of loan costs paid
                
                
                6,470,553
                
                
                
                1,817,550Proceeds
      from issuance of warrants, net of offering costs paid
                
                
                6,654,165
                
                
                
                -Proceeds
      allocated to registration payment liability
                
                
                270,000
                
                
                
                -Proceeds
      from issuance of common stock and exercise of warrants
                
                
                170
                
                
                
                1,500,000Principal
      payments on notes payable
                
                
                (3,421,065
                )
                
                
                (18,602
                )Principal
      payments under capital lease obligations
                
                
                (121,067
                )
                
                
                (76,553
                )Proceeds
      from repayment of checks drawn in excess of cash in bank
                
                
                -
                
                
                
                (96,000
                )Net
      Cash Provided by Financing Activities
                
                
                9,852,756
                
                
                
                3,126,395Net
      Decrease in Cash
                
                
                232,524
                
                
                
                (798,745
                )Cash
      at Beginning of Year
                
                
                63,437
                
                
                
                862,182Cash
      at End of Year
                
                $
                295,961
                
                
                $
                63,437Supplemental
      Disclosures of Cash Flow InformationCash
      paid for interest
                
                $
                1,672,916
                
                
                $
                830,339Supplemental
      Schedule of Noncash Investing and Financing ActivitiesIn
      connection with the acquisition of MCC, Inc., liabilities were
      assumedas
      follows:Fair
      value of assets acquired, including $68,780 of cash
                
                $
                7,142,826
                
                
                $
                -Cash
      paid
                
                
                (5,000,000
                )
                
                
                -Common
      stock issued
                
                
                (906,666
                )
                
                
                -Liabilities
      assumed
                
                $
                1,236,160
                
                
                $
                -Notes
      payable issued for the purchase of equipment and insurance
                
                $
                83,158
                
                
                $
                513,203Capital
      lease obligation incurred for the lease of equipment
                
                
                -
                
                
                
                671,019Common
      stock issued upon conversion of notes payable and accrued
      interest
                
                
                2,685,360
                
                
                
                -Common
      stock issued for services of convertible debenture
    placementagent
      recognized as deferred loan costs
                
                
                113,572
                
                
                
                -
 
 See the
accompanying notes to the consolidated financial statements.
  F-6
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
  NOTE
1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
 Nature of
Operations - nCoat, Inc. and its subsidiaries specialize in
nanotechnology research, licensing, and the commercialization, distribution and
application of nano as well as multiple non-nano surface coatings. The Company’s
specialized coatings are used by the automotive, diesel engine, trucking,
recreational vehicle, motorcycle, aerospace and oil and gas industries for heat
management, corrosion resistance, friction reduction, bond strength and
appearance. Corporate offices and operations headquarters are located in
Whitsett, North Carolina and application operations are conducted at facilities
located in Bluffdale, Utah; Oklahoma City, Oklahoma; Pascagoula, Mississippi;
Quaker Town, Pennsylvania; Tempe, Arizona; and Whitsett, North
Carolina.
 
 Organization and
Basis of Presentation - On February 1, 2007, the shareholders of
nCoat, Inc. changed its name to nCoat Automotive Group, Inc. (referred to herein
as nCoat). On February 14, 2007, nCoat consummated a Share Exchange Agreement
with Tylerstone Ventures Corporation (Tylerstone) whereby Tylerstone acquired
all of the outstanding common stock of nCoat in exchange for the issuance of
50,840,000 shares of Tylerstone common stock.
 
 The nCoat
shareholders received a majority of the voting equity interests of Tylerstone
and nCoat was therefore considered to have acquired Tylerstone for financial
reporting purposes. Immediately prior to the share exchange, nCoat had
11,554,545 shares of common stock outstanding. The share exchange was recognized
as the recapitalization of nCoat into Tylerstone at historical cost in a manner
similar to a 4.4-for-1 forward stock split. The accompanying consolidated
financial statements have been restated on a retroactive basis for all periods
presented to reflect the shares issued to the nCoat shareholders under the Share
Exchange Agreement.  On February 2, 2007, the Tylerstone shareholders
amended the articles of incorporation of Tylerstone to change its name to nCoat,
Inc. (to conform to the name of the operating company) and to increase the
authorized common stock to 500,000,000 shares, $0.0001 par value.
 
 On June
29, 2007, nCoat, Inc. acquired of all the capital stock of MCC, Inc. (Metallic
Ceramic Coatings, Inc. or MCCI). The results of MCCI’s operations have been
included in the consolidated financial statements of the Company from June 29,
2007.
 
 Principles of
Consolidation–The accompanying consolidated financial statements include the
operations, accounts and transactions of nCoat, Inc. from February 14, 2007, of
nCoat Automotive Group, Inc., High Performance Coatings, Inc. and nTech, Inc.
for all periods presented and of MCCI from the date of its acquisition. These
entities, for the periods included in the consolidated financial statements, are
collectively referred to as the Company. All intercompany transactions and
balances have been eliminated in consolidation.
 
 Use of Estimates
– The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
 
 Concentration of
Credit Risk – Financial instruments that potentially subject the Company
to concentration of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its customers.
The Company performs ongoing credit evaluations of its customers and maintains
an allowance for possible losses which, when realized, have been within the
range of management’s expectations. The allowance for losses on uncollectible
accounts receivable is established by charges to operations based on
management’s judgment of anticipated losses. Such accounts are charged to the
allowance when collection appears doubtful. Any subsequent recoveries are
credited to the allowance account.  The allowance for doubtful
accounts at December 31, 2007 and 2006 was $175,769 and $96,518,
respectively.
  F-7
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 Inventory
– Inventory
consists of raw materials, labor and overhead.  Inventory is stated at
cost using the first-in, first-out method, which does not exceed market.
Abnormal costs for items such as idle facility expenses, double freight,
rehandling costs and excessive spoilage are recognized as current-period
charges.
 
