FORM 10-KSB
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended: December 31, 2006

            For the period from January 1, 2006 to December 31, 2006

                        COMMISSION FILE NUMBER 333-127080

                               MACHINETALKER, INC.
                              --------------------
             (Exact name of registrant as specified in its charter)

        DELAWARE                                   01-0592299
     --------------                       -----------------------------------
(State of Incorporation)                  (I.R.S. Employer Identification No.)


             513 DE LA VINA STREET, SANTA BARBARA, CALIFORNIA 93101
               (Address of principal executive offices) (Zip Code)

                                 (805) 957-1680
               Registrant's telephone number, including area code

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                   NAME OF EACH EXCHANGE ON
   TITLE OF EACH CLASS                                   WHICH REGISTERED
------------------------                          --------------------------
      COMMON STOCK                                              OTC

         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 |X| No |__|

         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  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. |X|

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

         State issuer's revenues for its most recent fiscal year.  $553,333

         The aggregate  market value of voting stock held by  non-affiliates  of
the  registrant was  approximately  $8,650,000 as of March 31, 2007 (computed by
reference to the last sale price of a share of the registrant's  Common Stock on
that date as reported by NASDAQ).

         There were 161,599,582  shares  outstanding of the registrant's  Common
Stock as of March 31, 2007.


<PAGE>

                                TABLE OF CONTENTS

PART I.................................................................   1
ITEM 1.................................................................   1
ITEM 2.................................................................   7
ITEM 3.................................................................   7
ITEM 4.................................................................   7
PART II................................................................   8
ITEM 5.................................................................   8
ITEM 6.................................................................   9
ITEM 7................................................................   13
ITEM 8.................................................................. 31
ITEM 8A................................................................. 31
ITEM 8B..................................................................31
PART III................................................................ 31
ITEM 9.................................................................. 31
ITEM 10................................................................. 34
ITEM 11................................................................. 36
ITEM 12................................................................. 38
ITEM 13................................................................. 38
ITEM 14................................................................. 39
SIGNATURES.............................................................. 39


                                     PART I

ITEM 1. BUSINESS

GENERAL

         MachineTalker, Inc. ("MTI" or "we") is a Delaware corporation formed to
engage  in  the  business  of  developing  and  marketing  a  wireless   control
technology.  From  inception  until mid 2004,  we focused our  operations on the
development  of our  wireless  control  technology.  We made our first  sales of
product and services in 2004. These sales, however, were not sufficient to cover
all expenditures for product development and marketing,  resulting in a net loss
since  inception  through  December  31,  2006  of  $(3,500,326).  While  we are
currently  shifting the focus of our operations  from developing new products to
marketing  and selling our existing  products,  we cannot assure that we will be
successful in our efforts.

         Our  new  smart  security  network   technology   allows   governments,
businesses,  and  individuals to deploy  wireless  security  systems  rapidly to
protect and monitor things,  places,  and people.  Current  security systems are
static and rely on centralized control over various types of detectors or nodes.
Without  independent  intelligence  and a way to  communicate  with one another,
individual  security nodes are unable to carry out functions or overcome failure
at the local level. Our technology  allows security systems to become dynamic by
creating "smart"  security  networks at the local level. The remote and wireless
devices  developed  by  us  ("MachineTalkers"  or  "Talkers")  contain  powerful
microprocessors, on-board sensors, detectors, readers or actuators, and wireless
radios.  Talkers(R) automatically form an ad hoc wireless mesh network, creating
intelligent  nodes,  each capable of processing data in real-time and on a local
basis.  Once formed,  a small community of Talkers(R)  operate  independently or
collectively to assess local  conditions or events and take action  accordingly.
These cooperating Talkers(R) form redundant and self-healing networks in case of
failure.  One or more  individual  units can be connected to modems for wireless
communication outside of the local community by way of the Internet.

         Talkers(R)  can be  used  in a  variety  of  applications.  In  2005 we
developed  a trial  application  for a  customer  who  needed a way to track and
maintain the security of numerous  shipping  containers.  Talkers(R) were placed
within the  shipping  containers  enabling the customer to track the location of
each  container  and  to  confirm  their  safety.  We  also  developed  a  trial
application  for a customer  who sought a way to relay  information  among small
Unmanned  Aerial Vehicles and ground  stations.  Talkers(R) were placed on-board
the UAV to gather and report  data to share with  adjacent  aircraft  and ground

                                      -1-
<PAGE>

stations.  With the implementation of our special display software,  tracking of
Talkers(R)  can be viewed on personal  computers,  laptops and PDAs.  In 2006 we
demonstrated new packaged  Talkers(R) that are to be used on pallets of cargo in
transport  and our product was HERO approved for use on pallets of munitions for
the  military.  Other  Talkers(R)  have been adapted for use in the gathering of
data from sensors in the energy audit business.  These  demonstrations are being
conducted by OEM  representative  and we continue to demonstrate our products at
trade shows and to potential customers.

HISTORY

         MTI was  formed in  January  2002 by Roland F.  Bryan,  Christopher  T.
Kleveland and Mark P. Harris.  Our founders are also shareholders of SecureCoin,
Inc.  ("SecureCoin").  As  part  of our  initial  capitalization,  our  founders
contributed  certain  intellectual  property that was developed at and purchased
from SecureCoin. SecureCoin assigned all rights to that intellectual property to
Messrs. Bryan,  Kleveland and Harris in January 2002, and those co-founders then
contributed  the  intellectual  property  rights  to us in  connection  with our
formation.  This  intellectual  property forms the core of our proprietary smart
security network technology that allow  governments,  businesses and individuals
to rapidly  deploy  wireless  security  systems to protect and  monitor  things,
places and people.  Talkers(R) are designed to track the  whereabouts and status
of the objects  into which they are placed.  Talkers(R)  can be grouped in small
clusters or "communities" and can be programmed to sense,  record,  process, and
act  upon  specified  events  based  upon  a  customer's  specific  needs.  Once
programmed,  Talkers(R)  are placed  into the objects  the  customer  desires to
track.  Talkers(R)  then monitor and report activity as programmed to each other
and to the customer via the  Internet.  For example,  Talkers(R)  placed  inside
shipping  containers  or on shipping  pallets can be  programmed  to monitor and
report activity  concerning the tracking and security of the shipping containers
or pallets and their cargo in transit,  including  loading and unloading freight
manifests.  The information can then be exchanged with the trucks onto which the
containers are being transported.

         Shortly after our formation in 2002, we voluntarily elected to become a
reporting  company  and  filed  a Form  10  with  the  Securities  and  Exchange
Commission.  We  subsequently  determined  not to register  any of our stock and
depleted most of our  financial  resources on the  development  of our products.
Lacking the capital we needed to prepare and file annual, quarterly, and current
reports, we filed a Form 15 in 2004 to terminate our reporting obligations.

THE NEED FOR THE SIMPLE MACHINE MANAGEMENT PROTOCOL(R)(SMMP(R))

         During  the 1970s and early  1980s,  a  revolution  of sorts came about
which led to what we now know as the  Internet.  An important  development  that
made this  possible  was the  establishment  of  standards,  rules,  and  shared
languages,  which  allowed  computers to "talk" to each other.  Because of these
"protocol" standards,  computer  interconnectivity exploded and the Internet was
put to use in ways that were previously unimaginable.

         MTI believes that today,  the same environment for change exists in the
world of non-computer  entities.  Many people can envision a future where almost
everything  communicates  for a useful  purpose.  Already,  our car keys deliver
wireless  commands to their car door locks and our airbags talk to the emergency
desk of the car manufacturer's network.

         Networking  of such  devices  today  is  limited  in the  same way that
computer networking was limited before universal  connectivity made the Internet
possible.  As in the case of the Internet,  we believe that all this will change
once a simple,  smart,  flexible,  and  inexpensive  communication  platform  is
introduced  that  will  enable  most  things  able to talk  to each  other.  Our
management team believes the platform will be the MachineTalker(R)  infused with
a new standard language, the Simple Machine Management Protocol ("SMMP").

         SMMP(R)  provides   MachineTalkers(R)   with  unique   characteristics,
including:

1        A  MachineTalker(R)with  SMMP(R)can  be  instructed  to represent or be
         proxy for any entity to which it is attached.

2        A  MachineTalker(R)  records and maintains a profile of that entity and
         shares that  profile with other  MachineTalker(R)  members of its local
         community.

                                      -2-
<PAGE>

3        A MachineTalker(R)  automatically forms an ad hoc mesh network with its
         peers  and  they  keep  track of each  other  and  share in  processing
         information.

4        The SMMP(R) operating system provides for peer-to-peer  control,  power
         management  to prolong  battery life and a  simplified  API for ease in
         programming new applications.

PROPRIETARY TECHNOLOGY

         GENERAL.  Information  passed to and from  local or remote  nodes and a
centralized  control facility is similar to the central  computer/dumb  terminal
installations of the pre-Internet era. Like those early hard-wired  systems that
required every action to be processed  centrally,  today's  security systems are
severely handicapped to meet the increasing demands of information  distribution
and local control.

         We believe  that we have  solved  this  problem  by moving  much of the
processing   now   located  at  the   central   control   site  to   inexpensive
MachineTalkers(R)  that serve as  intelligent  proxies  for  sensor,  detectors,
readers,   or  actuators.   These  Talkers(R)  can  make  decisions  based  upon
information  provided by their local attachments or by their networked  "peers."
Each  MachineTalker(R)  can be set up to  perform  diagnostics  and to  transmit
status reports on itself and on other members of its "community."

         Like the  Internet  revolution,  we believe  that the  MachineTalker(R)
revolution   will   be   driven   by  a   change   in   networking   technology.
MachineTalkers(R) are managed by the SMMP(R) that forms the basis for the ad hoc
wireless network and the peer-to-peer relationships.

         AUTOMATIC NETWORK CONFIGURATION (ANC(TM)). The significant advantage of
wireless  networking is the ability to bring new nodes on-line without  plugging
in cables or physically  reconfiguring a local network. This advantage dovetails
with  the   MachineTalker(R)   concept  of   Automatic   Network   Configuration
("ANC(TM)"),  whereby  the  addition  of a new  "Talker(R)"  to a  community  of
Talkers(R) will happen simply by powering it up or coming into the sphere of the
"community." This means that a number of sensing devices,  made "intelligent" by
attachment to  MachineTalkers(R),  can be moved,  or  supplemented  in the field
without having to connect them because they will  automatically  become absorbed
as a member  of a local  community  of  sensors.  In  practical  terms,  service
personnel can add new types of sensors or replace failed sensors  without having
to interrupt  network  operation.  We believe that the  foregoing  benefits will
justify the deployment of the MachineTalker(R) technology by our target customer
base. Once adopted however,  we believe that the real value of  MachineTalker(R)
technology  lies in the vast  potential  that is  unlocked  as  these  networked
entities  or  sensors  acquire  and share  intelligence  and  knowledge  amongst
themselves in a decentralized and flexible model.

         PATENT  APPLICATION.  Application  No.  20040114557 for a United States
patent in the names of Roland F.  Bryan,  Mark P.  Harris,  and  Christopher  T.
Kleveland and assigned to MTI entitled "Self  Coordinated  Machine  Network" was
filed on April 23, 2002, by our former  intellectual  property  counsel,  Lyon &
Lyon,  LLP. In 2005 we contacted  our patent  examiner who permitted us to amend
our  application  to  include  additional  claims.  We filed an  amended  patent
application  in May 2005.  Our Patent  No.:  US  7,184,423,B2  was issued to the
Company, on 27 February 2007, Titled "Self Coordinated Machine Network."

         ABSTRACT OF THE PATENT DISCLOSURE.  A self coordinated  machine network
is  established by two or more machines in proximity with each other via a wired
or wireless network infrastructure.  The machines are configured to establish an
ad hoc network  between  them for sharing  information  related to their  common
applications.   New   machines   that  come  into   proximity   of  the  network
infrastructure are automatically  configured to join an existing ad hoc network.
Machines  that  power  down  or  are  removed  from  proximity  of  the  network
infrastructure  are eliminated from the ad hoc network.  Communications  between
the  constituent  machines  of the ad hoc  network  allow the  machines  to self
coordinate  the network and  redundantly  store  information  pertaining  to the
common and disparate applications of the various machines that comprise the self
coordinated  machine network.  The same is the case for the internal  components
that make up the machine; in that self-contained  subassemblies that take action
in response to stimulus or change in status, like keyboards,  card readers, bill
changers and  electronic  devices,  can be similarly self  coordinated  with the
addition to each sub-assembly of the present invention;  whereby cabling between
such  sub-assemblies  is  minimized  or even  eliminated  by use of the wireless
version of the present invention.

                                      -3-
<PAGE>

PRODUCTS

         We currently  offer  several  smart  security  network  components  for
rapidly deploying wireless security systems, including:

         MACHINETALKER(R).  MachineTalker(R)  is a  high  performance  unit  for
applications  requiring extensive local processing and/or gateway connections to
higher level networks (such as Internet, Ethernet, 802.11 and WiFi).

         MINITALKER(R).   MiniTalker(R)  is  similar  in  functionality  to  the
MachineTalker(R),  but has lower  performance  levels,  reduced size,  and lower
power  consumption.  As an option,  this unit may include on-board sensors for a
particular application.

         TAGTALKER(TM).  TagTalker(TM) is an ultra low power, very low cost unit
for applications requiring limited local processing.

         TOUGHTALKER(TM).   ToughTalker(TM)   is  a  more   rugged   version  of
MiniTalker(R) and is designed for use in harsh, industrial environments where it
must operate more reliably through shock and vibration,  such as inside shipping
containers.

         CONTAINERTRACKER(TM).   We   recently   completed   development   of  a
demonstration  software  program  to  support  ToughTalkers(TM)  which have been
placed aboard a community of shipping  containers.  The  demonstration  software
enables a user to monitor the containers and control  interaction  with on-board
Talkers(R).  The  ContainerTracker(TM)  software includes the ability to create,
insert,  and read-back a freight manifest that shows what has been loaded within
a  container,  from where the  container  came,  and to where the  container  is
supposed  to go. The  manifest  can also be  accessed  by a  hand-held  personal
digital assistant when a container is encountered in the field.

         ASSETTRACKER(TM).  In June 2005, we released AssetTracker(TM),  a small
portable  battery powered roving unit that integrates a  ToughTalker(TM)  with a
Global  Positioning  System Modem. When an  AssetTracker(TM)  is plugged into an
automobile's  cigarette  lighter,  the  devise  will send  location  data over a
cellular  telephone  connection  which can then be monitored on the Internet and
tracked on a map. Additionally, an AssetTracker(TM) can also feed the connection
with  information  from other  Talkers it  encounters  within  its  vicinity  or
community.  We are  currently  testing  this  devise in Texas  with a  potential
customer.

SPECIFICATIONS

         SMMP(R) OPERATING SYSTEM. All of our MachineTalker(R)  products use the
SMMP(R)  language  developed by MTI. SMMP(R) is an operating system and protocol
that facilitates the establishment of ad hoc wireless networks. MachineTalker(R)
modules  maintain  profiles  of  all  devices  and  interchange  information  to
facilitate  redundancy,  establish  network  relationships  and build autonomous
communities of MachineTalkers(R).

