UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-KSB

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

For the fiscal year ended December 31, 2007

[  ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission file number: 33-23617

Material Technologies, Inc.
(Name of small business issuer in its charter)

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

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

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

For the year ended December 31, 2007, our revenue was $201,917.

As of April 3, 2008, the number of shares of Class A common stock outstanding was 192,288,844.  As of April 8, 2008, the aggregate market value of our common stock held by non-affiliates was approximately $3,846,657.83 (based upon 153,253,260 shares at $0.0251 per share).

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated herein by reference: (i) Registration Statement on Form S-1, filed April 30, 1997; (ii) Annual Report on Form 10-KSB for the fiscal year December 31, 2000, filed March 30, 2001; (iii) Annual Report on Form 10-KSB for the fiscal year December 31, 2003, filed April 9, 2004; (iv) Current Report on Form 8-K, filed August 24, 2006; (v) Current Report on Form 8-K, filed November 8, 2006; (vi) Current Report on Form 8-K, filed February 6, 2007; (vii) Registration Statement on Form S-1, filed January 19, 1996; (viii) Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2005, filed November 14, 2005; (ix) Current Report on Form 8-K/A, filed January 5, 2006; (x) Current Report on Form 8-K, filed May 17, 2006; (xi) Current Report on Form 8-K, filed June 8, 2006; (xii) Current Report on Form 8-K/A, filed June 15, 2006; (xiii) Registration Statement on Form SB-2, filed June 15, 2006; (xiv) Current Report on Form 8-K, filed June 9, 2006; (xv) Current Report on Form 8-K, filed November 2, 2006; (xvi) Current Report on Form 8-K, filed November 28, 2006; (xvii) Current Report on Form 8-K, filed January 3, 2007; and (xviii) Annual Report on Form 10-KSB for the fiscal year December 31, 2006, filed April 3, 2007, are incorporated in Part III, Item 13.

Transitional Small Business Disclosure Format (check one):  Yes           No   X  

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TABLE OF CONTENTS

ITEM 1	DESCRIPTION OF BUSINESS........................................................................................	1
ITEM 2	DESCRIPTION OF PROPERTY.......................................................................................	7
ITEM 3	LEGAL PROCEEDINGS...................................................................................................	7
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................	9
ITEM 5	MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................................................................................................	9
ITEM 6	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................................	11
ITEM 7	FINANCIAL STATEMENTS...........................................................................................	19
ITEM 8	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................................................	19
ITEM 8A	CONTROLS AND PROCEDURES..................................................................................	20
ITEM 8B	OTHER INFORMATION.................................................................................................	21
ITEM 9	DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.........	21
ITEM 10	EXECUTIVE COMPENSATION.....................................................................................	26
ITEM 11	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS...................................	27
ITEM 12	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................	28
ITEM 13	EXHIBITS..........................................................................................................................	28
ITEM 14	PRINCIPAL ACCOUNTANT FEES AND SERVICES...................................................	34
SIGNATURES.........................................................................................................................................		35

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PART I

ITEM 1 – DESCRIPTION OF BUSINESS.

Development of Business

We were formed as a Delaware corporation on March 4, 1997.  We are the successor to the business of Material Technology, Inc., a Delaware corporation, also doing business as Tensiodyne Scientific, Inc.  Material Technology, Inc. was the successor to the business of Tensiodyne Corporation that began developing the Fatigue Fuse in 1983.  Our two predecessors, Tensiodyne Corporation and Material Technology, Inc. were engaged in developing and testing our Fatigue Fuse and, beginning in 1993, developing our Electrochemical Fatigue Sensor.

Our Business

Over the last several years, we were engaged in research and development of metal fatigue detection, measurement, and monitoring technologies.  We have now developed several monitoring devices for metal fatigue detection and measurement.  We are currently marketing our technology.