 Property and
Equipment –Property and equipment
are stated at cost.  Additions and major improvements are capitalized
while maintenance and repairs are charged to operations.  Upon
retirement, trade-in, sale or disposition, the cost and the accumulated
depreciation of the items sold are eliminated from the accounts, and any gain or
loss is recognized in operations.  Depreciation is computed using the
straight-line method and is recognized over the estimated useful lives of the
property and equipment, which are three to ten years.
 
 Impairment of
Long-Lived Assets – The Company evaluates long-lived assets for
impairment at each balance sheet date in compliance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144).  An impairment loss
is recognized whenever events or changes in circumstances indicate the carrying
amount of an asset is not recoverable.  Recovery is measured by a
comparison of the carrying amount of an asset or asset group to estimated future
undiscounted net cash flows of the related asset or group of assets over their
remaining lives.  If the carrying amount of an asset exceeds the
future undiscounted cash flows, an impairment loss is recognized for the amount
by which the carrying amount exceeds the estimated fair value of the
asset.  Fair value is normally determined based on the discounted
future net cash flows of the asset or asset group.  As a result of the
impairment analysis, the Company recorded a $4,618,392 impairment loss on
intangible assets during December 31, 2007.  No impairment was
recognized in 2006.
 
 Revenue
Recognition – Revenue from sales is recognized when goods are shipped and
title to products and risk of loss have passed to the customer. Revenue for
services are recognized when related products have been delivered to and
accepted by the customer. Once goods or services have been delivered to and
accepted by the customer, no right of return exists, except for warrantee
services, which have not been material.
 
 Shipping and
Handling Costs –Amounts billed to customers for shipping and handling
are reported in net sales in the accompanying consolidated statements of
operations.  Shipping and handling costs incurred by the Company for
the delivery of goods to customers are included in cost of sales.
 
 Research and
Development – Research and development costs are expensed when incurred
and amounted to $604,149 during the year ended December 31, 2007. Research and
development costs were not material during the year ended December 31,
2006.
 
 Advertising
– Advertising costs are expensed at the time the advertising takes place.
Advertising expense totaled $214,727 and $145,295 for the years ended December
31, 2007 and 2006, respectively.
 
 Basic and Diluted
Loss Per Share – Basic loss per common
share is computed by dividing net loss by the weighted-average number of common
shares outstanding during each period. Diluted loss per share is computed by
dividing net loss by the weighted-average number of common shares outstanding
plus potential shares of common stock outstanding, except during periods when
those potential common shares are anti-dilutive.  There were
72,510,528 and 7,240,000 potential common shares relating to non-vested shares,
convertible debt and warrants that were excluded from the calculation of diluted
loss per share during the years ended December 31, 2007 and 2006,
respectively.
  F-8
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 Recently Enacted
Accounting Standards – In December 2007, the Financial Accounting
Standards Board (the FASB) issued Statement of Financial Accounting Standards
No. 141(R), Business Combinations and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS 141(R) requires an acquirer to measure
the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net identifiable assets
acquired. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary
should be reported as equity in the consolidated financial statements,
consolidated net income or loss shall be adjusted to include the net income or
loss attributed to the non-controlling interest and consolidated comprehensive
income or loss shall be adjusted to include the comprehensive income or loss
attributed to the non-controlling interest. The calculation of earnings per
share will continue to be based on income or loss amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. The Company has not yet determined the effect on the consolidated
financial statements, if any, that will result from the adoption of SFAS No.
141(R) or SFAS No. 160.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. In February
2008, the FASB issued Staff Position No. 1657-2 which extended the effective
date for certain nonfinancial assets and nonfinancial liabilities to fiscal
years beginning after November 15, 2008. The Company is currently evaluating the
impact that SFAS 157 will have on the consolidated financial
statements.
 
 Income
Taxes – On January 1, 2007, the Company adopted FASB Interpretation No.
48, Accounting for Uncertainty
in Income Taxes (FIN 48), which clarifies the accounting for uncertainty
in tax positions. FIN 48 requires financial statement recognition of the impact
of a tax position, if that position is more likely than not to be sustained on
examination, based on the technical merits of the position. The adoption of FIN
48 did not have any effect upon the consolidated financial
statements.
 
 Registration
Payment Arrangements – On January 1, 2007, the Company adopted FASB Staff
Position EITF 00-19-2, Accounting for Registration Payment
Arrangements (FSP 00-19-2). Under FSP 00-19-2, a registration payment
arrangement is an arrangement where (a) the Company endeavors to file a
registration statement for certain securities with the SEC and have the
registration statement declared effective within a certain time period; or (b)
the Company will endeavor to keep a registration statement effective for a
specified period of time; and (c) transfer of consideration is required if the
Company fails to meet those requirements. When the Company issues an instrument
with these registration payment requirements, the Company estimates the amount
of consideration that is likely to be paid out under the agreement and offsets
the amount of the liability against the proceeds of the instrument issued. The
estimate is re-evaluated at the end of each reporting period, with any changes
recorded as a registration penalty in the statements of operations.
 F-9
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 NOTE
2 - ACQUISTIONS
 
 On
February 14, 2007, nCoat consummated a Share Exchange Agreement with Tylerstone
Ventures Corporation (Tylerstone) whereby Tylerstone acquired all of the
outstanding common stock of nCoat in exchange for the issuance of 50,840,000
shares of Tylerstone common stock. Tylerstone had 37,200,000 shares of common
stock outstanding on February 14, 2007. Tylerstone’s only significant asset at
February 14, 2007, was $2,250,000 of notes receivable from nCoat, which were
offset by $2,250,000 of convertible debentures payable to a third party. The
reverse acquisition of Tylerstone by nCoat was recognized by nCoat as the
conversion of the $2,250,000 of notes payable to Tylerstone into the convertible
debentures and the constructive issuance of the 37,200,000 shares of common
stock of Tylerstone that remained outstanding for no consideration.
 