          RADIO TECHNOLOGIES.  Our  MachineTalker(R)  products utilize a modular
architecture  to meet the  requirement of disparate  applications,  meaning that
different types of radios can be used. The MachineTalker(R)  demonstration units
utilize a single chip RF  transceiver  operating in the 902-928 MHz ISM band. We
are a voting  member of the IEEE  802.15.4  Committee,  which has  introduced  a
standard for a low power RF transceiver  that utilizes direct  sequence,  spread
spectrum.  The  802.15.4  standard is intended to meet the  requirements  of low
power  networks  in  the  future,  such  as   MachineTalker(R).   Several  large
semiconductor manufacturers have announced products to fulfill a wide variety of
applications.  Position  Location and high performance can be obtained by our RF
transceiver using pulsed spread spectrum techniques.

         MICROPROCESSOR.  The MachineTalker(R) is based on a low power extremely
powerful 8-bit RISC processor (Atmel ATmega 128).  Depending on the application,
the  MachineTalker(R) can make use of the on-board  Analog-to-Digital  Converter
("ADC") and various  serial and parallel  interfaces.  The chip contains 128k of
flash memory for program and data storage.

                                      -4-
<PAGE>

         LOW POWER OPERATION.  Depending on the duty cycle specified for a given
application,  the  MachineTalker(R)  can have a  battery  life of 2+ years on AA
batteries.

         SENSORS. The MachineTalker(R) can be interfaced to a variety of sensors
including micro electro-mechanical systems ("MEMS") and advanced nanotechnology,
including:

         o        Temperature o Humidity
         o        Gas (all types)
         o        BioHazard
         o        Pressure
         o        Light Measurement
         o        Magnetometer (compass)
         o        Ultrasonic distance
         o        GPS o Displacement
         o        Gyroscope (MEMS)
         o        Hall Effect (magnetic proximity)
         o        Biometric (Fingerprint)
         o        Accelerometers (vibration, tilt)
         o        Sound Detection
         o        Corrosion Detection
         o        Proximity sensors (human)

         INTERNET  ACCESS.  Remote  and  wireless  MachineTalkers(R)  with their
detectors and sensors are now accessible via the Internet. Using the services of
SensorLogic, Inc., a strategic partner which provides access services, all types
of activities  can be easily  monitored in real-time from anywhere in the world.
Such access can also be made by attachment of our products to standard  personal
computers, laptops, and PDAs; all acting as "network gateways."

APPLICATIONS FOR MACHINE TALKER SMART SECURITY NETWORK TECHNOLOGY

         GENERAL.  We  intend  to become a  significant  part of the  electronic
architecture  of the worldwide  security and sensor market.  We believe that the
United  States   homeland   security  market  provides  us  with  an  attractive
opportunity,  as  well  as the  market  for  mobile  sensors.  We  believe  that
applications for our smart security network technology include the following:

        o        Transportation Security (land, sea and air)
        o        People Screening
        o        Cargo Security
        o        Container Security
        o        Mail and Mail Room Security
        o        Sensitive Sites and Public Spaces Security
        o        Weapons of Mass Destruction/Disruption
        o        Logistics and Critical Inventory Tracking

         APPLICATION  FOR KELLOGG,  BROWN & ROOT.  In December  2004, we entered
into an agreement with Kellogg,  Brown & Root ("KBR"), a division of Halliburton
Company,  pursuant  to which we agreed to  develop a  solution  to enable KBR to
track its 600,000  shipping  containers on a global basis.  Our solution for KBR
consisted of equipping  each KBR shipping  container with a  MiniTalker(R)  unit
programmed  with  the  shipping  manifest,   source,   destination,   and  other
information to identify the individual container when queried.  Considering that
shipping  containers  are not usually  handled with care and that they generally
pass  through  very harsh  environments  while in transit,  we designed a rugged
version  of our  MiniTalker(R)  unit  for  use in this  particular  application,
referred  to  as  a   ToughTalker(TM).   In  consideration  for  developing  and
demonstrating  applications  software and designing product variations for KBR's
intended use, KBR agreed to pay us $300,000,  $240,000 of which has been paid in
fixed  increments  as we  completed  certain  milestones  for the  project.  The
agreement  also  contains  a five  year  software  license  agreement  component

                                      -5-
<PAGE>

pursuant  to  which  Kellogg,  Brown & Root  has the  right  to use our  SMMP(R)
software and the right of first  refusal to  participate  with us in the sale of
our  Talkers(R)  in the area of tracking of inventory,  containers,  and similar
packages in consideration for a license fee of $200,000.  Kellogg,  Brown & Root
also had the right under the agreement to purchase up to 250 MiniTalkers(R) at a
purchase price of $100 per MiniTalker(R),  which it exercised on August 9, 2005.
Both parties agreed,  however,  that due to increased production costs, Kellogg,
Brown & Root would purchase 100  MiniTalkers(R)  at a purchase price of $250 per
MiniTalker(R),  for a total of $25,000.  Accordingly,  the maximum  value of the
agreement is $525,000,  not including an additional $11,145.90 which we received
for field services and ten sample  ToughTalkers(R) for evaluation  purposes.  By
its terms, the agreement, except for the software license agreement,  terminated
on September  1, 2005.  As of March 31, 2006,  all  deliverable  items have been
shipped  and  invoiced  to KBR and all  payments  have been  received.  With the
successful demonstration of the trial application, KBR has orally indicated that
it would extend the term of the  agreement  again for a period to be  determined
pursuant  to which we expect to  manufacture  and  install a large  quantity  of
ToughTalker(TM)  units in KBR  shipping  containers.  We have not yet,  however,
entered  into an  agreement  to extend the term and cannot  assure if or for how
long the agreement will actually be extended.

         NASA  PROJECT.  In July 2004,  we entered into an  agreement  with NASA
through its contracting group at SAIC,  pursuant to which we agreed to provide a
version of  MachineTalker(R)  that could be placed in an unmanned aerial vehicle
("UAV") to read multiple  sensors  (atmospheric  pressure,  accelerometers,  and
gyroscopes)  and to convey results to other  Talkers(R) in nearby UAVs in-flight
and on the ground.  In  consideration  for our product,  NASA agreed to pay us a
total of $55,000,  payable in  increments  as we completed  certain  milestones.
Delivery  of the final  product  was to take  place  within  22 weeks  after the
commencement  of the  agreement.  When NASA was unable to provide the  equipment
necessary  for us to complete  the  project,  the  agreement  was extended for a
period of one year. We completed  development  of the  application  software and
display  software for the ground  station on schedule,  and shipped the units to
NASA for flight  testing.  As of March 31,  2006,  NASA has paid us $25,000  and
$15,000,  respectively,  for those  deliverables which have been shipped to NASA
Langley for testing.  We completed  flight  testing in October 2005 and NASA was
billed the remaining  $15,000 due to us under the agreement in November 2005. We
believe that the NASA test has  illustrated  how wireless  sensors can be placed
anywhere  inside an airframe,  each with the  intelligence to make decisions and
gather data, without the need to rewire the aircraft.  Information can be passed
among sites  containing  the wireless  sensors,  to nearby  aircraft  containing
wireless sensors, and to ground stations containing wireless sensors.

BUSINESS AND REVENUE MODELS

         Our   business   strategy   is   very   straight-forward:   (1)   apply
MachineTalker(R)  smart security network technology to the $80 billion worldwide
security  and  sensor   products  and  systems   market,   (2)  initially   sell
MachineTalker(R)  devices  through  channel  partners and  distributors  in this
market,  and  (3)  later  on,  further  develop   MachineTalker(R)   proprietary
technology and products for sale to manufacturers and operators of virtually all
machines, appliances and devices.

         Our  management  believes  that most of our revenues will come from the
sale of  MachineTalker(R)  devices.  We  also  plan  to  earn  revenues  through
licensing of our proprietary technology to equipment manufacturers.

MARKETING AND SALES PLAN

         We compete in worldwide  security  products and systems market, as well
as the market for sensors.  The Freedonia  Group forecasts that the world market
for  security  products  and systems  will  expand  dramatically  through  2006,
approaching $80 billion, and perhaps double to $160 billion by 2011.  Heightened
fears of terrorism in the wake of the  September  11, 2001 attacks on the United
States,  in tandem with rising  conventional  crime rates in many countries,  is
expected to be the major  factor  driving  growth.  Also  important  will be the
robust pace of new product  development,  especially in the electronic  security
segment. MTI intends to become a significant part of the electronic architecture
of the worldwide security products and systems market.

         MARKETING  STRATEGY.  Our  marketing  strategy is to create a favorable
environment  in  which  to sell  our  MachineTalker(R)  smart  security  network
devices.  We intend to enhance,  promote,  and support our supposition  that the
MachineTalker(R)  proprietary  smart  security  network  technology  is the most
complete  and  comprehensive  solution  available in the  marketplace  to deploy
wireless security and sensor systems rapidly.

                                      -6-
<PAGE>

         PRODUCT   AND   SERVICE   DIFFERENTIATION.    We   believe   that   the
differentiating  attributes  of the  MachineTalker(R)wireless  control  solution
include:

        o        The only complete smart security  system to easily create,
                 deploy and manage local wireless security systems
        o        Dynamic ("smart") networks
        o        Creates communities of wireless sensors via SMMP(R)
        o        Low cost, easy-to-install wireless components
        o        Designed for diverse types of applications
        o        Highly scalable
        o        Highly reliable

         VALUE  PROPOSITION.  Our value  proposition is simple:  we believe that
MachineTalker(R)smart  security  networks  allow  governments,   businesses  and
individuals  to deploy  wireless  security  systems  rapidly to protect  people,
places and things at a reasonable cost.

         POSITIONING.  We believe that MachineTalker(R) can be positioned as the
superior solution for creating,  deploying, and managing local wireless security
systems.  We believe that  MachineTalker(R)  offers a complete  solution that is
inexpensive,  efficient and scalable.  We plan to reposition our  competitors by
demonstrating that their offerings are inadequate, too costly and not dynamic.

         SALES  STRATEGY.  After  creating a high level of  perceived  value and
building significant demand for sales through our marketing campaign,  we intend
to sell our smart security  network devices  aggressively  throughout the United
States. If and when we achieve initial success in the domestic  marketplace,  we
plan to expand our sales efforts into the international marketplace.

         SALES MARGIN STRUCTURE.  We believe that the majority of our sales will
be derived  from channel  partners  and  certified  integration  partners.  As a
result,  our sales margin  structure must be appropriate  for these  independent
organizations. Our proposed margin structure includes:

         1.       Direct Sales - Full suggested list price.
         2.       Channel  Partners/Certified  Integration  Partners Sales - 40%
                  off suggested list price.
         3.       Manufacturer's Representatives - 10% commission.

         FIELD SALES  FORCE.  Under our current  business  model we plan to hire
approximately  two  salespeople  who  are  also  experienced  engineers  ("Sales
Engineers").  The  majority  of our sales  efforts  are  expected to be targeted
toward Original Equipment  Manufacturers ("OEMs") and will be handled internally
through these Sales Engineers. MTI has chosen to use Sales Engineers because OEM
accounts  require  considerable  customer  education  and  post-sales  technical
support  directly from MTI. Our price  points,  pricing  structure,  and profits
justify a technical "person-to-person" selling strategy.

         MANUFACTURERS'  REPRESENTATIVES.  We can supplement our own field sales
force by entering into agreements with manufacturers'  representatives.  Because
manufacturers'  representatives  carry  several  product/service  lines that are
compatible  with our products  and  services,  we plan to select  manufacturers'
representatives  carrying complementary and compatible products and services, as
well  as  manufacturers'  representatives  that  sell  dissimilar  products  and
services yet ones that are appropriate to their customers' customer.

DISTRIBUTION CHANNELS

         We plan to sell our smart security network  components  through several
channels of distribution, including the following:

                                      -7-
<PAGE>

         DIRECT  SALES TO END USERS.  Under our current  policy we only sell our
products   directly  to  end-users  when  other  channels  of  distribution  are
unavailable.  We anticipate that direct sales will occur most often with smaller
customers.

         CHANNEL  PARTNERS AND/OR  CERTIFIED  INTEGRATION  PARTNERS.  We plan to
identify  a  number  of  independent  organizations  that may  serve as  channel
partners,  certified  integration  partners,  or both. These  organizations  are
likely  to have  well-established  relationships  with  mid-size  to large  size
customers.  Many may also provide  specific  vertical market  applications.  Our
requirements for channel partners and certified  integration  partners  include:
established branding,  established market segment, solid reputation, high volume
transactions and independent marketing and services organizations.

INVESTMENT IN SENSE-COMM TECHNOLOGY LLC

         In  November  2006,  we issued  600,000  shares of our common  stock to
purchase  10% of  Sense-Comm  Technology  LLC  ("Sense-Comm").  Sense-Comm  is a
limited  liability company formed in August 2006 by a small group of individuals
to become a distributor and reseller of our intelligent  wireless network sensor
controlling technology to the energy and petroleum industries.

COMPETITION

         The worldwide security products and systems industry in general and the
market for security products in particular is highly competitive.  Our principal
competitors  include large scale security companies that have provided container
security in the past such as Savi  Technology  that have OEMs that are trying to
do what we are doing. Many of these competitors have longer operating histories,
greater name  recognition,  larger installed  customer bases, and  substantially
greater  financial  and  marketing  resources  than  MTI.  Because  these  other
companies  use bar code  readers  and  radio  frequency  identification  devices
without  local  intelligence  to accomplish  security and  tracking,  management
believes that one of the features  that will  distinguish  our security  systems
from the  competition  is our  ad-hoc  local  wireless  network  approach  to do
tracking  and  security.  Our ability to compete  successfully  in the  security
products  systems  industry  depends in large part upon our  ability to sell and
install  our smart  security  systems  and to respond  effectively  to  changing
technology.  By installing  representative  products in projects funded by large
OEM customers such as KBR, we believe that principal industry leaders will adopt
our technology. We cannot assure that we will be able to compete successfully in
the security products and systems industry,  or that future competition will not
have a material adverse effect on our business, operating results, and financial
condition.

GOVERNMENT REGULATION

         We are  subject to  various  federal,  state and local  laws  affecting
wireless communication and security businesses. The Federal Trade Commission and
equivalent  state agencies  regulate  advertising  and  representations  made by
businesses  in the sale of their  products,  which apply to us. Our  business is
also  subject to  government  laws and  regulations  governing  health,  safety,
working conditions,  employee relations, wrongful termination,  wages, taxes and
other matters applicable to businesses in general. Failure of MTI to comply with
applicable  government rules or regulations could have a material adverse effect
on our financial condition and business operations.

EMPLOYEES

         As of December 31, 2006, we employed five people on a full-time  basis.
Of those  five  full-time  employees,  two are  employed  in an  administrative,
marketing,  and sales position,  and the remaining three are technical employees
employed in research,  development,  and production  positions.  We project that
during the next 12 months,  our  workforce is likely to increase to eight,  with
two of the new positions being in administrative, marketing, and sales positions
and the remaining position being in research, development, and production.

         To  support  our  need  for  technical  staffing,  we have  established
relationships  with technical  staffing  organizations  that continuously  offer
highly qualified  personnel to meet our needs,  both locally and from out of the
area.