 On June
29, 2007, nCoat, Inc. completed the acquisition of all the capital stock of MCC,
Inc. (MCCI), doing business in the marketplace under the brand of JET-HOT®
Coatings. MCCI provides high performance coatings of metal parts for industrial
and personal use. The purchase consideration paid to the MCCI stockholders
consisted of $5,000,000 in cash and the issuance of 1,333,333 shares of common
stock. The common stock issued was placed into an escrow to be available to
compensate the Company pursuant to the indemnification obligations of the MCCI
stockholders as set forth in the related stock purchase agreement. The escrow
will terminate on the earlier of the date on which the escrow agent receives
instructions to terminate the escrow from all of the MCCI shareholders and the
Company, or the eighteenth month anniversary of the closing of the
transaction.
 
 The
common stock issued was valued at $906,666, or $0.68 per share, based on the
market value of the Company’s common stock on June 29, 2007. The total
consideration paid to acquire MCCI of $5,906,666 was allocated to the assets and
liabilities of MCCI based upon their fair values. The estimated fair values of
the assets acquired and the liabilities assumed on the date of acquisition were
as follows:
  Current
      assets
                    
                    $
                    717,917Property
      and equipment
                    
                    
                    1,016,664Intangible
      and other assets
                    
                    
                    5,408,245Total
      assets acquired
                    
                    
                    7,142,826Current
      liabilities
                    
                    
                    (714,239
                    )Long-term
      liabilities
                    
                    
                    (521,921
                    )Total
      liabilities assumed
                    
                    
                    (1,236,160
                    )Net
      Assets Acquired
                    
                    $
                    5,906,666
 
 On June
29, 2007, the Company entered into a consulting agreement with the former
majority shareholder of MCCI whereby the Company has committed to pay the former
majority shareholder consulting fees of $120,000 annually, performance bonuses
equal to 2.5% of gross revenue from new customers and to purchase, for up to
$70,000, an automobile for the consultant. The term of the obligation for the
consulting fees and the performance bonuses is through December 31, 2009, and
will continue for successive one-year periods unless terminated by either
party.
 F-10
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 NOTE
3 – PROPERTY AND EQUIPMENT
 
 Property
and equipment consisted of the following:
  December
      31,
                  
                  2007
                  
                  
                  2006Machinery
      and equipment
                  
                  $
                  1,982,909
                  
                  
                  $
                  966,715Computer
      and office equipment
                  
                  
                  247,791
                  
                  
                  
                  247,791Furniture
      and fixtures
                  
                  
                  55,205
                  
                  
                  
                  39,007Vehicles
                  
                  
                  51,364
                  
                  
                  
                  27,701Leasehold
      improvements
                  
                  
                  660,975
                  
                  
                  
                  640,975Total
      Property and Equipment
                  
                  
                  2,998,244
                  
                  
                  
                  1,922,189Less:
      Accumulated depreciation
                  
                  
                  765,055
                  
                  
                  
                  272,698Net
      Property and Equipment
                  
                  $
                  2,233,189
                  
                  
                  $
                  1,649,491
  NOTE
4 – INTANGIBLE ASSETS
 
 The
carrying values of intangible assets are reviewed for impairment annually or
whenever events or changes in circumstances indicate that they may not be
recoverable. When such an event occurs, the Company projects the undiscounted
cash flows to be generated from the use of the asset and its eventual
disposition over the remaining life of the asset. If projections indicate that
the carrying value of the long-lived asset will not be recovered, the carrying
value of the long-lived asset is reduced by the estimated excess of the carrying
value over the projected discounted cash flows. At December 31, 2007, the
Company determined that the intangible assets were impaired due to the decrease
in estimated future cash flows and recognized an impairment loss of $4,618,392.
The remaining carrying values and estimated useful lives of the intangible
assets at December 31, 2007 were as follows:
  Weighted-Average
                  
                  Gross
                  
                  
                  
                  
                  
                  NetUseful
      Life
                  
                  Carrying
                  
                  
                  Accumulated
                  
                  
                  CarryingAt
      December 31, 2007
                  
                  After
      Impairment
                  
                  Amount
                  
                  
                  Amortization
                  
                  
                  AmountAssets
      Not Subject to AmortizationBrand
      names and trademarks
                  
                  
                  
                  $
                  928,991
                  
                  
                  
                  
                  
                  $
                  928,991Assets
      Subject to AmortizationNon-compete
      and non-disclosure agreements
                  
                  2.5
      years
                  
                  
                  150,051
                  
                  
                  
                  -
                  
                  
                  
                  150,051Certifications
      and licenses
                  
                  7.7
      years
                  
                  
                  139,146
                  
                  
                  
                  -
                  
                  
                  
                  139,146Customer
      base
                  
                  5.8
      years
                  
                  
                  730,256
                  
                  
                  
                  -
                  
                  
                  
                  730,256Technology
                  
                  6.7
      years
                  
                  
                  734,320
                  
                  
                  
                  -
                  
                  
                  
                  734,320Trade
      secrets and formulas
                  
                  7.7
      years
                  
                  
                  286,100
                  
                  
                  
                  -
                  
                  
                  
                  286,100Total
      Assets Subject to Amortization
                  
                  3.4
      years
                  
                  
                  2,039,873
                  
                  
                  
                  -
                  
                  
                  
                  2,039,873Total
      Intangible Assets
                  
                  
                  
                  $
                  2,968,864
                  
                  
                  $
                  -
                  
                  
                  $
                  2,968,864
  F-11
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 The
carrying values of the intangible assets at December 31, 2006 were as
follows:
 
 Gross
                  
                  
                  
                  
                  
                  NetCarrying
                  
                  
                  Accumulated
                  
                  
                  CarryingDecember
      31, 2006
                  
                  Amount
                  
                  
                  Amortization
                  
                  
                  AmountAssets
      Not Subject to AmortizationBrand
      name and trademark
                  
                  $
                  508,002
                  
                  
                  
                  
                  
                  $
                  508,002Assets
      Subject to AmortizationNon-compete
      and non-disclosure agreements
                  
                  
                  762,003
                  
                  
                  
                  210,292
                  
                  
                  
                  551,711Certifications
      and licenses
                  
                  
                  508,002
                  
                  
                  
                  101,600
                  
                  
                  
                  406,402Customer
      base
                  
                  
                  798,289
                  
                  
                  
                  271,615
                  
                  
                  
                  526,674Technology
                  
                  
                  471,716
                  
                  
                  
                  58,965
                  
                  
                  
                  412,751Trade
      secrets and formulas
                  
                  
                  943,432
                  
                  
                  
                  117,930
                  
                  
                  
                  825,502Total
      Assets Subject to Amortization
                  
                  
                  3,483,442
                  
                  
                  
                  760,402
                  
                  
                  
                  2,723,040Total
      Intangible Assets
                  
                  $
                  3,991,444
                  
                  
                  $
                  760,402
                  
                  
                  $
                  3,231,042
 
 NOTE
5 – NOTES PAYABLE
 
 Revolving Credit
Loan Agreements– The Company had a $200,000 revolving credit loan
agreement with a bank. The related promissory note accrued interest on the
outstanding balance at the bank’s prime rate plus 1%. The balance of $195,720
was paid during the second quarter of 2007.
 
 Convertible
Debentures – Through December 31, 2006, the Company borrowed $1,750,000
and through February 14, 2007, the Company borrowed an additional $500,000 from
Tylerstone under the terms of a $3,500,000 revolving line of credit agreement.
The related promissory notes bore interest on the outstanding balance at 0.5%
over prime, (8.75% at February 14, 2007). Upon the reorganization of nCoat into
Tylerstone on February 14, 2007, the amounts due under the revolving credit line
with Tylerstone were in substance converted into $2,250,000 of convertible
debentures payable to third parties (the “debenture holders”). On May 14,
2007, the Company issued an additional $250,000 of convertible debenture under
the same terms. The convertible debentures bore interest at prime plus 0.5% and
were due from October 23, 2007 through April 9, 2008. Principal and accrued
interest under the debentures was convertible, from the date of issuance, into
common stock at $0.50 per share.
 
 Management
determined the fair value of the common stock on February 14, 2007 based on a
third-party valuation of the Company’s common stock, an assessment of estimated
future cash flows and the market value and discounted market value of the
Company’s common stock for a short period after February 14, 2007. Based upon
management’s assessment of the fair value of the Company’s common stock of
$0.129 per share on February 14, 2007, the debenture holders did not receive a
beneficial conversion option. This conclusion is based on the fair value of the
common stock into which the debentures are convertible of $580,500 being less
than the $2,250,000 face amount of the convertible debentures. The $250,000 of
convertible debenture issued on May 14, 2007 resulted in that debenture holder
receiving a beneficial conversion option of $155,000; the resulting discount on
the note payable was recognized as interest expense through August 24,
2007.
 F-12
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 In
connection with the issuance of the debentures, the Company granted registration
rights to the debenture holders, which required the Company to file a
registration statement by April 15, 2007, registering the resale of the shares
issuable upon conversion of the debentures and to use reasonable, commercial,
best efforts to have the registration statement declared effective within 90
days thereafter. The debenture holders consented to waive this registration
requirement provided that the shares issuable upon conversion were included in
the next subsequent registration of the Company’s shares, which obligation was
fulfilled by the Company.
 
 Under the
conversion terms of the convertible debentures, $2,000,000 of the convertible
debentures and $67,752 of related accrued interest were converted into 4,135,504
shares of common stock at $0.50 per share during the second quarter of 2007.
During the third quarter of 2007, the remaining $500,000 of the convertible
debentures and $17,608 of related interest were converted into 1,035,215 shares
of common stock at $0.50 per share. At December 31, 2007, none of the debentures
remained outstanding.
 
 Loans Payable –As part of a facility lease agreement, the Company financed leasehold
improvements through the lessor. Loans of $283,203 and $230,000 were incurred
and under the terms of the agreement, the loans bear interest at 1% over prime,
or 8.25% at December 31, 2007.  The agreement requires the Company to
make monthly payments, plus interest, through March 2011.  A balloon
payment of $264,792 was due on May 1, 2007. Prior to the due date of the balloon
payment, the Company and the note holder agreed to modify the repayment terms of
the balloon payment to payment upon demand. All other terms of the notes
remained the same.
 