                                      -8-
<PAGE>

INTELLECTUAL PROPERTY

         We currently own the following registered trademarks and service marks:
(i) United  States  Trademark  Registration  No.  2848438,  issued by the United
States  Patent and  Trademark  Office on June 1, 2004 , covering  the  trademark
"TALKER," (ii) United States Trademark  Registration No. 2872244,  issued by the
United  States  Patent and  Trademark  Office on August 10,  2004,  covering the
trademark "SMMP," (iii) United States Trademark Registration No. 2872243, issued
by the United States Patent and  Trademark  Office on August 10, 2004,  covering
the trademark  "MACHINETALKER,"  (iv) United States  Trademark  Registration No.
2882375, issued by the United States Patent and Trademark Office on September 7,
2004,  covering the  trademark  "MINITALKER,"  and (v) United  States  Trademark
Registration  No.  2897704,  issued by the United  States  Patent and  Trademark
Office on October 26, 2004,  covering the trademark  "SIMPLE MACHINE  MANAGEMENT
PROTOCOL" with no claim made to the exclusive  right to use "MACHINE  MANAGEMENT
PROTOCOL" apart from the entire mark.

         We have  also  applied  for the  following  additional  trademarks  and
services marks:  (i) United States Serial No. 78141481,  application  filed with
the United States Patent and Trademark Office on July 5, 2002, for the trademark
"TAGTALKER," (ii) United States Serial No. 78154576,  application filed with the
United States Patent and Trademark  Office on August 15, 2002, for the trademark
"TINYTALKER,"  (iii) United States Serial No. 78389393,  application  filed with
the  United  States  Patent  and  Trademark  Office on March 23,  2004,  for the
trademark  "RFIDNET," (iv) United States Serial No. 78425975,  application filed
with the United  States  Patent and  Trademark  Office on May 27, 2004,  for the
trademark "SEALTALKER," (v) United States Serial No. 78522694, application filed
with the United States Patent and Trademark Office on November 24, 2004, for the
trademark "TOUGHTALKER," and (vi) United States Serial No. 78535515, application
filed with the United States  Patent and Trademark  Office on December 20, 2004,
for the trademark  "TINYTALKER."  We cannot assure that we will be successful in
obtaining theses marks,  that these  applications  will not be challenged,  that
others  will not attempt to  infringe  upon our marks,  or that these marks will
afford us any protection or competitive advantages.  We have not yet been issued
these  trademarks  and  service  marks.  We may file  additional  trademark  and
tradename  applications  with the United States Office of Patents and Trademarks
for additional tradenames and trademarks in the future.

         In April 2002, a Patent  Application  to the United  States  Patent and
Trademark  Office  ("USPTO")   entitled  "Self   Coordinated   Machine  Network"
application No.  20040114557  was filed,  regarding a self  coordinated  machine
network  established  by two or more machines in proximity with each other via a
wired or  wireless  network  infrastructure.  The  machines  are  configured  to
establish an ad hoc network between themselves for sharing  information  related
to their  common  applications.  New  machines  that come into  proximity of the
network  infrastructure  are  configured  to join an  existing  ad hoc  network.
Machines  that  power  down  or  are  removed  from  proximity  of  the  network
infrastructure  are eliminated from the ad hoc network.  Communications  between
the  constituent  machines  of the ad hoc  network  allow the  machines  to self
coordinate  the network and  redundantly  store  information  pertaining  to the
common and disparate applications of the various machines that comprise the self
coordinated  machine  network.  An assignment of this application to us from the
inventors,  Bryan F. Roland,  Mark P. Harris,  and  Christopher T. Kleveland was
filed with the USPTO on April 23, 2002.

         All of our employees have executed agreements that impose nondisclosure
obligations  on the  employee  and  pursuant to which the employee has agreed to
assign to us (to the extent  permitted by  California  law) all  copyrights  and
other  inventions  created by the employee  during  employment MTI. We have also
implemented  a trade secret  protection  policy that  management  believes to be
adequate to protect our intellectual property and trade secrets.

SEASONALITY

         Our   operations   are  not   expected   to  be  affected  by  seasonal
fluctuations,  although  our cash flow may be  affected by  fluctuations  in the
timing of cash receipts from our customers.

ITEM 2. PROPERTIES

         We currently lease  approximately  1,541 square feet of office space at
513 De La Vina Street,  Santa Barbara,  California 93101 from a company owned by
the  majority  shareholders  at a base rental rate of  approximately  $1,426 per
month pursuant to a month to month lease.

                                      -9-
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

         We are not currently a party to any material legal proceedings.

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

         No matters were submitted  during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

         Our common  stock began  trading in February  2006 on the OTC  Bulletin
Board Market under the symbol  "MTKN." The range of high and low bid  quotations
for each fiscal quarter within the last two fiscal years was as follows:

                 Year Ended December 31, 2006          HIGH             LOW
                                                       ----             ---

     First Quarter ended March 31, 2006                $0.25            $0.19
     Second Quarter ended June 30, 2006                $0.21            $0.15
     Third Quarter ended September 30, 2006            $0.18            $0.09
     Fourth Quarter ended December 31, 2006            $0.17            $0.11

                 Year Ended December 31, 2005          HIGH             LOW
                                                       ----             ---

     First Quarter ended March 31, 2005                N/A              N/A
     Second Quarter ended June 30, 2005                N/A              N/A
     Third Quarter ended September 30, 2005            N/A              N/A
     Fourth Quarter ended December 31, 2005            N/A              N/A
---------------------

         The  above  quotations  reflect  inter-dealer  prices,  without  retail
markup,  mark-down,  or  commission  and may not  necessarily  represent  actual
transactions.

         As of December 31, 2006, there were approximately 199 record holders of
our common  stock,  not  including  shares  held in "street  name" in  brokerage
accounts  which is unknown.  As of December 31, 2006,  there were  approximately
160,539,193 shares of common stock outstanding on record.

DIVIDENDS

         We have not declared or paid any cash dividends on its common stock and
does not anticipate paying dividends for the foreseeable future.

EQUITY COMPENSATION PLAN INFORMATION

         Effective  February  15,  2002,  our  Board of  Directors  adopted  the
MachineTalker,  Inc. 2002 Stock Option Plan for Directors,  Officers,  Employees
and Key  Consultants  (the "Plan") under which a total of  20,000,000  shares of
Common Stock have been reserved for issuance  pursuant to the grant and exercise
of up to 20,000,000 stock options.  The Plan has been approved by the holders of
our  outstanding  shares.  The following  table sets forth  certain  information
regarding the Plan as of December 31, 2006:

                                      -10-
<PAGE>
<TABLE>
<CAPTION>
                                                                                            NUMBER OF SECURITIES
                             NUMBER OF SECURITIES TO BE     WEIGHTED-AVERAGE EXERCISE      REMAINING AVAILABLE FOR
                               ISSUED UPON EXERCISE OF     PRICE OF OUTSTANDING STOCK   FUTURE ISSUANCE UNDER EQUITY
                              OUTSTANDING STOCK OPTIONS              OPTIONS                 COMPENSATION PLANS
                             --------------------------    --------------------------   -----------------------------
<S>                                   <C>                            <C>                         <C>
Equity compensation plans             8,700,000                      $0.051                      11,300,000
approved by security
holders
</TABLE>

         For the  fiscal  year  ended  December  31,  2006,  we  issued no stock
options.

WARRANTS

         For the fiscal year ended  December  31,  2006,  we issued  warrants to
purchase  620,000 shares of unregistered  common stock,  at a weighted  exercise
average  price  of  $0.12  per  share,  to  various   consultants  for  business
development and marketing  services in lieu of cash. None of these warrants have
been exercised.

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

CAUTIONARY STATEMENTS

         This   Form   10-KSB   contains   financial   projections   and   other
"forward-looking  statements," as that term is used in federal  securities laws,
about  MachineTalker,  Inc.'s  financial  condition,  results of operations  and
business.  These statements  include,  among others:  statements  concerning the
potential  for revenues and expenses and other  matters that are not  historical
facts.  These statements may be made expressly in this Form 10-KSB. You can find
many of these  statements  by looking for words such as  "believes,"  "expects,"
"anticipates,"  "estimates,"  or similar  expressions  used in this Form 10-KSB.
These forward-looking statements are subject to numerous assumptions,  risks and
uncertainties that may cause our actual results to be materially  different from
any future  results  expressed  or implied by us in those  statements.  The most
important  facts that could prevent us from  achieving its stated goals include,
but are not limited to, the following:

         (a)      volatility or decline of our stock price;
         (b)      potential fluctuation in quarterly results;
         (c)      failure of us to earn revenues or profits;
         (d)      inadequate  capital and  barriers  to raising  the  additional
                  capital or to obtaining the financing  needed to implement its
                  business plans;
         (e)      inadequate capital to continue business;
         (f)      changes in demand for our products and services;
         (g)      rapid and significant changes in markets;
         (h)      litigation  with or legal  claims and  allegations  by outside
                  parties;
         (i)      insufficient revenues to cover operating costs.

         Because the statements are subject to risks and  uncertainties,  actual
results  may  differ   materially   from  those  expressed  or  implied  by  the
forward-looking  statements.  We caution you not to place undue  reliance on the
statements,  which speak only as of the date of this Form 10-KSB. The cautionary
statements  contained or referred to in this  section  should be  considered  in
connection with any subsequent written or oral  forward-looking  statements that
MTI or  persons  acting  on our  behalf  may  issue.  We do  not  undertake  any
obligation  to review or  confirm  analysts'  expectations  or  estimates  or to
release  publicly any  revisions to any  forward-looking  statements  to reflect
events or  circumstances  after the date of this Form  10-KSB or to reflect  the
occurrence of unanticipated events.

         The  following  discussion  should  be read  in  conjunction  with  our
condensed  consolidated  financial statements and notes to those statements.  In
addition to historical information,  the following discussion and other parts of
this quarterly  report contain  forward-looking  information that involves risks
and uncertainties.

                                      -11-
<PAGE>

OVERVIEW

         Our  completion  of  several  products  that  are  now  being  used  in
demonstrations  of Talker(R)  capability  at  conferences,  seminars and invited
presentations  during the year ended December 31, 2006 have increased the number
of customer  contacts,  from which we expect to secure new  business in the next
several  years.  Our  products  have  entered  the next  level  in two  separate
industrial areas, that of tracking and security of goods loaded upon pallets for
transport and storage;  and that of data acquisition by servicing remote sensors
over  wireless  connections.  We  obtained  small  amounts  of  external  equity
financing  plus  revenue  during  fiscal  year 2006,  so we were able to produce
sufficient   numbers  of  the  new   products   to   introduce   them  into  the
demonstrations.  We have supplied these  representative units to the several OEM
representatives  that  have  signed  on  to  introduce  our  products  to  their
customers.

         Now that we have  completed  development  of the basic product line, we
require additional  capital to promote sales growth.  Depending on the amount of
additional  capital available to us, we plan to invest a significant  portion in
sales and marketing,  manufacturing  inventory,  and  infrastructure.  We cannot
assure that we will be able to locate  sources of capital on terms  favorable to
us.

         We  currently  have five  full  time  employees  as  compared  to seven
employees  during 2005. This change reflects  concentration on completion of the
products by our Engineering staff and reduction of  administration.  Now that we
have products to demonstrate we need to employ  technical  sales staff to better
introduce  the products to OEMs and System  Integrators  so that they will adopt
our technology into their relative fields and applications.

CRITICAL ACCOUNTING POLICIES

         Our discussion  and analysis of our financial  condition and results of
operations are based upon our financial statements,  which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The  preparation  of these  financial  statements  requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues  and  expenses,   and  related  disclosure  of  contingent  assets  and
liabilities.  We monitor our estimates on an on-going basis for changes in facts
and  circumstances,  and material  changes in these estimates could occur in the
future.  Changes in  estimates  are  recorded in the period in which they become
known. We base our estimates on historical experience and other assumptions that
we believe to be reasonable under the  circumstances.  Actual results may differ
from our estimates if past experience or other assumptions do not turn out to be
substantially accurate.

         We have  identified  the  policies  below as critical  to our  business
operations and the understanding of our results of operations.

         REVENUE  RECOGNITION.  We  recognize  revenue  in  accordance  with the
Securities and Exchange  Commission  ("SEC") Staff Accounting  Bulletin No. 104,
"Revenue Recognition in Financial  Statements" ("SAB 104"). We recognize revenue
upon delivery,  provided that evidence of an arrangement exists, title, and risk
of loss  have  passed  to the  customer,  fees are  fixed or  determinable,  and
collection of the related  receivable is reasonably  assured.  We record revenue
net of estimated product returns,  which is based upon our return policy,  sales
agreements,  management estimates of potential future product returns related to
current period revenue, current economic trends, changes in customer composition
and historical  experience.  We accrue for warranty  costs,  sales returns,  and
other  allowances  based on our  experience  which  tells us we have  less  than
$25,000 per year in warranty returns and allowances. Generally, we extend credit
to our  customers  and do not  require  collateral.  We perform  ongoing  credit
evaluations  of our  customers  and historic  credit losses have been within our
expectations. We do not ship a product until we have either a purchase agreement
or rental agreement signed by the customer with a payment arrangement. This is a
critical  policy,  because we want our  accounting  to show only sales which are
"final"  with a  payment  arrangement.  We do not make  consignment  sales,  nor
inventory  sales subject to a "buy back" or return  arrangement  from customers.
Accordingly,  original equipment  manufacturers do not presently have a right to
return unsold products to us.

         We also grant exclusive licenses for the use of the technology required
to  operate  our  products.   We  recognize  revenue  from  software   licensing
arrangements  under SOP 97-2  "Software  Revenue  Recognition,"  as  amended  by
SOP-98-9,  Modification of SOP 97-2,  "Software Revenue Recognition with Respect
to Certain  Transactions."  For those  contracts  that  either do not  contain a

                                      -12-
<PAGE>

services  component  or  that  have  services  which  are not  essential  to the
functionality of any other element of the contract,  software license revenue is
recognized over the contract period.

         PROVISION FOR SALES RETURNS,  ALLOWANCES  AND BAD DEBTS.  We maintain a
provision  for sales  allowances,  returns  and bad  debts.  Sales  returns  and
allowances   result   from   equipment   damaged   in   delivery   or   customer
dissatisfaction,  as provided by  agreement.  The  provision  is provided for by
reducing gross revenue by a portion of the amount  invoiced  during the relevant
period. The amount of the reduction is estimated based on historical experience.

         RESERVE FOR  OBSOLETE/EXCESS  INVENTORY.  Inventories are stated at the
lower of cost or market. We regularly review our inventories and, when required,
will record a provision for excess and obsolete  inventory based on factors that
may impact the realizable value of our inventory including,  but not limited to,
technological changes,  market demand,  regulatory  requirements and significant
changes in our cost  structure.  If ultimate  usage  varies  significantly  from
expected  usage,  or other factors arise that are  significantly  different than
those anticipated by management,  inventory write-downs or increases in reserves
may be required.