 From
March 30, 2007 through May 4, 2007, the Company borrowed $355,783 from a
consultant to the Company and issued notes, which were due on September 1, 2007,
and bear interest at 5% per annum. The note holder agreed to modify the
repayment terms to payment upon demand. From August 31, 2007 through September
25, 2007, the Company borrowed $200,000 from an investor and issued notes, which
are due on demand and bear interest at 10% per annum.
 
 At the
time the Company acquired MCCI there existed a $251,000 loan between MCCI and
its majority shareholder.  That loan was converted into a $151,000
promissory note; bearing interest at 6%; payable in monthly installments of
$15,670 and 250,000 shares of the Company’s common stock.
 
 Note and Warrant
Financing Agreement – On September 28, 2005, nCoat, Inc. received
$3,000,000 of proceeds from the issuance of a promissory note payable to a
family trust along with warrants to purchase 3,740,000 shares of common stock
for $170. Interest on the note accrued at 18% per annum and was payable in
quarterly payments of $135,000 through September 30, 2006 when principal and
unpaid accrued interest were due. Effective September 30, 2006, the parties
agreed to extend the maturity date of the note and the payment of any accrued
interest until March 31, 2007. The Company agreed to pay the family trust a fee
of $200,000, due at the note’s maturity. The fee was recognized as interest
expense on the date of the extension. The note was secured by 7,333,333 shares
of common stock of nCoat, Inc. held by companies owned by officers and directors
of nCoat, Inc.  The family trust further extended the term for
repayment of the note until such time as the Company raised additional financing
and the Company agreed to increase the interest rate on this note to 36% per
annum to compensate the holder for the extension. The $3,000,000 of principal on
the promissory note, $477,286 of accrued interest and the $200,000 fee were paid
on June 5, 2007.
 
 The
warrants were exercisable on the earlier of September 28, 2008, the date the
Company closed an initial public offering of its common stock, or ten days
preceding the date of a reorganization, merger or sale of substantially all of
the assets of the Company and expired if not exercised on December 31, 2010. The
warrants were exercised by the family trust immediately prior to the February
14, 2007, reorganization of nCoat into Tylerstone.
 F-13
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 Series A and B 6%
Convertible Promissory Notes – From May 25, 2007 through June 18, 2007
(primarily on May 31, 2007), the Company issued $9,000,000 of Series A 6%
convertible promissory notes (the “Series A Notes”) and warrants to purchase
22,500,000 shares of common stock exercisable at $1.00 per share through May 31,
2012. The Series A Notes are convertible into common stock at $0.40 per share
through May 31, 2010, when the Series A Notes are due. Accrued interest is
payable quarterly.  From May 31, 2007 through July 10, 2007, the
Company issued $3,250,000 of Series B 6% convertible promissory notes (the
“Series B Notes”) and warrants to purchase 8,125,000 shares of common stock
exercisable at $0.80 per share through May 31, 2010. The Series B Notes are
convertible into common stock at $0.40 per share through May 31, 2010, when the
Series B Notes are due. Accrued interest is payable quarterly. The Company
issued the placement agent 1,793,750 warrants that are exercisable at $0.40 per
share through May 31, 2012. The Series A and B private placement offerings
included $800,000 of advances received from the note holders during March and
April 2007 before the notes were issued. The Company received $11,318,936 of
proceeds from the issuance of the Series A and Series B convertible notes and
warrants, net of cash offering costs of $931,064.
 
 The
common stock into which the Series A Notes are convertible, the related warrants
and the common stock issued upon conversion of the $2,500,000 convertible
debentures described above are subject to certain registration rights. Per the
registration rights agreement, the Company was required to file a registration
statement within 45 calendar days of the first closing of $1,000,000 or more of
the private placement offering of the Series A Notes, which filing obligation
was met, and the Company is required to have the registration statement declared
effective within 75 calendar days of the initial filing. After the registration
statement is declared effective, the Company is required to keep the
registration statement effective until all the registered shares of common stock
are sold. In the event that the Company fails to accomplish any of these
requirements, the Company will be required to pay partial liquidating damages of
1% per month of the aggregate purchase price paid by the Series A note holders,
or $90,000 per month. If the Company fails to pay the prescribed damages within
7 days of the date payable, interest will be charged at a rate of 18% per annum.
In accordance with FASB Staff Position (FSP) EITF 00-19-2, Accounting for Registration Payment
Arrangements, and SFAS No. 5, Accounting for Contingencies,
the registration payment liability has been adjusted to $540,000 at December 31,
2007 for estimated payments to be made under the registration rights agreement
and is included in accrued liabilities. The value of this registration payment
liability will be adjusted to reflect the fair value of the liability at each
balance sheet date until all related obligations have been met.
 
 The
Series A and Series B Notes become redeemable upon demand of the note holders
upon the occurrence of certain default or triggering events. Upon a triggering
event, the holders have a right to require the Company to redeem their notes at
an amount equal to any accrued interest, accrued and unpaid liquidated damages
plus the greater of (A) the conversion amount to be redeemed multiplied by 125%
during the first 12 months of the term of the note or 115% thereafter, or (B)
the conversion amount to be redeemed multiplied by the quotient of (i) the
closing sale price at the time of the triggering event (or at the time of
payment of the redemption price, if greater) divided by (ii) the conversion
price. There are 14 triggering events in the Series A Notes and 13 triggering
events in the Series B Notes. Among the major triggering events are failure
provide notice and pay the related partial liquidated damages to the note
holders within one day of the following events: failure to file the registration
statement or obtain its effectiveness by the required dates, failure to respond
to comments by the U.S. Securities and Exchange Commission within 15 days of
receipt of those comments, suspension from trading or listing on a market,
failure to convert shares upon request, failure to qualify new debt as permitted
debt under the terms of the Series A and Series B Notes and failure to make
payments under the terms of the promissory notes.
 F-14
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 Conversion
of the promissory notes is limited such that at any time a note holder cannot
own more than 4.99% of the Company’s outstanding common stock. The conversion
price is adjustable to match any additional issuances of common stock at prices
lower than $0.40 per share or the effects of any stock splits or stock
dividends.
 
 The fair
value of the warrants issued with the Series A Notes, as determined by the
Black-Scholes option pricing model, was $12,113,496 using the following
weighted-average assumptions: volatility of 87%; risk-free interest rate of
4.86%; expected life of 5 years and estimated dividend yield of 0%. The warrants
issued with the Series B Notes were valued at $3,744,616 using the following
weighted-average assumptions: volatility of 87%; risk-free interest rate of
4.86%; expected life of 3 years and estimated dividend yield of 0%. The
placement agent warrants were valued at $998,108 using the following
weighted-average assumptions: volatility of 87%; risk free interest rate of
4.86%; estimated life of 5 years and estimated dividend yield of
0%.
 
 The value
of the placement agent warrants issued and the cash offering costs were
allocated on a pro-rata basis to the underlying instruments of the offering. The
Company capitalized $975,786 of deferred loan costs. These costs were amortized
to interest expense through August 24, 2007. The proceeds from issuance of the
Series A and Series B Notes were allocated to the notes and the warrants based
upon their relative fair values. This allocation resulted in allocating
$5,236,985 to the beneficial conversion option, $5,656,056 to the warrants,
$998,108 to the placement agent warrants, $270,000 to the registration payment
liability and none to the notes payable. The resulting $12,250,000 discount to
the Series A and Series B Notes and the deferred loan costs were amortized to
interest expense August 24, 2007.
 
 The
Company filed a registration statement with the U.S. Securities and Exchange
Commission (the “SEC”) on July 12, 2007 to register the common stock into which
the Series A Notes are convertible and the shares of common stock underlying the
warrants and received comments on the registration statement from the SEC on
August 8, 2007. The Company did not respond to those comments by August 23, 2007
as required by the terms of the Series A and Series B Notes; therefore a
triggering event occurred on August 24, 2007 when the Company failed to notify
the note holders of the failure to respond to the SEC’s comments or to pay the
related $90,000 of liquidated damages to the Series A note holders. As a result,
the Series A and Series B Notes became due upon demand at 125% of their original
face amount, or $15,312,500. During September 2007, the Company issued $200,000
of notes payable that were not permitted loans under the terms of the Series A
and Series B Notes. The Company’s failures to notify the note holders of the
issuances of the $200,000 of non-permitted notes payable were additional
triggering events.
 
 The
Company did not obtain effectiveness of the registration statement on September
25, 2007 and failed to notify the note holders on September 26, 2007,
which is an additional triggering event. As a result, the conversion price
of the common stock was changed that date, under the terms of the Series A and
Series B notes, to $0.36 per share. As a result, the Series A and Series B notes
became convertible into 42,534,722 shares of common stock. No additional
beneficial conversion option was recognized as a result of the modification of
the conversion price since the beneficial conversion option is limited to the
proceeds allocated to the notes payable and all of the proceeds were originally
allocated to the original beneficial conversion option.
 
 In
December 2007, the Company entered into an Amendment and Waiver of Registration
Rights Agreement and 6% Series A Convertible Notes dated as of November 30, 2007
(the “Series A and Series B Amendment Agreement”), with the Series A and Series
B Noteholders.
 F-15
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 Pursuant
to the terms of the Series A and Series B Amendment Agreement, the Series A and
Series B Noteholders agreed to waive certain “Trigger Events” as the term is
defined in the Series A and Series B Notes, in exchange for certain amendments
to the terms of the Series A and Series B Notes and the related registration
rights agreement (the “Registration Rights Agreement”) between the Company and
the Series A and Series B Noteholders.  The Registration Rights
Agreement was amended by adding the following language to the end of the Section
2(b) of the Registration Rights Agreement:
 
 “Notwithstanding
anything to the contrary in this Section 2(b), the Company shall only be
obligated to pay partial liquidated damages to the Holders for Events occurring
after the earlier to occur of (i) the effective date of the Registration
Statement and (ii) February 29, 2008.  Further, notwithstanding
anything to the contrary in this Section 2(b), in the event that the Company is
not permitted to include all of the Registrable Securities in the Registration
Statement due solely to SEC Guidance, the Company shall not be liable for
liquidated damages as to any such Registrable Securities which are not permitted
to be so included if, as of February 29, 2008, such Registrable Securities may
be transferred by the Holders pursuant to Rule 144.”
 
 Additionally,
the Company and the Series A and Series B Noteholders agreed that the conversion
price of the Series A and Series B Notes would be adjusted from $0.36 per
share to $0.25 per share, subject to further adjustment as set forth in the
Series A and B Notes.
 