OTHER ACCOUNTING FACTORS

         The  effects  of  inflation  have  not  had a  material  impact  on our
operation,  nor are they  expected to in the immediate  future.  Although we are
unaware of any major  seasonal  aspect that would have a material  effect on the
financial  condition or results of  operation,  the first quarter of each fiscal
year is always a financial  concern due to slow collections  after the holidays.
The deposits that are shown in the  financials are for pending sales of existing
products and not any new patented product.  These are deposits received from our
customers  for sales of equipment  and services and are only removed as deposits
upon  completion  of the  sale.  If for  whatever  reason  a  customer  order is
cancelled, the deposit would be returned as stated in the terms of sale, minus a
restocking  fee. No depositor  is a related  party of any officer or employee of
MachineTalker,  Inc.  Our  terms of  deposits  typically  are 50% down  with the
balance of the sale due upon delivery.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

REVENUE

         Total  revenue for the twelve  month  period  ended  December  31, 2006
increased by $328,650 to $553,333 from $224,683 in the prior year. This increase
in revenue was a result of sales to existing customers.

COST OF SALES

         Cost of Sales ("COS") expenses decreased by $(291,559) or (84.41)%,  to
$53,865 for the year ended  December 31, 2006  compared to the prior year.  This
decrease in COS expenses was the result of a decrease in materials purchased for
inventory.

GENERAL AND ADMINISTRATIVE EXPENSES

         General and  administrative  ("G&A") expenses decreased by $(44,004) or
(6.04)%,  to $683,266 for the year ended December 31, 2006 compared to the prior
year. This decrease in G&A expenses was the result of a decrease in professional
and consulting fees.

RESEARCH AND DEVELOPMENT

         Research and Development ("R&D") costs increased by $126,204 or 63.16%,
to $326,032  for the year ended  December  31, 2006  compared to the prior year.
This  increase  in R&D costs was the result of an increase in testing of product
alternatives, construction of prototypes, and application of engineering time to
new customer demonstration projects.

                                      -13-
<PAGE>

NET LOSS

         Net Loss decreased by $(456,223), or (42.70)%, to $611,967 for the year
ended December 31, 2006,  compared to the prior year.  This decrease in Net Loss
was the result of a decrease in G&A expenses and an increase in sales. Currently
operating  costs exceed  revenue  because sales are not yet  sufficient to cover
costs. We cannot assure when or if revenue will exceed operating costs.

LIQUIDITY AND CAPITAL RESOURCES

         MTI had net cash of  $50,546 at  December  31,  2006,  as  compared  to
$171,934 at December 31, 2005.

         During the year ended  December 31, 2006, MTI used $451,513 of cash for
operating activities, as compared to $566,510 during the year ended December 31,
2005. The decrease in the use of cash for operating activities was a result of a
decrease in legal fees incurred, and other general and administrative expenses.

         Cash used in investing activities to purchase equipment during the year
ended  December  31,  2006 was $0  compared  to  $41,015  during  the year ended
December 31, 2005.

         Cash  provided by  financing  activities  relating  to the  issuance of
shares of common stock during the year ended  December 31, 2006 was $80,125,  as
compared to $653,000  during the year ended December 31, 2005. Our capital needs
have  primarily  been met from the proceeds of private  placements,  shareholder
loans, and to a lesser extent, sales.

         We will have additional capital requirements during 2007 as we continue
with  our  plan of  securing  new OEM  relationships  and  developing  requisite
products.  Although we cannot quantify these anticipated costs with specificity,
we estimate  that we will incur  approximately  $300,000 in marketing  and sales
costs  during the next twelve  months of  operations  and that our  research and
development  costs will  approximate  $400,000  during the next twelve months of
operations.  We do not anticipate,  however,  any significant  capital equipment
expenditures.  There is no assurance that  marketing,  research and  development
costs in 2007 will not exceed or vary from those costs  expected by  management.
We intend to meet our cash  requirements  through sales of our products and plan
to continue to generate sales leads through tradeshows and marketing.  If we are
unable to satisfy our cash  requirements  through product sales, we will attempt
to raise additional capital through the sale of our common stock.

         We cannot  assure that we will have  sufficient  capital to finance our
growth and business  operations  or that such capital will be available on terms
that  are  favorable  to us or at  all.  We are  currently  incurring  operating
deficits that are expected to continue for the foreseeable future.

                                      -14-
<PAGE>




ITEM 7.       FINANCIAL STATEMENTS OF MACHINETALKER, INC.



                               MACHINETALKER, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                                    CONTENTS









                                                                            PAGE


Report of Independent Registered Public Accounting Firm ................     16

Balance Sheet as of December 31, 2006...................................     17

Statements of Operations for the years ended
 December 31, 2006 and 2005.............................................     18

Statement of Changes in Shareholders Equity for the years
 ended December 31, 2006 and 2005.......................................     19

Statements of Cash Flows for the years ended
 December 31, 2006 and 2005 ............................................     21

Notes to Financial Statements ..........................................  22-30










                                      -15-
<PAGE>




             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors
MachineTalker, Inc.
Santa Barbara, California

We have  audited the balance  sheet of  MachineTalker,  Inc. as of December  31,
2006, and the related statements of operations,  stockholders'  deficit and cash
flows for years  ended  December  31,  2006 and 2005,  and for the  period  from
inception of the  development  stage on January 30, 2002,  through  December 31,
2006.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of  MachineTalker,  Inc. as of
December  31,  2006,  and the results of its  operations  and its cash flows for
years ended December 31, 2006 and 2005, and for the period from inception of the
development stage on January 30, 2002,  through December 31, 2006, 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 2 to the
financial  statements,  the Company has incurred  significant  losses which have
resulted in an accumulated  deficit and has negative cash flows from operations,
raising  substantial  doubt about its  ability to  continue as a going  concern.
Management's  plans in regard to these matters are also discussed in Note 2. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

/s/ HJ Associates & Consultants, LLP

HJ Associates & Consultants, LLP
Salt Lake City, Utah
April 9, 2007


                                      -16-
<PAGE>

                              MACHINETALKER, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                                 BALANCE SHEET
                               DECEMBER 31, 2006
<TABLE>
<CAPTION>

                                     ASSETS

CURRENT ASSETS
<S>                                                                                        <C>
         Cash and cash equivalents                                                         $       50,546
         Inventory                                                                                 48,476
         Prepaid Expenses                                                                           4,136
         Employee Advances                                                                            227
                                                                                           -----------------
TOTAL CURRENT ASSETS                                                                              103,385
                                                                                           -----------------

PROPERTY & EQUIPMENT, at cost
        Machinery & Equipment                                                                      13,080
        Computer equipment                                                                         50,750
        Furniture & Fixture                                                                         4,671
                                                                                           -----------------
                                                                                                   68,501

        Less accumulated depreciation                                                             (37,963)
                                                                                           -----------------
                NET PROPERTY AND EQUIPMENT                                                         30,538
                                                                                           -----------------

OTHER ASSETS
         Security Deposit                                                                           2,975
                                                                                           -----------------


  TOTAL ASSETS                                                                             $      136,898
                                                                                           =================

                      LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES
        Accounts payable                                                                   $       38,266
        Accrued expenses                                                                           65,282
        Unearned revenues                                                                          40,000
        Notes Payable, shareholder (note 7)                                                       250,000
                                                                                           -----------------
                TOTAL CURRENT LIABILITIES                                                         393,548
                                                                                           -----------------

LONG TERM LIABILITIES
        Unearned revenues                                                                          78,817
        Notes Payable, shareholder (note 7)                                                       436,000
                                                                                           -----------------
                                                                                                  514,817
                                                                                           -----------------
                TOTAL  LIABILITIES                                                                908,365
                                                                                           -----------------

SHAREHOLDERS' EQUITY DEFICIT
        Common stock, $.001 par value;
        500,000,000 authorized shares;
        160,539,193 shares issued and outstanding                                                 160,539
        Additional paid in capital                                                              2,568,320
        Deficit accumulated  during the development stage                                      (3,500,326)
                                                                                           -----------------

                TOTAL SHAREHOLDERS'  DEFICIT                                                     (771,467)
                                                                                           -----------------

                        TOTAL LIABILITIES AND SHAREHOLDERS'  DEFICIT                       $      136,898
                                                                                           =================
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      -17-
<PAGE>
                              MACHINETALKER, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                               Year Ended
                                                       ---------------------------    From Inception
                                                                                     January 30,2002
                                                               December 31,               through
                                                            2006          2005       December 31, 2006
                                                       ------------- -------------  ------------------

<S>                                                    <C>           <C>            <C>
REVENUE                                                $     553,333 $     224,683  $          982,849

COST OF SERVICES                                              53,865       345,424             399,289
                                                       ------------- -------------  ------------------

GROSS PROFIT (DEFICIT)                                       499,468      (120,741)            583,560

OPERATING EXPENSES
 Salaries                                                    311,674       179,927           1,014,185
 Professional and consulting fees                             90,768       212,474             673,139
 Research and development                                    326,032       199,828             971,193
 Stock Compensation Cost                                      39,855             -              39,855
 Patent Expense                                                6,735        10,564              25,849
 Rent                                                         14,264        14,264             145,844
 Insurance expenses                                           27,863        24,886              96,667
 Depreciation and amortization                                13,638        13,638              37,963
 Payroll taxes                                                44,701        44,848             151,593
 Office expense                                                8,525        10,545              54,287
 Meals and entertainment                                       2,352         2,262              13,274
 Postage & Delivery                                            4,130         5,632              15,827
 Repairs & Maintenance                                         2,882         3,753               9,647
 Storage Expense                                              18,000        13,620              34,530
 Travel                                                       19,646         8,710              53,418
 Taxes & Licenses                                              1,594         4,356               9,658
 Advertising                                                  20,391        17,247              45,676
 Contributions                                                   660             -                 660
 Telephone and Utilities                                       8,727         7,714              27,607
 Marketing Services                                           46,861       152,950             456,061
                                                       ------------- -------------  ------------------
        TOTAL OPERATING EXPENSES                           1,009,298       927,218           3,876,933
                                                       ------------- -------------  ------------------

LOSS FROM OPERATIONS                                        (509,830)   (1,047,959)         (3,293,373)

OTHER INCOME/(EXPENSE) BEFORE PROVISION FOR INCOME TAXES
 Interest Income                                                 358         9,126              10,225
 Interest Expense                                            (29,658)      (26,357)           (139,741)
 Loss on Investment                                          (72,000)            -             (72,000)
 Loss on Sale of Asset                                             -        (2,200)             (2,200)
                                                       ------------- -------------  ------------------
                                                            (101,300)      (19,431)           (203,716)
                                                       ------------- -------------  ------------------

PROVISION FOR INCOME TAXES                                      (837)         (800)             (3,237)
                                                       ------------- -------------  ------------------

NET (LOSS)                                                  (611,967)   (1,068,190)         (3,500,326)
                                                       ============= =============  ==================


BASIC AND DILUTED LOSS PER SHARE                       $       (0.00)$       (0.01)
                                                       ============= =============

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
      BASIC AND DILUTED                                  159,577,725   156,972,271
                                                       ============= =============
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      -18-
<PAGE>

                               MACHINETALKER, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                       STATEMENTS OF SHAREHOLDERS DEFICIT
                 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                                                  Accumulated
                                                                                                 Deficit During
                                                              Common stock          Additional        the
                                                       ---------------------------    Paid-in     Development
                                                         Shares         Amount        Capital        Stage          Total
                                                       ------------ -------------- -------------- ------------- -------------
<S>                                                      <C>        <C>            <C>            <C>           <C>

Balance from original Issuance at January 30, 2002
($0.0017 per share) ($7,650 in cash and a patent at
 a fair value of $5,100)                                 7,500,000  $       7,500  $       5,250  $          -  $     12,750

Issuance of common stock in February and March 2002
($0.50 per share in cash)                                  250,000            250        124,750             -       125,000

Issuance of common stock in April 2002
(20,000 shares at $0.50 per share in cash)                  20,000             20          9,980             -        10,000

Issuance of common stock in April 2002
 (20,000 shares as finders fees)                            20,000             20            (20)            -             -

Issuance of common stock in May 2002
(140,000 shares at $0.50 per share in cash)                140,000            140         69,860             -        70,000

Issuance of common stock in May 2002
(20,000 shares as finders fees)                             20,000             20            (20)            -             -

Issuance of common stock in June 2002
($1.00 per share in cash)                                   50,000             50         49,950             -        50,000

Net Loss for the year ended December 31, 2002                    -              -              -      (852,600)     (852,600)
                                                       ------------ -------------- -------------- ------------- -------------
Balance at December 31, 2002                             8,000,000          8,000        259,750      (852,600)     (584,850)

Issuance of common stock in January 2003
 ($1.00 per share in cash)                                 128,000            128        127,872             -       128,000

Issuance of common stock in March 2003
 ($1.00 per share in cash)                                  10,000             10          9,990             -        10,000

Net Loss for the year ended December 31, 2003                    -              -              -      (394,115)     (394,115)
                                                       ------------ -------------- -------------- ------------- -------------
Balance, December 31, 2003                               8,138,000          8,138        397,612    (1,246,715)     (840,965)

Issuance of common stock in January 2004
  (25,000 shares valued at $6,250 for services              25,000             25          6,225             -         6,250

Issuance of common stock in June 2004
  (16,000,000 shares at $0.025 per share in
   conversion debt)                                     16,000,000         16,000        384,000             -       400,000

Issuance of common stock in June 2004
  (10,000,000 shares at $0.025 per share for services)  10,000,000         10,000        240,000             -       250,000

Stock Split                                             83,207,000         83,207        (83,207)            -             -


                                      -19-

<PAGE>
                               MACHINETALKER, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                       STATEMENTS OF SHAREHOLDERS DEFICIT
                 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

                                   continued

Issuance of common stock in July
  through December 31, 2004 for cash                    24,560,000         24,560        589,440             -       614,000

Net Loss for the year ended December 31, 2004                    -              -              -      (573,454)     (573,454)
                                                       ------------ -------------- -------------- ------------- -------------
Balance at December 31, 2004                           141,930,000        141,930      1,534,070    (1,820,169)     (144,169)

Issuance of common stock in January 2005
  (13,720,000 shares at $0.025 per share for cash)      13,720,000         13,720        329,280             -       343,000

Issuance of common stock in March 2005
  (300,000 shares at $0.10 per share for cash)             300,000            300         29,700             -        30,000

Issuance of 3,817,000 warrants for services                      -              -        129,550             -       129,550

Issuance of common stock in April 2005
  (300,000 shares at $0.10 per share for cash)             300,000            300         29,700             -        30,000

Issuance of common stock in May 2005
  (267,050 shares at fair value for services)              267,050            267          7,801             -         8,068

Issuance of common stock in May 2005
  (1,450,000 shares at $0.10 per share for cash)         1,450,000          1,450        143,550             -       145,000

Issuance of common stock in June 2005
  (1,050,000 shares at $0.10 per share for cash)         1,050,000          1,050        103,950             -       105,000

Issuance of 260,000 warrants for services                        -              -         23,400             -        23,400

Net Loss for the year ended December 31, 2005                    -              -              -    (1,068,190)   (1,068,190)
                                                       ------------ -------------- -------------- ------------- -------------

Balance at December 31, 2005                           159,017,050        159,017      2,331,001    (2,888,359)     (398,341)
                                                       ------------ -------------- -------------- ------------- -------------

Common stock warrants exercised in March 2006
  (315,000 common stock warrants excercised at $0.025)     315,000            315          7,560             -         7,875

Private Placement in 2nd Qtr 2006
  (400,000 shares at $0.15 per share for cash)             400,000            400         59,600             -        60,000

Stock Compensation Cost                                          -              -         35,008             -        35,008