 As result
of the waiver, the Company reversed the 25% redemption premium interest expense
returning the Series A and Series B Notes to their original values of $9,000,000
and 3,250,000, respectively.
  F-16
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
  Notes payable at December
31, 2007 and December 31, 2006 are summarized as follows:
 December
      31,
                  
                  
                  December
      31,2007
                  
                  
                  20066%
      $9,000,000 Series A convertible promissory notes; due on
      demand
                  
                  $
                  9,000,000
                  
                  
                  $
                  -6%
      $3,250,000 Series B convertible promissory notes; due on
      demand
                  
                  
                  3,250,000
                  
                  
                  
                  -$200,000
      Revolving credit line payable to a bank
                  
                  
                  -
                  
                  
                  
                  195,720Convertible
      debentures; bore interest at 0.5% over prime rate; converted in
      2007
                  
                  
                  -
                  
                  
                  
                  1,750,000Note
      payable; paid June 5, 2007
                  
                  
                  -
                  
                  
                  
                  3,000,000Note
      payable, bearing interest at prime plus 1.0% (8.25% at December 31,
      2007);due
      March 2011
                  
                  
                  174,537
                  
                  
                  
                  230,000Note
      payable, bearing interest at prime plus 1.0% (8.25% at December 31,
      2007);payable
      on demand
                  
                  
                  280,364
                  
                  
                  
                  283,203Note
      payable; bearing interest at 8.35%, due November 7, 2007; in
      default
                  
                  
                  28,950
                  
                  
                  
                  -Note
      payable to bank; secured by equipment; bearing interest at
      8.75%:payments
      due through 2010
                  
                  
                  13,637
                  
                  
                  
                  -Notes
      payable to a bank; secured by equipment; bearing interest at 6.75%
      to7.75%;
      payments due through 2010
                  
                  
                  33,703
                  
                  
                  
                  67,007Notes
      payable, bearing interest at 5%; due September 1, 2007; in
      default
                  
                  
                  355,783
                  
                  
                  
                  -Note
      payable, bearing interest at 6%; payable on demand
                  
                  
                  76,476
                  
                  
                  
                  -Note
      payable to a bank; secured by equipment; bearing interest at 6.98%;
      payable inmonthly
      installments of $4,841 through February 2014
                  
                  
                  289,328
                  
                  
                  
                  -Notes
      payable; bearing interest at 10%; unsecured; due on demand
                  
                  
                  1,140,000
                  
                  
                  
                  -Total
      Notes Payable
                  
                  
                  14,642,778
                  
                  
                  
                  5,525,930Less:
      Current portion
                  
                  
                  1,987,966
                  
                  
                  
                  5,305,021Long-Term
      Notes Payable
                  
                  $
                  12,654,812
                  
                  
                  $
                  220,909
  The fair
value of notes payable was determined based upon current market interest rates
and was $14,642,778 at December 31, 2007. Future annual maturities of notes
payable, as of December 31, 2007, were as follows:
  Years
      Ending December 31:2008
                  
                  $
                  1,987,9662009
                  
                  
                  115,9322010
                  
                  
                  12,361,0552011
                  
                  
                  72,9192012
                  
                  
                  57,459Thereafter
                  
                  
                  47,447Total
                  
                  $
                  14,642,778
 NOTE
6 - STOCK COMPENSATION PLAN
 
 On
February 2, 2007, the Company adopted a stock award plan (the “Plan”) and began
awarding shares of common stock and shares of nonvested common stock to
employees and consultants as compensation.  The nonvested shares vest
over periods ranging from immediately upon being issued to four years. If an
employee terminates employment with the Company prior to the shares vesting, the
nonvested portion of the shares will be forfeited and should be returned to the
Company.  As of December 31, 2007, 235,000 nonvested shares had been
forfeited but to date have not been returned.  The Company is at risk
that it may not obtain back the forfeited shares.  Accordingly, those
shares are not reflected as forfeited in the following table.
 
 Compensation
related to the shares awarded is based upon the fair value of the awards on the
dates awarded or modified as determined by the Black-Scholes option-pricing
model applied to awards expected to vest and recognized by the graded-vesting
method applied to awards expected to vest.  Compensation expense
related to forfeited shares will be reversed when and if these shares are
returned to the Company. The Company recognized $1,422,410 of related
compensation expense during the year ended December 31, 2007.
 F-17
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 A summary
of the status of the Company’s nonvested shares of common stock as of December
31, 2007 and changes during the year were as follows:
  Weighted-AverageAward-DateNonvested
      Shares of Common Stock
                  
                  Shares
                  
                  
                  Fair
      ValueAward
                  
                  
                  13,309,090
                  
                  
                  $
                  0.144Vested
                  
                  
                  (7,237,090
                  )
                  
                  $
                  0.129Nonvested
      at December 31, 2007
                  
                  
                  6,072,000
                  
                  
                  $
                  0.160
 
 As of
December 31, 2007, there was $354,876 of total unrecognized compensation expense
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average period of
1.54 years from December 31, 2007. The total fair value of the shares that
vested during the year ended December 31, 2007 was $996,657.
 
 NOTE
7 – COMMON STOCK
 
 In
addition to shares of common stock issued as part of the stock compensation
plan, on February 2, 2007, 1,130,910 shares of common stock were issued to a
shareholder to whom the company had issued 5,666,668 shares of common stock for
$1,500,000 in June 2006. The additional shares were to increase the number of
shares issued for the original cash consideration and was recorded during
February 2007 for no additional consideration. On February 14, 2007, 3,740,000
shares of common stock were issued upon the exercise of warrants for $170. On
March 23, 2007, the Company issued 880,400 shares of common stock to an
investment banker for its services in facilitating a debt or equity offering.
The shares were valued at $113,572, or $0.129 per share, and were recognized as
deferred loan costs. On August 17, 2007, $100,000 of principal on a note payable
to the former majority shareholder of MCCI was converted into 250,000 shares of
common stock.
 