Common stock warrants exercised in August 2006
  (50,000 common stock warrants excercised at $0.025)       50,000             50          1,200             -         1,250

Issuance of common stock in August 2006
  (157,143 shares at $0.07 per share for cash)             157,143            157         10,843             -        11,000

Investment in Sense Comm
  (600,000 common stock issued at $0.12 per share at FMV)  600,000            600         71,400             -       (72,000)

Stock Compensation Cost                                          -              -          4,847             -         4,847

Issuance of 620,000 warrants for services                        -              -         46,861             -        46,861

Net Loss for the year ended December 31, 2006                    -              -              -      (611,967)     (611,967)
                                                       ------------ -------------- -------------- ------------- -------------

Balance at December 31, 2006                           160,539,193  $     160,539  $   2,568,320    (3,500,326) $   (915,467)
                                                       ============ ============== ============== ============= =============
</TABLE>


  The accompanying notes are an integral part of these financial statements.
                                      -20-
<PAGE>
                              MACHINETALKER, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                                        -------------------------------------     From Inception
                                                                                                                 January 30, 2002
                                                                                      December 31,                   through
                                                                               2006               2005           December 31, 2006
                                                                        ------------------- ----------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                       <C>                 <C>               <C>
 Net loss                                                                 $        (611,967)  $    (1,068,190)  $        (3,500,326)
 Adjustment to reconcile net loss to net cash
  used in operating activities
 Depreciation and amortization                                                       13,638            13,638                43,063
 Issuance of common shares and warrants for  services                                46,861           161,018               464,128
 Issuance of common shares in conversion of debt                                          -                 -               400,000
 Write off of investment value                                                       72,000                 -                72,000
 Stock Compensation Cost                                                             39,855                 -                39,855
 Disposal of Asset                                                                        -             4,200                 4,200
  (Increase) Decrease in:
   Accounts receivable                                                                2,000           178,000                     -
   Inventory                                                                        (35,952)          (12,524)              (48,476)
   Employee Advances                                                                     68              (295)                 (227)
   Prepaid Expenses                                                                  (4,136)                -                (4,136)
   Deposits                                                                               -            (2,500)               (2,975)
  Increase (Decrease) in:
   Accounts payable                                                                  25,668            (7,710)               38,266
   Accrued expenses                                                                  40,452             9,227                65,282
   Unearned revenue                                                                 (40,000)          158,817               118,817
   Tax liabilities                                                                        -              (191)                    -
                                                                        ------------------- ----------------- ---------------------

        NET CASH USED IN OPERATING ACTIVITIES                                      (451,513)         (566,510)           (2,310,529)
                                                                        ------------------- ----------------- ---------------------

Net CASH FLOWS USED IN INVESTING ACTIVITIES:
 Purchase of property and equipment                                                       -           (41,015)              (72,700)
                                                                        ------------------- ----------------- ---------------------
        NET CASH USED IN INVESTING ACTIVITIES                                             -           (41,015)              (72,700)
                                                                        ------------------- ----------------- ---------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from/payments to Officers Loans                                           250,000            (6,000)              686,000
 Proceeds from issuance of common stock                                              80,125           653,000             1,740,125
                                                                        ------------------- ----------------- ---------------------

        NET CASH PROVIDED BY FINANCING ACTIVITIES                                   330,125           647,000             2,426,125
                                                                        ------------------- ----------------- ---------------------

                NET INCREASE IN CASH                                               (121,388)           39,475                42,896


CASH, BEGINNING OF PERIOD                                                           171,934           132,459                 7,650
                                                                        ------------------- ----------------- ---------------------

CASH, END OF PERIOD                                                       $          50,546   $       171,934   $            50,546
                                                                        =================== ================= =====================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
   Interest paid                                                          $          23,691   $        18,715   $           133,774
                                                                        =================== ================= =====================
   Income Taxes paid                                                      $             837   $           800   $             3,237
                                                                        =================== ================= =====================
</TABLE>

SUPPLEMENTAL  SCHEDULE OF NON-CASH  TRANSACTIONS

     During the year ended  December 31, 2006, the Company issued 600,000 shares
     of  common  stock  with a fair  value  of  $72,000;  the  Company  expensed
     compensation cost of $39,855; 620,000 warrants were issued for services for
     a fair value of  $46,861;  During the year ended  December  21,  2005,  the
     Company issued  4,077,000  warrants for services;  267,050 shares of common
     stock for services at a fair value of $152,950.




  The accompanying notes are an integral part of these financial statements.
                                      -21-
<PAGE>

                               MACHINETALKER, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                           December 31, 2006 and 2005


1.   ORGANIZATION AND LINE OF BUSINESS

     ORGANIZATION
     MachineTalker,  Inc.  (the  "Company")  was  incorporated  in the  state of
     Delaware on January 30,  2002.  The Company,  based in Goleta,  California,
     began  operations  on January  30,  2002 to  develop  and market a wireless
     control technology. The Company's founders are also the principal owners of
     SecureCoin,  Inc.  ("SecureCoin").   As  part  of  MachineTalker's  initial
     capitalization,   the   Company's   founders   have   contributed   certain
     intellectual  property that was developed at and acquired from  SecureCoin.
     SecureCoin  assigned  all  rights  to  that  intellectual  property  to the
     co-founders in January 2002, and those  co-founders  then  contributed  the
     intellectual  property  rights  to  the  Company  in  connection  with  its
     formation.  This  intellectual  property,  including a provisional  patent,
     forms  the  core of  MachineTalker's  proprietary  smart  security  network
     technology.

     LINE OF BUSINESS
     The Company is currently  in the stage of  developing  wireless  networking
     products that combine  microcomputers  and wireless  radio  components in a
     single  package  that can be used to  service  a  variety  of  attachments,
     including Sensors for measuring temperature,  pressure,  motion, vibration,
     location  and many other  parameters.  These  "MachineTalkers"  can then be
     programmed to form local  wireless  networks with other  MachineTalkers  to
     process the Sensor  data  collectively  in real time and on a local  basis.
     This allows  governments,  businesses  and  individuals  to rapidly  deploy
     wireless security systems to protect and monitor things, places and people.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     This summary of significant  accounting policies of MachineTalker,  Inc. is
     presented to assist in understanding  the Company's  financial  statements.
     The financial  statements  and notes are  representations  of the Company's
     management, which is responsible for their integrity and objectivity. These
     accounting policies conform to accounting  principles generally accepted in
     the United  States of  America  and have been  consistently  applied in the
     preparation of the financial statements.

     GOING CONCERN
     The accompanying financial statements have been prepared on a going concern
     basis  of  accounting,   which   contemplates   continuity  of  operations,
     realization of assets and  liabilities and commitments in the normal course
     of  business.  The  accompanying  financial  statements  do not reflect any
     adjustments  that might  result if the  Company is unable to  continue as a
     going concern.  The Company does not generate  significant revenue, and has
     negative cash flows from operations,  which raise  substantial  doubt about
     the Company's  ability to continue as a going  concern.  The ability of the
     Company to continue as a going  concern  and  appropriateness  of using the
     going concern basis is dependent  upon,  among other things,  an additional
     cash infusion.  As discussed in note 6, the Company has obtained funds from
     its shareholders since its inception through 2006. Management believes this
     funding  will  continue,  and  is  also  actively  seeking  new  investors.
     Management  believes  the existing  shareholders  and the  prospective  new
     investors  will provide the  additional  cash needed to meet the  Company's
     obligations as they become due, and will allow the  development of its core
     of business

     DEVELOPMENT STAGE ACTIVITIES AND OPERATIONS
     The Company has been in its initial  stages of  formation  and for the year
     ended  December 31, 2006,  had  insignificant  revenues.  FASB #7 defines a
     development  stage  activity  as one  in  which  all  efforts  are  devoted
     substantially to establishing a new business and even if planned  principal
     operations have commenced, revenues are insignificant.

     REVENUE RECOGNITION
     The Company recognizes revenue when services are performed, and at the time
     of shipment of products,  provided that evidence of an arrangement  exists,
     title  and risk of loss  have  passed  to the  customer,  fees are fixed or
     determinable,  and  collection  of the  related  receivable  is  reasonably
     assured.  To date the Company  has had minimal  revenue and is still in the
     development stage.  Also, the Company  recognizes  unearned revenue ratably
     over the term of the license.

                                      -22-
<PAGE>
                               MACHINETALKER, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                           December 31, 2006 and 2005


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     CASH AND CASH EQUIVALENT
     The  Company  considers  all highly  liquid  investments  with an  original
     maturity of three months or less to be cash equivalents.

     USE OF ESTIMATES
     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions that affect the amounts reported in the accompanying  financial
     statements.   Significant  estimates  made  in  preparing  these  financial
     statements  include the estimate of useful lives of property and equipment,
     the deferred tax valuation allowance,  and the fair value of stock options.
     Actual results could differ from those estimates.

     PROPERTY AND EQUIPMENT
     Property and equipment are stated at cost,  and are  depreciated  using the
     straight-line method over 3-10 years

     FAIR VALUE OF FINANCIAL INSTRUMENTS
     SFAS No.  107,  "Disclosures  About Fair Value of  Financial  Instruments",
     requires  disclosure  of  the  fair  value  information,   whether  or  not
     recognized in the balance  sheet,  where it is practicable to estimate that
     value.  As of December  31, 2006 and 2005,  the amounts  reported for cash,
     accounts receivable, accounts payable, accrued interest and other expenses,
     and  notes  payable  approximate  the fair  value  because  of their  short
     maturities.

     ADVERTISING
     The Company expenses  advertising costs as incurred.  Advertising costs for
     the years  ended  December  31,  2006 and 2005  were  $20,391  and  $17,247
     respectively.

     RESEARCH AND DEVELOPMENT COSTS
     Research and development costs are expensed as incurred. These cost consist
     primarily of salaries and direct payroll  related costs.  The costs for the
     years  ended  December  31,  2006  and  2005  were  $326,032  and  $199,828
     respectively.

     INVENTORY
     Inventories are stated at the lower of cost (first-in,  first-out basis) or
     market, and consists of finished goods, raw materials, and work-in-process.
     As of December 31, 2006, the value of the inventory was $38,476.

     STOCK-BASED COMPENSATION
     As of December 31, 2006, the Company adopted Financial Accounting Standards
     No.  123  (revised  2004),  "Share-Based  Payment"  (FAS)  No.  123R,  that
     addresses the accounting for share-based  payment  transactions in which an
     enterprise  receives  employee  services  in  exchange  for  either  equity
     instruments  of the  enterprise or  liabilities  that are based on the fair
     value of the enterprise's  equity instruments or that may be settled by the
     issuance of such equity instruments.  The statement  eliminates the ability
     to account for share-based compensation  transactions,  as we formerly did,
     using the intrinsic  value method as  prescribed  by Accounting  Principles
     Board, or APB, Opinion No. 25,  "Accounting for Stock Issued to Employees,"
     and  generally  requires  that such  transactions  be accounted for using a
     fair-value-based  method and  recognized  as expenses in our  statement  of
     income.  The  adoption  of (FAS) No.  123R by the  Company  had no material
     impact on the statement of income.

     The Company  adopted FAS 123R using the modified  prospective  method which
     requires the  application of the  accounting  standard as of June 30, 2006.
     Our  financial  statements  as of and for the year ended  December 31, 2006
     reflect the impact of adopting FAS 123R.  In  accordance  with the modified
     prospective  method,  the financial  statements  for prior periods have not
     been restated to reflect, and do not include, the impact of FAS 123R.

                                      -23-
<PAGE>
                               MACHINETALKER, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                           December 31, 2006 and 2005


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     CONCENTRATION OF CREDIT RISK
     The Company is potentially  exposed to  concentrations  of credit risk with
     trade  accounts  receivable,  because the Company has a major  customer who
     represented  approximately  90% of  total  revenue  as of the  years  ended
     December 31, 2006 and 2005.

     LOSS PER SHARE CALCULATIONS
     The Company adopted Statement of Financial  Standards  ("SFAS") No. 128 for
     the calculation of "Loss per Share".  SFAS No. 128 dictates the calculation
     of basic earnings per share and diluted earnings per share.  Basic earnings
     per share is computed by dividing income  available to common  shareholders
     by the weighted-average number of common shares available. Diluted earnings
     per share is computed  similar to basic  earnings per share except that the
     denominator is increased to include the number of additional  common shares
     that would have been  outstanding  if the potential  common shares had been
     issued and if the  additional  common shares were  dilutive.  The Company's
     diluted  loss per  share is the same as the  basic  loss per  share for the
     years ended  December 31, 2006,  and 2005 as the inclusion of any potential
     shares would have had an anti-dilutive effect due to the Company generating
     a loss. The weighted  average number of shares used for the  calculation of
     the loss per share  considers  the  stock  split as if it had  occurred  on
     January 1, 2003.

     INCOME TAXES
     The Company  uses the  liability  method of  accounting  for income  taxes.
     Deferred  tax  assets and  liabilities  are  recognized  for the future tax
     consequences  attributable  to  financial  statements  carrying  amounts of
     existing  assets  and  liabilities  and  their  respective  tax  bases  and
     operating loss and tax credit  carryforwards.  The  measurement of deferred
     tax assets and  liabilities  is based on provisions of applicable  tax law.
     The  measurement  of deferred  tax assets is reduced,  if  necessary,  by a
     valuation  allowance  based on the amount of tax  benefits  that,  based on
     available evidence, is not expected to be realized.

     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
     In December 2002, the Financial  Accounting Standards Board ("FASB") issued
     SFAS  148,  Accounting  for  Stock-Based   Compensation  -  Transition  and
     Disclosure.  This Statement  amends SFAS 123,  Accounting  for  Stock-Based
     Compensation,  to provide alternative methods of transition for a voluntary
     change  to the fair  value  based  method  of  accounting  for  stock-based
     employee  compensation.  In addition,  this Statement amends the disclosure
     requirements  of Statement  123 to require  prominent  disclosures  in both
     annual and interim financial  statements about the method of accounting for
     stock-based employee  compensation and the effect of the method used on the
     reported  results.  The  disclosure  requirements  of this  statement  were
     effective for our years ended December 31, 2006 and 2005.

     In  January  2003,  the FASB  issued  FASB  Interpretation  No. 46  (FIN46)
     "Consolidation of Variable  Interest  Entities,  and  Interpretation of ARB
     51." This interpretation addresses consolidation by business enterprises of
     certain variable interest entities (VIEs). The Interpretation as amended is
     effective  immediately for all  enterprises  with interests in VIEs created
     after January 31, 2003. In December 2003, the FASB issued a revised version
     of FIN46  (FIN46R),  which  clarified the provisions of FIN46 by addressing
     implementation  issues.  FIN46R must be applied to all entities  subject to
     the  Interpretation  as of the first interim quarter ending after March 15,
     2004.  The  adoption of this  interpretation  did not impact the  financial
     statements.

     In  November  2004,  the FASB  issued  SFAS No. 151  "Inventory  Costs,  an
     amendment of ARB No. 43,  Chapter 4. The  amendments  made by Statement 151
     clarify that abnormal amounts of idle facility expense,  freight,  handling
     costs,   and  wasted   materials   (spoilage)   should  be   recognized  as
     current-period  charges  and  require the  allocation  of fixed  production
     overheads  to  inventory  based on the normal  capacity  of the  production
     facilities.  The guidance is effective for inventory  costs incurred during
     fiscal  years  beginning  after  June  15,  2005.  Earlier  application  is
     permitted for inventory  costs incurred during fiscal years beginning after
     November 23, 2004.  The Company has evaluated the impact of the adoption of
     SFAS 151,  and does not  believe  the  impact  will be  significant  to the
     Company's overall results of operations or financial position.

                                      -24-
<PAGE>

                               MACHINETALKER, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                           December 31, 2006 and 2005


     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

     In  December  2004,  the FASB  issued  Statement  of  Financial  Accounting
     Standards  No. 123R,  Share-based  Payment.  SFAS 123R revises SFAS 123 and
     supersedes APB 25. SFAS 123R will be effective for the year ending December
     31, 2006,  and applies to  transactions  in which an entity  exchanges  its
     equity instruments for goods or services and also applies to liabilities an
     entity may incur for goods or  services  that are to follow a fair value of
     those equity instruments.  Under SFAS 123R, we will be required to follow a
     fair  value  approach  using an  option-pricing  model,  such as the  Black
     Scholes option  valuation  model, at the date of a stock option grant.  The
     deferred compensation  calculated under the fair value method would then be
     amortized  over the  respective  vesting  period of the stock  option.  The
     adoption of SFAS 123R is expected to have a material  impact on our results
     of operations.

     In December 2004, the Financial  Accounting Standards Board issued two FASB
     Staff  Positions  - FSP  FAS  109-1,  Application  of  FASB  Statement  109
     "Accounting for Income Taxes" to the Tax Deduction on Qualified  Production
     Activities  Provided by the American Jobs Creation Act of 2004, and FSP FAS
     109-2   Accounting  and  Disclosure   Guidance  for  the  Foreign  Earnings
     Repatriation  Provision  within the  American  Jobs  Creation  Act of 2004.
     Neither of these  affected  the Company as it does not  participate  in the
     related activities.

     In  December  2004,  the FASB  issued  Statement  No. 123  (revised  2004),
     "Share-Based  Payment" ("SFAS No. 123(R)"),  which requires the recognition
     of share based payments cost in earnings. This Statement replaces Statement
     No. 123,  "Accounting  for Stock-Based  Compensation"  ("SFAS No. 123") and
     supersedes  Accounting  Principles  Board Opinion No. 25,  "Accounting  for
     Stock Issued to Employees"  ("APB No. 25"), which permitted the recognition
     of compensation expense using the intrinsic value method. Effective January
     1, 2006, the Company adopted the provisions of SFAS No. 123(R). See Note 2.

     In  March  2005,  the SEC  released  Staff  Accounting  Bulletin  No.  107,
     "Share-Based  Payment" ("SAB 107"),  which provides  interpretive  guidance
     related to the  interaction  between  SFAS 123(R) and certain SEC rules and
     regulations.  It also provides the SEC staff's views regarding valuation of
     share-based  payment  arrangements.  In April  2005,  the SEC  amended  the
     compliance  dates for SFAS 123(R),  to allow  companies  to  implement  the
     standard at the  beginning of their next fiscal  year,  instead of the next
     reporting  period  beginning  after June 15, 2005.  Management is currently
     evaluating the impact SAB 107 will have on our financial statements.

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
     Corrections",  which was adopted  effective January 1, 2006. This statement
     addresses the retrospective application of such changes and corrections and
     will be followed if and when  necessary.  Adoption of this standard did not
     have a material impact on the Company's financial statements.

     In February  2006,  the FASB issued SFAS No. 155,  "Accounting  for Certain
     Hybrid  Financial  Instruments",  or SFAS 155,  which will be effective for
     fiscal years that begin after December 15, 2006. This statement amends SFAS
     No. 133, ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES,  to
     narrow the scope exception for interest-only and  principal-only  strips on
     debt instruments to include only such strips representing rights to receive
     a specified  portion of the  contractual  interest or principal cash flows.
     SFAS 155 also amends SFAS 140 to allow qualifying  special-purpose entities
     to hold a passive derivative financial instrument  pertaining to beneficial
     interests  that itself is a derivative  financial  instrument.  The Company
     does not anticipate  adoption of this standard will have a material  impact
     on its financial statements.

     In March 2006, the FASB issued SFAS No. 156,  "Accounting  for Servicing of
     Financial  Assets",  which will be  effective  for fiscal  years that begin
     after  December 15, 2006.  This statement  amends SFAS 140,  ACCOUNTING FOR
     TRANSFERS  AND  SERVICING  OF  FINANCIAL  ASSETS  AND   EXTINGUISHMENTS  OF
     LIABILITIES,  A REPLACEMENT OF FASB  STATEMENT 125, or SFAS 140,  regarding
     (1) the circumstances  under which a servicing asset or servicing liability
     must  be  recognized,   (2)  the  initial  and  subsequent  measurement  of
     recognized  servicing assets and liabilities,  and (3) information required
     to be disclosed  relating to servicing assets and liabilities.  The Company
     does not anticipate  adoption of this standard will have a material  impact
     on its financial statements.

                                      -25-
<PAGE>
                               MACHINETALKER, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                           December 31, 2006 and 2005

     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ( CONTINUED)

     In June  2006,  the FASB  issued  Interpretation  No. 48,  "Accounting  for
     Uncertainty in Income Taxes-an interpretation of SFAS 109", ("FIN 48"). FIN
     48 provides  interpretive  guidance for the financial statement recognition
     and  measurement  of a tax position  taken or expected to be taken in a tax
     return.  FIN 48 is effective for fiscal years  beginning after December 15,
     2006. The Company does not anticipate adoption of this standard will have a
     material impact on its financial statements.

     In September  2006, the FASB issued SFAS No. 157, Fair Value  Measurements,
     ("SFAS  157").  SFAS 157 defines fair value,  establishes  a framework  for
     measuring  fair  value in  generally  accepted  accounting  principles  and
     expands  disclosures about fair value  measurements.  SFAS 157 is effective
     for financial  statements  issued for fiscal years beginning after November
     15, 2007 and interim  periods  within those fiscal years.  The Company does
     not anticipate adoption of this standard will have a material impact on its
     financial statements.

3.   DEFERRED TAX BENEFIT

     At December 31, 2006, the Company had net operating loss  carry-forwards of
     approximately  $1,914,800 that may be offset against future taxable income.
     No tax  benefit  has been  reported  in the  December  31,  2006  financial
     statements  since the  potential  tax  benefit  is  offset  by a  valuation
     allowance of the same amount.

     The income tax provision  differs from the amount of income tax  determined
     by  applying  the U.S.  federal  income  tax  rate to  pretax  income  from
     continuing  operations  for the period ended December 31, 2006 and 2005 due
     to the following:

                                                       2006         2005
                                                   ------------ -----------
Income tax benefit computed at U.S. Federal        $  (167,000) $ (336,000)
  statutory rate of 34%
State income taxes, net of benefit federal taxes       (41,000)    (27,000)
Non-deductible - Stock for Services                     54,000     142,000
Other                                                  (80,000)     10,000

Less Valuation Allowance                               234,000     211,000
                                                   ------------ -----------

  Income tax expense                                         -           -
                                                   ============ ===========

     Deferred  taxes are  provided on a liability  method  whereby  deferred tax
     assets are recognized for deductible differences and operating loss and tax
     credit  carry-forwards  and deferred tax  liabilities  are  recognized  for
     taxable  temporary  differences.  Temporary  differences are the difference
     between the reported amounts of assets and liabilities and their tax bases.
     Deferred  tax assets are  reduced by a  valuation  allowance  when,  in the
     opinion of management,  it is more likely than not that some portion or all
     of the deferred  tax assets will not be  realized.  Deferred tax assets and
     liabilities  are  adjusted for the effects of changes in tax laws and rates
     on the date of enactment.

                                      -26-
<PAGE>
                               MACHINETALKER, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                           December 31, 2006 and 2005


3.   DEFERRED TAX BENEFIT (continued)

     Net deferred tax  liabilities  consist of the  following  components  as of
     December 31, 2006 and 2005:

                                                 2006           2005
                                              --------------- -------------
        Deferred tax assets:
          NOL Carryover                       $      651,000  $    393,000
          R & D                                       35,000        35,000

        Deferred tax asset:                                -             -

        Deferred tax liabilities:                           -             -

        Less Valuation Allowance                    (686,000)     (428,000)
                                              --------------- -------------

     Due to the change in  ownership  provisions  of the Tax Reform Act of 1986,
     net operating loss carry-forwards for Federal income tax reporting purposes
     are subject to annual limitations.  Should a change in ownership occur, net
     operating loss carryforwards may be limited as to use in future years.

4.   CAPITAL STOCK

     At  December  31,  2006,  the  Company's   authorized   stock  consists  of
     500,000,000 shares of common stock, par value $0.001 per share.  During the
     year ended  December 31, 2006 the Company  issued  557,143 shares of common
     stock for cash of $71,000;  365,000  shares of common stock issued for cash
     of $9,125 for warrants  exercised at a price of $0.025;  600,000  shares of
     common  stock  issued  at fair  value of  $72,000.  During  the year  ended
     December 31, 2005 the Company issued  13,720,000 shares of common stock for
     cash of  $343,000;  3,100,000  shares of common  stock  issued  for cash of
     $310,000; 267,050 shares of common stock issued at fair value of $8,068 for
     services

5.   STOCK OPTIONS AND WARRANTS

     The Company  adopted a Stock Option Plan for the purposes of granting stock
     options to its  employees  and others  providing  services to the  Company,
     which  reserves  and sets  aside for the  granting  of  Options  for Twenty
     Million (20,000,000) shares of Common Stock. Options granted under the Plan
     may be  either  Incentive  Options  or  Nonqualified  Options  and shall be
     administered  by the Company's  Board of Directors  ("Board").  Each option
     shall  be  exercisable  in full or in  installments  and at such  times  as
     designated by the Board. Notwithstanding any other provision of the Plan or
     of any Option agreement,  each Option shall expire on the date specified in
     the  Option  agreement,  which  date  shall  not be later  than  the  tenth
     anniversary from the effective date of this option.  During the years ended
     December  31,  2006 and  2005,  the  Company  granted 0 and  700,000  stock
     options,  respectively,  with  effective  dates of March 19,  2003  through
     December 31, 2005. The stock options vest as follows:  25% from the date of
     employment  and 1/36 every 30 days  thereafter  until the  remaining  stock
     options have vested.  The stock options are exercisable for a period of ten
     years  from the date of grant at an  exercise  price of $0.025,  $0.05,  or
     $0.10 per  share,  as  adjusted  for the ten for one  forward  split of the
     Company's common stock.


                                                       2006           2005
                                                 --------------  --------------
        Risk free interest rate                  4.08% to 4.47%   4.08% to 4.47%
        Stock volatility factor                        1%               1%
        Weighted average expected option life       10 years         10 years
        Expected dividend yield                       None             None


                                      -27-

<PAGE>
                               MACHINETALKER, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                           December 31, 2006 and 2005

5.   STOCK OPTIONS AND WARRANTS (continued)

     A summary of the Company's  stock option  activity and related  information
     follows:

<TABLE>
<CAPTION>
                                                       2006                           2005
                                            ----------------------------  ----------------------------
                                                            Weighted                       Weighted
                                               Number        average          Number       average
                                                 of         exercise            of         exercise
                                               Options        price           Options        price
                                            ----------------------------  ----------------------------
<S>                                             <C>             <C>            <C>            <C>
Outstanding, beginning of year                  8,700,000       $ 0.051        8,000,000      $ 0.047
Granted                                                 -             -          700,000      $ 0.100
Exercised                                               -             -                -            -
Expired                                                 -             -                -            -
                                           -----------------------------------------------------------
Outstanding, end of year                        8,700,000       $ 0.051        8,700,000      $ 0.051
                                           =============================  ============================
Exercisable at the end of year                  8,327,123       $ 0.051        6,616,479      $ 0.051
                                           =============================  ============================
Weighted average fair value of
  options granted during the year                               $ 0.000                       $ 0.100
                                                          ==============                 =============
</TABLE>

     The  Black  Scholes  option  valuation  model  was  developed  for  use  in
     estimating  the fair  value of traded  options,  which do not have  vesting
     restrictions  and are fully  transferable.  In addition,  option  valuation
     models require the input of highly  subjective  assumptions,  including the
     expected  stock price  volatility.  Because the  Company's  employee  stock
     options have characteristics  significantly  different from those of traded
     options,  and  because  changes in the  subjective  input  assumptions  can
     materially  affect the fair value estimate,  in management's  opinion,  the
     existing models do not necessarily provide a reliable single measure of the
     fair value of its employee stock options.

     The weighted  average  remaining  contractual  life of options  outstanding
     issued under the plan as of December 31, 2006 was as follows:
<TABLE>
<CAPTION>

                                                              Weighted           Weighted            Weighted
                                                              Average             Average             Average
                          Stock              Stock           Remaining        Exercise Price      Exercise Price
   Exercisable           Options            Options         Contractual         of Options          of Options
      Prices           Outstanding         Exercisable      Life (years)        Outstanding         Exercisable
------------------- ------------------ ------------------------------------ -------------------- ------------------
<S>   <C>                 <C>                <C>             <C>                 <C>                <C>
      $ 0.025             1,000,000          1,000,000       7.3 years           $ 0.025            $ 0.025
      $ 0.050             7,000,000          7,000,000       6.7 years           $ 0.050            $ 0.050
      $ 0.100               700,000            327,123       8.7 years           $ 0.100            $ 0.100
                    ------------------ -------------------
                          8,700,000          8,327,123
                    ================== ===================
</TABLE>

     Stock-based  compensation  expense recognized during the period is based on
     the value of the portion of  stock-based  payment awards that is ultimately
     expected  to  vest.  Stock-based  compensation  expense  recognized  in the
     financial statements of operations during the year ended December 31, 2006,
     included  compensation  expense for the stock-based  payment awards granted
     prior to, but not yet vested,  as of  December  31, 2006 based on the grant
     date fair value  estimated in accordance  with the pro forma  provisions of
     FAS 148,  and  compensation  expense  for the  stock-based  payment  awards
     granted subsequent to December 31, 2006, based on the grant date fair value
     estimated in accordance with FAS 123R. As stock-based  compensation expense
     recognized in the statement of income for the year ended  December 31, 2006
     is based on awards  ultimately  expected to vest,  it has been  reduced for
     estimated forfeitures. FAS 123R requires forfeitures to be estimated at the
     time of grant and revised,  if necessary,  in subsequent  periods if actual
     forfeitures  differ  from  those  estimates.  In the pro forma  information
     required under FAS 148 for the periods prior to the year ended December 31,
     2006,  we accounted  for  forfeitures  as they  occurred.  The  stock-based
     compensation  expense  recognized in the statement of operations during the
     year ended December 31, 2006 is $39,855.