 NOTE
8 – INCOME TAXES
 
 Accrued
income taxes at December 31, 2007 consisted of $108,975 of federal and state
income taxes assumed in the acquisition of MCC, Inc. on June 29, 2007. There was
no benefit or provision for income taxes during the year ended December 31,
2007. The net deferred income tax liability consisted of the following at
December 31, 2007 and December 31, 2006:
 F-18
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
  December
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006Deferred
      Tax LiabilitiesProperty
      and equipment
                  
                  $
                  205,078
                  
                  
                  $
                  9,332Intangible
      assets
                  
                  
                  1,146,574
                  
                  
                  
                  1,205,179Total
      Deferred Tax Liabilities
                  
                  
                  1,351,652
                  
                  
                  
                  1,214,511Deferred
      Tax AssetsAllowance
      for doubtful accounts
                  
                  
                  67,882
                  
                  
                  
                  36,001Accrued
      consulting obligation
                  
                  
                  193,100
                  
                  
                  
                  186,500Accrued
      liabilities
                  
                  
                  83,718
                  
                  
                  
                  -Operating
      loss carryforwards
                  
                  
                  6,640,543
                  
                  
                  
                  3,001,627Total
      Deferred Tax Assets
                  
                  
                  6,985,243
                  
                  
                  
                  3,224,128Valuation
      Allowance
                  
                  
                  (5,633,591
                  )
                  
                  
                  (2,009,617
                  )Net
      Deferred Tax Liability
                  
                  $
                  -
                  
                  
                  $
                  -
 During
the year ended December 31, 2007, the deferred tax valuation allowance increased
by $5,706,337 from operations and decreased by $2,082,363 from the deferred tax
effects of acquiring MCC, Inc.
 
 
 NOTE
9 – LEASING ARRANGEMENTS
 
 The
Company leases operating and manufacturing facilities under the terms of
operating leases which expire on December 31, 2010 and March 31, 2011. Other
operating and manufacturing facilities are leased on a month to month basis.
Future annual minimum lease payments required under the terms of operating
leases that have non-cancelable lease terms in excess of one month are as
follows:
 
 Year
      Ending December 31:2008
                  
                  
                  349,7282009
                  
                  
                  324,7282010
                  
                  
                  349,7282011
                  
                  
                  71,184Total
                  
                  $
                  1,095,368
 
 The
Company entered into multiple capital lease obligations for software and
equipment.  The terms of the lease agreements require the Company to
make monthly payment of $17,437 through 2011.  The following is a
schedule by years of future minimum lease payments under capital leases together
with the present value of the net minimum lease payments as of December 31,
2007:
 F-19
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 Years
      Ending December 31:2008
                  
                  $
                  209,2912009
                  
                  
                  199,1202010
                  
                  
                  133,1622011
                  
                  
                  41,872Total
      minimum lease payments
                  
                  
                  583,445Less:
      Amount representing interest
                  
                  
                  (101,712
                  )Present
      value of net minimum lease payments
                  
                  
                  481,733Less:
      Current portion of capital lease obligation
                  
                  
                  (153,540
                  )Long-Term
      Capital Lease Obligation
                  
                  $
                  328,193
 
 NOTE
10 – COMMITMENTS AND CONTINGENCIES
 
 During
May 2007, an equipment dealer filed a lawsuit and received a default judgment
for over $14,000.  Also included in the judgment the plaintiff is
seeking to obtain the related equipment associated in the
agreement.
 
 NOTE
11 – RELATED PARTY TRANSACTION
 
 The
Company leased office space, telephone and computer equipment and purchased long
distance telephone service from an entity owned by an officer and director of
the Company.  In 2006, this entity was reimbursed for funds advanced
related to the formation of the Company and the acquisitions of
HPC.  Payments were $0 and $103,013, including expense reimbursements,
respectively, for periods ended December 31, 2007, and December 31,
2006.
 
 
 NOTE
12 – SUBSEQUENT EVENTS
 
 On
January 23, 2008, the Company entered into agreements with the holders of the
Series A and Series B convertible notes that allowed the Company to pay the
interest on the Notes, which was due and payable on January 1, 2008 in shares of
the Company’s common stock. As a result, the Company issued 1,554,198 shares of
common stock to the Series A and Series B note holders.
 
 In
February 2008, the Company entered into a Waiver Agreement with certain of the
holders of Series A Convertible Notes and Series B Convertible Notes, who
together were the holders of 75% of the Company’s Series A Notes and Series B
Notes.  The Waiver Agreement related to the incurrence by the Company
of debt without receiving the required approval.  Under the Waiver
Agreement, the Series A and Series B Note holders concurred to the incurrence by
the Company of up to $600,000 of debt and waive their rights to claim a default
under the Series A and Series B Notes.
 
 In April
2008, the Company was in breach of the Series A and B Convertible Notes
Securities Purchase Agreement and the related Registration Agreement due to our
failure to have the registration of the underling shares effective, failure to
pay partial liquidating damages of $90,000 and failure to pay interest that was
due and payable on April 1, 2008.   As a result, the Notes are
redeemable at a redemption premium. No demand has been made for
redemption.
 F-20
 NCOAT,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006
 On
February 20, 2008, Jeffrey Holm and Thundercheif Enterprises, LLC filed a
complaint against the nCoat in connection with a stock purchase agreement, a
consulting agreement, an escrow agreement, and other agreements between certain
of the parties. Jeffrey Holm and Thundercheif Enterprises, LLC is seeking
damages for approximately $740,000, plus the return of certain designated
personal property.  nCoat has filed motions against the complaint, but
no ruling on the motions have been issued as of today.  Because no
discovery has been commenced, there has been no opinion as to the
outcome.
 
 In May
2008, the Company sold certain of its operating equipment for $25,000 and
entered into an agreement to payments of $1,000 per month.
     F-21