                                      -28-
<PAGE>

                               MACHINETALKER, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                           December 31, 2006 and 2005

5.   STOCK OPTIONS AND WARRANTS (continued)

<TABLE>
<CAPTION>
                                                                    2006              2005
                                                              -----------------  ----------------
<S>                                                                 <C>              <C>
Net Loss as reported                                                $ (611,967)      $(1,068,190)

Add: Stock Based Employee Compensation expense
included in reported net loss, net of related tax effects                    -                 -


Deduct: Total Stock Based Employee Compensation
expense determined under fair value based method
for all awards, net of related tax effects                                   -           (35,155)
                                                              -----------------  ----------------

Pro Forma                                                           $ (611,967)      $(1,103,345)
                                                              =================  ================

Basic and Diluted Loss Per Share
   As Reported                                                      $    (0.00)      $     (0.01)
   Pro Forma                                                        $    (0.00)      $     (0.01)
</TABLE>


     WARRANTS

     During the year ended  December 31,  2006,  365,000  common stock  purchase
     warrants were exercised at $0.025 per share and the Company granted a total
     of 620,000  warrants to purchase a total of 620,000  shares of common stock
     to two individuals for marketing services rendered to the Company, of which
     600,000 are  exercisable at $0.12 per share and expire in October 2011, and
     20,000 are excercisable at $0.15 per share and expire in November 2011. The
     fair market value for the warrants was $46,861 as of December 31, 2006, and
     was  determined  using the Black Scholes  pricing  model.   During the year
     ended December 31, 2005 the Company  granted a total of 4,077,000  warrants
     to purchase a total of 4,077,000  shares of the  Company's  common stock to
     fifteen  individuals  for marketing  services  rendered to the Company,  of
     which  3,292,000 are  exercisable at $0.025 per share and expire in January
     2010;  525,000 are exercisable at $0.10 per share and expire in March 2010;
     and  260,000 are  exercisable  at $0.10 per share and expire in April 2010.
     The fair market  value for the  warrants  was  $184,025 as of December  31,
     2006, and was determined using the Black Scholes pricing model. At December
     31,  2006  the  Company  had a total  of  4,332,000  warrants  to  purchase
     4,332,000 shares of common stock outstanding.

6. INVESTMENT IN EQUITY SECURITIES

     At December 31, 2006,  the Company  adopted SFAS No. 115,  "ACCOUNTING  FOR
     CERTAIN  INVESTMENTS  IN DEBT AND EQUITY  SECURITIES."  The Company  issued
     600,000  shares of common  stock for a value of  $72,000  to  purchase  10%
     ownership of a limited  liability  company formed in August 2006 by a small
     group of individuals to become a distributor  and reseller of the Company's
     intelligent  wireless network sensor  controlling  technology to the energy
     and petroleum  industries.  The  investment has no value as of December 31,
     2006.  The  impact of the  year-end  adoption  of SFAS No.  115 on the 2006
     results of operations was $72,000.

                                      -29-
<PAGE>

                               MACHINETALKER, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                           December 31, 2006 and 2005

7.   RELATED PARTY

     The  Company  leases  its  premises  from a company  in which our  majority
     shareholders are minority  shareholders  pursuant to a one year lease which
     expires on August 20, 2007.  The rent expense for the years ended  December
     31, 2006 and 2005 amounted to $14,264 for each year.

     During the year ended December 31, 2006, the Company's  President and Chief
     Executive  Officer loaned  $250,000 to the Company for operating  expenses.
     The loan bears  interest at the rate of 6% per annum.  Also, as of the year
     ended December 31, 2006, the  convertible  debenture was  outstanding  with
     interest  payable  at the rate of 6% per  year,  principal  due July  2009,
     convertible into 17,440,000 shares of common stock at $0.025 per share.


8.   SUBSEQENT EVENTS

     In  January  2007,  the  Company  granted a total of  600,000  warrants  to
     purchase a total of 600,000 shares of common stock to two  individuals  for
     marketing services rendered to the Company, all of which are exercisable at
     $0.12 per share and expire in January 2012.

     Through a private  offering the Company issued  1,828,571  shares of common
     stock for cash of $128,000.














                                      -30-
<PAGE>

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

         On or about  January 3, 2006,  the  Company  engaged  HJ  Associates  &
Consultants,  LLP,  Certified Public Accountants ("New Accountant") to audit and
review the Company's  financial  statements for the fiscal year ending  December
31,  2005.  The New  Accountant  has been  engaged for general  audit and review
services and not because of any particular  transaction or accounting principle,
or because of any  disagreement  with the  Company's  former  accountant,  Rose,
Snyder & Jacobs,  a corporation  of certified  public  accountants  (the "Former
Accountant").

         The Former  Accountant  was dismissed  effective  January 3, 2006.  The
Former  Accountant's  reports on the Company's  financial  statements during its
past two  fiscal  years did not  contain an adverse  opinion  or  disclaimer  of
opinion,  nor was it  modified  as to  uncertainty,  audit  scope or  accounting
principles,  except for a going  concern  qualification  contained  in its audit
report for the fiscal years ending  December 31, 2003 and 2004.  The decision to
change  accountants  was  recommended  and  approved by the  Company's  Board of
Directors. During the fiscal years ended December 31, 2003 and December 31, 2004
through the date  hereof,  the Company did not have any  disagreements  with the
Former Accountant on any matter of accounting principles or practices, financial
statement  disclosure,  or auditing scope or procedure which, if not resolved to
the Former Accountant's satisfaction,  would have caused it to make reference to
the subject matter of the disagreement in connection with its report.

         The New  Accountant  was  engaged  effective  January 3, 2006.  The New
Accountant was engaged for general audit and review  services and not because of
any  particular   transaction  or  accounting  principle,   or  because  of  any
disagreement  with the Former  Accountant.  A letter from the Former  Accountant
addressed to The Securities and Exchange Commission was requested by the Company
and was attached to its Report on Form 8-K,  dated  January 3, 2006,  as Exhibit
9(c)(16).

ITEM 8A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

         Disclosure  controls and procedures  are controls and other  procedures
that are  designed to ensure that  information  required to be  disclosed by our
company is recorded, processed, summarized and reported, within the time periods
specified in the rules and forms of the SEC.  Roland Bryan,  our Chief Executive
Officer and our Principal  Accounting  Officer,  is responsible for establishing
and maintaining disclosure controls and procedures for our company.

         Our  management  has  evaluated  the  effectiveness  of our  disclosure
controls and procedures as of December 31, 2006 (under the  supervision and with
the  participation of the Chief Executive  Officer and the Principal  Accounting
Officer), pursuant to Rule 13a-15(b) promulgated under the Exchange Act. As part
of such evaluation,  management  considered the matters discussed below relating
to internal  control over financial  reporting.  Based on this  evaluation,  our
Company's  Chief  Executive  Officer  and  Principal   Accounting  Officer  have
concluded  that  our  Company's  disclosure  controls  and  procedures  were not
effective  as of  December  31,  2006,  due to certain  material  weaknesses  in
internal control over financial reporting.

         The term "internal  control over  financial  reporting" is defined as a
process  designed by, or under the  supervision of, the  registrant's  principal
executive  and  principal  financial  officers,  or persons  performing  similar
functions,  and effected by the registrant's board of directors,  management and
other personnel,  to provide reasonable  assurance  regarding the reliability of
financial  reporting and the  preparation  of financial  statements for external
purposes  in  accordance  with  generally  accepted  accounting  principles  and
includes those policies and procedures that:

         o        pertain  to the  maintenance  of  records  that in  reasonable
                  detail  accurately  and fairly  reflect the  transactions  and
                  dispositions of the assets of the registrant;

         o        provide reasonable assurance that transactions are recorded as
                  necessary to permit  preparation  of financial  statements  in
                  accordance with generally accepted accounting principles,  and

                                      -31-
<PAGE>

                  that receipts and  expenditures  of the  registrant  are being
                  made only in accordance with  authorizations of management and
                  directors of the registrant; and

         o        provide reasonable  assurance  regarding  prevention or timely
                  detection of unauthorized  acquisition,  use or disposition of
                  the  registrant's  assets that could have a material effect on
                  the financial statements.

         Our auditors believe that our methodology for identifying all necessary
disclosures  related to non-cash  equity  transactions  could lead to a material
misstatement  of net income (loss).  We intend to cooperate with our auditors in
2007 to address this material weakness.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

         In connection  with the evaluation of the Company's  internal  controls
during the Company's last fiscal year, the Company's Principal Executive Officer
and Principal  Accounting  Officer have  determined that there are no changes to
the Company's  internal  controls over financial  reporting that have materially
affected,  or are reasonably likely to materially effect, the Company's internal
controls over financial reporting.

INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS

         The Company's  management does not expect that its disclosure  controls
or its internal  control  over  financial  reporting  will prevent or detect all
error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable,  not absolute,  assurance that the control system's
objectives  will be met.  The design of a control  system must  reflect the fact
that there are  resource  constraints,  and the  benefits  of  controls  must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that  misstatements  due to error or fraud  will not  occur or that all  control
issues and instances of fraud,  if any,  within the Company have been  detected.
These  inherent  limitations  include the realities  that  judgments in decision
making can be faulty and that  breakdowns  can occur  because of simple error or
mistake.  Controls  can  also be  circumvented  by the  individual  acts of some
persons,  by  collusion  of two or more people,  or  management  override of the
controls.  The  design of any  system of  controls  is based in part on  certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving  its stated goals under all  potential
future  conditions.  Projections of any evaluation of controls  effectiveness to
future periods are subject to risks.  Over time,  controls may become inadequate
because of changes in  conditions or  deterioration  in the degree of compliance
with policies or procedures.

ITEM 8B. OTHER INFORMATION

         None.

                                    PART III

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

         The following table lists our executive  officers,  directors,  and key
employees as of March 31, 2007:

         NAME                      AGE             POSITION
         ----                      ---             --------
         Roland F. Bryan (1)        72    President, Chief Executive Officer,
                                          Chief Financial Officer, Secretary,
                                          and Chairman of the Board of Directors

         Gerald A. Nadler           65    Chief Scientist (Key Employee)

----------------------------
(1)  Member of Audit Committee.

                                      -32-
<PAGE>

         ROLAND  F.  BRYAN,  age 72,  has been the  President,  Chief  Executive
Officer,  Chief Financial Officer, and Chairman of the Board of Directors of MTI
since our inception in January 2002 and the Secretary of MTI since May 2006. For
the six  years  prior  to  founding  MTI,  Mr.  Bryan  was self  employed  as an
independent  advisor to several high-tech  companies on corporate  organization,
management,   marketing  and  product  development.   Mr.  Bryan's  professional
background is in the areas computer science research and process control through
computer  automation.  During the last 25 years he has built up and sold several
high-tech  companies in the fields of  telecommunications  networking,  military
computer  systems and  commercial  equipment  for network  access.  In 1974,  he
founded  Associated   Computer   Consultants,   Inc.  ("ACC"),  a  company  that
implemented  interconnections to the first packet network for many United States
government  agencies.  In 1983 the name of the  company  was changed to Advanced
Computer  Communications,  Inc. and continued to produce networking products for
both military and commercial applications. ACC made the Inc. 500 List of Fastest
Growing  Companies  in 1984.  In 1991 the  company  was split into two  separate
businesses, one to concentrate on military products, the other to concentrate on
commercial  products.  ACC was acquired by Ericsson in 1998 for $265 million. In
September 1994, WIRED MAGAZINE honored Mr. Bryan and 18 others, as the "Creators
of the Internet."

         GERALD  A.  NADLER,  age 65,  as our  Chief  Scientist,  has been a key
employee of MTI since our inception in January 2002.  From 1998 to January 2002,
Mr. Nadler was self employed as an independent  advisor consulting on designs of
networking products for Cratos Networks, Nortel/Aptis, Lucent/Ascend, Openroute,
Shiva,  and Data General.  In 1992, Mr. Nadler founded and from 1992 to 1995 was
the President of Elettra Systems, a data  communications  company.  From 1987 to
1991,  he  designed  the  spread  spectrum  wireless  meter-reading  system  for
Metricom.  In 1985,  he founded and from 1985 to 1987 was the President of Token
Automation,  a data communications company. In 1979, he founded and from 1979 to
1985 was the  President of  Distributed  Computer  Systems,  a computer and data
communications  company.  From 1976 to 1979, he was a computer architect at Wang
Laboratories.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

         Under   Delaware   General   Corporation   Law  and  our   Articles  of
Incorporation,  our  directors  will  have no  personal  liability  to us or our
stockholders  for  monetary  damages  incurred  as the  result of the  breach or
alleged  breach by a director  of his "duty of care."  This  provision  does not
apply  to  the  directors'  (i)  acts  or  omissions  that  involve  intentional
misconduct  or a knowing and culpable  violation of law,  (ii) acts or omissions
that a director believes to be contrary to the best interests of the corporation
or its shareholders or that involve the absence of good faith on the part of the
director,  (iii) approval of any  transaction  from which a director  derives an
improper personal benefit, (iv) acts or omissions that show a reckless disregard
for the director's duty to the corporation or its  shareholders in circumstances
in which the  director  was aware,  or should have been aware,  in the  ordinary
course of  performing a director's  duties,  of a risk of serious  injury to the
corporation  or its  shareholders,  (v) acts or omissions  that  constituted  an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the  corporation  or its  shareholders,  or (vi) approval of an unlawful
dividend,  distribution,  stock  repurchase or redemption.  This provision would
generally  absolve  directors  of  personal  liability  for  negligence  in  the
performance of duties, including gross negligence.

         The effect of this  provision  in our Articles of  Incorporation  is to
eliminate  the  rights  of  MTI  and  our  stockholders  (through  stockholder's
derivative  suits on  behalf  of MTI) to  recover  monetary  damages  against  a
director  for  breach of his  fiduciary  duty of care as a  director  (including
breaches  resulting from negligent or grossly negligent  behavior) except in the
situations  described in clauses (i) through (vi) above. This provision does not
limit nor eliminate the rights of MTI or any  stockholder  to seek  non-monetary
relief  such as an  injunction  or  rescission  in the  event of a  breach  of a
director's duty of care. In addition, our Articles of Incorporation provide that
if Delaware law is amended to authorize the future  elimination or limitation of
the  liability  of a  director,  then the  liability  of the  directors  will be
eliminated  or limited to the fullest  extent  permitted by the law, as amended.
Delaware  General  Corporation  Law grants  corporations  the right to indemnify
their  directors,  officers,  employees and agents in accordance with applicable
law. Our Bylaws provide for  indemnification  of such persons to the full extent
allowable under applicable law. These provisions will not alter the liability of
the directors under federal securities laws.

         We intend to enter into  agreements  to  indemnify  our  directors  and
officers,  in addition to the indemnification  provided for in our Bylaws. These
agreements, among other things, indemnify our directors and officers for certain

                                      -33-
<PAGE>

expenses (including attorneys' fees),  judgments,  fines, and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in the right of MTI,  arising out of such person's  services as a director or
officer of MTI, any  subsidiary  of MTI or any other  company or  enterprise  to
which the person provides  services at the request of MTI. We believe that these
provisions  and  agreements  are  necessary  to  attract  and  retain  qualified
directors and officers.

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors,  officers or persons controlling MTI pursuant
to the  foregoing  provisions,  MTI has been informed that in the opinion of the
Securities  and Exchange  Commission,  such  indemnification  is against  public
policy as expressed in the Act and is therefore unenforceable.

BOARD COMMITTEES

         The Board of Directors  has appointed an Audit  Committee.  As of March
31, 2007, the sole member of the Audit Committee is Roland Bryan, who may not be
considered to be independent as defined in Rule 4200 of the National Association
of Securities  Dealers' listing standards.  The Board of Directors has adopted a
written charter of the Audit Committee. The Audit Committee is authorized by the
Board of  Directors  to review,  with our  independent  accountants,  the annual
financial statements of MTI prior to publication, and to review the work of, and
approve non-audit services preformed by, such independent accountants. The Audit
Committee will make annual  recommendations  to the Board for the appointment of
independent  public  accountants  for the ensuing year. The Audit Committee will
also review the effectiveness of the financial and accounting  functions and the
organization,  operations and management of MTI. The Audit  Committee was formed
on February 8, 2005.  The Audit  Committee  held one meeting  during fiscal year
ended  December 31,  2006.  As of March 31,  2007,  we have not yet  appointed a
Compensation Committee.

REPORT OF THE AUDIT COMMITTEE

         Our Audit  Committee has reviewed and  discussed our audited  financial
statements for the fiscal year ended  December 31, 2006 with senior  management.
The Audit  Committee has also discussed  with HJ Associates & Consultants,  LLP,
Certified  Public  Accountants  ("HJ"),  our independent  auditors,  the matters
required  to be  discussed  by  the  statement  on  Auditing  Standards  No.  61
(Communication  with Audit Committees) and received the written  disclosures and
the letter from HJ required  by  Independence  Standards  Board  Standard  No. 1
(Independence  Discussion  with  Audit  Committees).  The  Audit  Committee  has
discussed  with  HJ  the  independence  of  HJ  as  our  auditors.  Finally,  in
considering whether the independent  auditors provision of non-audit services to
us is compatible with the auditors' independence for HJ, our Audit Committee has
recommended to the Board of Directors that our audited  financial  statements be
included in our Annual Report on Form 10-KSB for the fiscal year ended  December
31, 2006 for filing with the United States  Securities and Exchange  Commission.
Our Audit Committee did not submit a formal report regarding its findings.

                                 AUDIT COMMITTEE

                                  ROLAND BRYAN

         Notwithstanding  anything  to  the  contrary  set  forth  in any of our
previous or future  filings under the United States  Securities  Act of 1933, as
amended,  or the  Securities  Exchange  Act of  1934,  as  amended,  that  might
incorporate  this report in future  filings  with the  Securities  and  Exchange
Commission,  in whole or in part, the foregoing report shall not be deemed to be
incorporated by reference into any such filing.

CODE OF CONDUCT

         We have adopted a Code of Conduct that applies to all of our directors,
officers and employees. The text of the Code of Conduct has been posted on MTI's
Internet website and can be viewed at  www.machinetalker.com.  Any waiver of the
provisions  of the Code of Conduct for  executive  officers and directors may be
made only by the Audit Committee and, in the case of a waiver for members of the
Audit  Committee,  by the Board of Directors.  Any such waivers will be promptly
disclosed to our shareholders.

                                      -34-
<PAGE>

COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT

         Section 16(a) of the Exchange Act requires our officers and  directors,
and certain  persons who own more than 10% of a  registered  class of our equity
securities (collectively, "Reporting Persons"), to file reports of ownership and
changes in ownership  ("Section 16 Reports")  with the  Securities  and Exchange
Commission (the "SEC").  Reporting Persons are required by the SEC to furnish us
with copies of all Section 16 Reports they file.

         Based  solely on its  review of the  copies of such  Section 16 Reports
received  by it, or written  representations  received  from  certain  Reporting
Persons,  all Section  16(a) filing  requirements  applicable  to our  Reporting
Persons  during and with respect to the fiscal year ended December 31, 2006 have
been complied with on a timely basis.

ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE OFFICER COMPENSATION

         The following table summarizes  compensation  paid or accrued by us for
the year ended December 31, 2006 for services rendered in all capacities, by the
chief executive officer and the other most highly compensated executive officers
during the fiscal year ended December 31, 2006.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
----------------------- -------- ----------- --------- ---------- ----------------- ----------------- ------------------ -----------
                                                                                     NON-QUALIFIED
                                                                     NON-EQUITY         DEFERRED
       NAME AND                                        OPTION      INCENTIVE PLAN     COMPENSATION        ALL OTHER
PRINCIPAL POSITION(1)    YEAR      SALARY     BONUS     AWARDS      COMPENSATION        EARNINGS        COMPENSATION       TOTAL
------------------------------------------------------------------------------------------------------------------------------------

<S>                    <C>      <C>           <C>        <C>           <C>               <C>                <C>         <C>
Roland Bryan,           2006     $115,000      0          0             0                 0                  0           $115,000
    Chief Executive
    Officer,
    President, Chief
    Financial
    Officer, and
    Secretary

Gerald Nadler (1),      2006     $120,000      0          0             0                 0                  0           $120,000
    Chief Scientist
    (Key Employee)

Christopher T.
Kleveland (1),          2006      $43,641      0          0             0                 0                  0            $43,641
    Former Vice
    President and
    Secretary
</TABLE>
-----------------------
(1) On May 5, 2006,  Christopher T. Kleveland resigned as a director and officer
of MTI.

EMPLOYMENT AGREEMENTS

         We have not entered into any employment  agreements  with its executive
officers  to date.  We may enter  into  employment  agreements  with them in the
future.

OUTSTANDING EQUITY AWARDS

         None of our  executive  officers  received any equity awards during the
year ended December 31, 2006.

                                      -35-
<PAGE>

DIRECTOR COMPENSATION

         None of our directors  received any  compensation  for their respective
services rendered to us during the year ended December 31, 2006.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth the names of our executive  officers and
directors  and all  persons  known by us to  beneficially  own 5% or more of the
issued  and  outstanding  common  stock of MTI at  March  31,  2007.  Beneficial
ownership is  determined  in  accordance  with the rules of the  Securities  and
Exchange  Commission.  In computing the number of shares beneficially owned by a
person and the  percentage  of ownership of that person,  shares of common stock
subject to options held by that person that are currently  exercisable or become
exercisable within 60 days of March 31, 2007 are deemed outstanding even if they
have  not  actually  been  exercised.  Those  shares,  however,  are not  deemed
outstanding  for the purpose of computing the percentage  ownership of any other
person.  The  percentage   ownership  of  each  beneficial  owner  is  based  on
161,599,582  outstanding  shares of common  stock.  Except as  otherwise  listed
below,  the address of each person is c/o  MachineTalker,  Inc.,  513 De La Vina
Street, Santa Barbara, California 93101. Except as indicated, each person listed
below has sole voting and investment  power with respect to the shares set forth
opposite such person's name.
<TABLE>
<CAPTION>
         NAME AND ADDRESS
          OF STOCKHOLDER                NUMBER OF SHARES OWNED(1)(2)                   PERCENTAGE OF OWNERSHIP
----------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                                            <C>
ROLAND F. BRYAN(3)                               39,510,000                                     24.45%

CHRISTOPHER T. KLEVELAND (4)                     23,500,000                                     14.54%

MARK P. HARRIS(5)                                23,500,000                                     14.54%

WINGS FUND, INC.(6)                              10,300,000                                     6.37%

GERRY NADLER(7)                                       0                                           0

JULIE O'REAR                                     13,250,000                                     8.20%
401 Church Road
Taigum, Queensland
Australia 4018

All Current Executive Officers as                63,010,000                                     24.45%
   a Group
All Current Directors who are not                     0                                           0
   Executive Officers as a Group
--------------------------
</TABLE>
(1)  Except as pursuant to applicable community property laws, the persons named
     in the table have sole  voting  and  investment  power with  respect to all
     shares of common stock  beneficially  owned. The total number of issued and
     outstanding shares and the total number of shares owned by each person does
     not include unexercised warrants and stock options, and is calculated as of
     March 31, 2007.

(2)  Does not include the exercise of 3,762,000  warrants to purchase  3,762,000
     shares of Common Stock and 8,700,000  options to purchase  8,700,000 shares
     of Common Stock.

(3)  Roland F. Bryan is the President,  Chief Executive Officer, and Chairman of
     the Board of Directors of MTI.  23,500,000 of these shares are owned by the
     Bryan Family Trust. Mr. Bryan holds an option to purchase 13,500,000 shares
     from Mr.  Harris at $0.10 per  share and an option to  purchase  13,500,000
     shares from Mr.  Kleveland at $0.10 per share. In addition,  Mr. Harris and

                                      -36-
<PAGE>

     Mr.  Kleveland  have agreed that Mr. Bryan has the right to vote the shares
     held under these option agreements. Mr. Bryan holds a convertible note from
     MTI in the principal amount of $436,000,  with interest payable at the rate
     of 6% per year,  principal due on or before July 2009, and convertible into
     17,440,000 shares of common stock at $0.025 per share.

(4)  Christopher  Kleveland is a former  director  and former Vice  President of
     Operations of MTI.

(5)  Mark P. Harris is a former director of MTI.

(6)  Wings Fund, Inc. provides consulting services to MTI.

(7)  As a Chief  Scientist,  Gerry  Nadler is a key  employee  of MTI.  Does not
     include 7,000,000  incentive stock options to purchase  7,000,000 shares of
     Common Stock  granted to Mr.  Nadler  pursuant to MIT's Option Plan.  These
     Options vest as follows:  25% on September  19, 2003 and 1/36 every 30 days
     thereafter  until the  remaining  Options  have vested.  These  Options are
     exercisable for a period of ten years from the date of grant at an exercise
     price of $0.05 per share.  As of March 31,  2007 these  Options  were fully
     vested.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         We currently lease  approximately  1,541 square feet of office space at
513 De La Vina Street,  Santa Barbara,  California 93101 from a company owned by
the  majority  shareholders  at a base rental rate of  approximately  $1,426 per
month pursuant to a month to month lease.

         During  the year  ended  December  31,  2006,  Mr.  Roland  Bryan,  our
President  and Chief  Executive  Officer,  loaned  $250,000  to the  Company for
operating expenses.  This loan bears interest at the rate of 6% per annum. Also,
as of the year ended  December 31, 2006, a convertible  debenture held by Roland
Bryan was outstanding in the principal  amount of $436,000 with interest payable
at the rate of 6% per year, principal due July 2009, convertible into 17,440,000
shares of common stock at $0.025 per share.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         EXHIBIT           DESCRIPTION

         3.1      Articles of Incorporation (1)
         3.2      Amendments to Articles of Incorporation (1)
         3.3      Bylaws (1)
         4.1      Specimen Certificate for Common Stock (1)
         4.2      2002 Stock Option Plan (1)
         4.3      Form of Incentive Stock Option Agreement (1)
         4.4      Form of Non Qualified Stock Option Agreement (1)
         10.1     Lease  Agreement  by  and  between  MachineTalker,   Inc.  and
                  SecureCoin, Inc., dated August 20, 2003 (1)
         10.2     Agreement No. CA-00062 by and between MachineTalker,  Inc. and
                  Kellogg, Brown & Root Services,  Inc., dated December 20, 2004
                  (2)
         10.3     Agreement  by and  between  MachineTalker,  Inc.  and  Science
                  Applications International Corporation, dated July 1, 2004 (1)
         14.1     Code of Conduct
         31.1     Section 302 Certification
         32.1     Section 906 Certification
--------------------------

     (1)  Incorporated  by  reference  to the Form SB-2  Registration  Statement
          filed with the  Securities  and  Exchange  Commission  dated August 1,
          2005.

     (2)  Incorporated  by  reference  to  Amendment  No.  4 to  the  Form  SB-2
          Registration   Statement   filed  with  the  Securities  and  Exchange
          Commission dated November 2, 2005.

                                      -37-
<PAGE>

(b)      MTI did not file any Current  Reports on Form 8-K during or  subsequent
         to the last quarter of the fiscal year ended December 31, 2006.

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

         HJ Associates & Consultants,  LLP,  Certified Public Accountants ("HJ")
is our principal auditing accountant firm, replacing Rose, Snyder & Jacobs, LLP,
Certified  Public  Accountants  ("RSJ") on January 3, 2006.  Both CPA firms have
provided other non-audit  services to the Company.  The Audit Committee approved
the engagement of HJ before HJ rendered audit and non-audit services to us.

         Each year the  independent  auditor's  retention to audit our financial
statements,  including the  associated  fee, is approved by the Board before the
filing of the previous year's Annual Report on Form 10-KSB.

HJ FEES
                                                         2006       2005
                                                     ------------------------

        Audit Fees(1)                                   $  20,900    $14,100
        Audit Related Fees                                  - 0 -      - 0 -
        Tax Fees(2)                                     $   1,570      - 0 -
        All Other Fees                                      - 0 -      - 0 -
                                                     ------------------------
                                                        $  22,470    $14,100
                                                     ========================
------------
(1)  Audit Fees consist of fees for the audit of our  financial  statements  and
     review of the financial statements included in our quarterly reports.

(2)  Tax fees consist of fees for the preparation of original  federal and state
     income tax returns and fees for miscellaneous tax consulting services.

RSJ FEES

                                                          2006       2005
                                                     ------------------------

        Audit Fees(1)                                          N/A    $50,900
        Audit Related Fees                                     N/A      - 0 -
        Tax Fees(2)                                            N/A    $ 2,300
        All Other Fees                                         N/A      - 0 -
                                                      ------------------------
                                                               N/A    $53,200
                                                      ========================
------------
(1)  Audit Fees consist of fees for the audit of our  financial  statements  and
     review of the financial statements included in our quarterly reports.

(2)  Tax fees consist of fees for the preparation of original  federal and state
     income tax returns and fees for miscellaneous tax consulting services.


PRE-APPROVAL  POLICIES  AND  PROCEDURES  OF  AUDIT  AND  NON-AUDIT  SERVICES  OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

         The  Audit  Committee's  policy  is to  pre-approve,  typically  at the
beginning of our fiscal year,  all audit and non-audit  services,  other than de
minimis non-audit services,  to be provided by an independent  registered public
accounting  firm.  These  services may include,  among others,  audit  services,
audit-related  services,  tax services and other  services and such services are
generally  subject to a  specific  budget.  The  independent  registered  public
accounting firm and management are required to  periodically  report to the full
Board regarding the extent of services  provided by the  independent  registered
public  accounting firm in accordance with this  pre-approval,  and the fees for

                                      -38-
<PAGE>

the services  performed to date. As part of the Board's  review,  the Board will
evaluate other known potential engagements of the independent auditor, including
the scope of work proposed to be performed and the proposed fees, and approve or
reject each service,  taking into account  whether the services are  permissible
under  applicable law and the possible  impact of each non-audit  service on the
independent auditor's independence from management.  At Audit Committee meetings
throughout the year, the auditor and management may present subsequent  services
for  approval.  Typically,  these would be services such as due diligence for an
acquisition, that would not have been known at the beginning of the year.

         The Audit Committee has considered the provision of non-audit  services
provided by our independent  registered  public accounting firm to be compatible
with  maintaining  their  independence.  The Audit  Committee  will  continue to
approve all audit and permissible non-audit services provided by our independent
registered public accounting firm.


                                   SIGNATURES

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

Dated: April 17, 2007           MACHINETALKER, INC.


                                BY:  \s\ Roland F. Bryan
                                      --------------------------------------
                                    Roland F. Bryan, Chairman of the Board,
                                    Chief Executive Officer, President, and
                                    Chief Financial Officer

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


BY:  \s\ Roland F. Bryan                             Dated: April 17, 2007
      --------------------------------------
    Roland F. Bryan, Chairman of the Board,
    Chief Executive Officer, President
    Chief Financial Officer, and Secretary


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