Our efforts have been dedicated to developing devices and systems that indicate the true status of fatigue damage in a metal component.  We have developed two products.  The first is a small, simple device that continuously integrates the effect of fatigue loading in a structural member, called a Fatigue Fuse.  The second is an instrument that detects very small growing fatigue cracks in metals, the Electrochemical Fatigue Sensor.  The Electrochemical Fatigue Sensor has demonstrated in the laboratory that it can detect cracks as small as 10 microns (0.0004 inches), which we believe is smaller than any other practical crack detection technology.  The Company holds the patents on the Fatigue Fuse and the license on the technology on the Electrochemical Fatigue Sensor from the University of Pennsylvania and licenses both of those technologies to us.

We have completed the technology to the point where we are now performing real world bridge inspections.

The Federal Highway Administration (FHA) has signed a $347,500 contract with us to purchase equipment and training as part of their Steel Bridge Testing Program.  They will use our EFS system in the laboratory and on actual bridges to find growing fatigue cracks.  Following the completion of this program, the FHA will recommend technologies for use on bridges for specific bridge problems.

Our on-call contract with the Pennsylvania Department of Transportation (PennDOT) is continuing to produce good results.  We have used the EFS on 12 bridges in Pennsylvania so far, totaling over $100,000.  We anticipate further work orders to be issued for the next inspection season.  We have also received interest from several inspection companies in Pennsylvania to purchase EFS equipment, as well as training and licensing, in order to execute these further work orders, with licensing fees payable to us for each bridge inspected.  One such company has already been trained at their cost to help us execute on-call contracts in 2008.

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We completed a contract with Massachusetts (MassHighway) for $24,290.  We then met with MassHighway representatives who hired us to conduct additional bridge inspections during 2008.

New York State contracted with us to provide EFS inspection services on a high profile fracture critical bridge for $9,630.  As a result of this initial inspection for the New York State Department of Transportation, we will be performing a follow up inspection.  Additionally, they are evaluating purchase of equipment, training for their engineers, and licensing in 2008.

We have completed an inspection of a fracture critical bridge in West Sacramento, California, and are also in the process of analyzing and reporting the results.  At the same time we have met with several high-ranking state and national officials in California, with more meetings planned, all discussing the use of EFS across the state. 

We have also formed a strategic alignment with a California-based independent testing laboratory called Smith Emery Company.  Smith Emery Company is over 100 years old and has over 400 employees in California as well as an office in China.  They perform weld testing, building façade testing, and metallurgical failure analysis.  Engineers and technicians have already been trained at their cost to execute contracts in the western U.S. region.

We have signed a contract with the Canadian National Railway to inspect a bridge in Wisconsin.  The Canadian National Railway owns a number of bridges in the United States.

We have completed and sent PennDOT a report on the nine bridges we inspected in Pennsylvania.  We hope to meet with PennDOT in the near future to discuss the use of EFS on their remaining steel bridges.

We have been invited by the U.S. Army Corps of Engineers to present at the U.S. Secretary of Defense’s office on May 1 and 2, 2008.  The U.S. Army Corps of Engineers owns all of the bridges over U.S. federal waterways.

We have scheduled inspections in 2008 for the following entities so far:

• Virginia Department of Transportation
• Canadian National Railway
• Alabama Department of Transportation
• MassHighway
• New York Department of Transportation

We have been hired to perform inspections with the following entities which have not yet been scheduled:

• New Jersey Department of Transportation
• PennDOT

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• Union Pacific Railroad
  
• URS Engineers

 Our Technologies

The Fatigue Fuse

The Fatigue Fuse is designed to be affixed to a structure to give warnings at pre-selected percentages of the fatigue life that have been used up (i.e., how close to failure the structure has progressed).  It warns against a condition of widespread generalized cracking due to fatigue.

The Fatigue Fuse is a thin piece of metal similar to the material being monitored.  It consists of a series of parallel metal strips connected to a common base, much as fingers are attached to a hand.  Each “finger” has a different geometric pattern, called “notches,” defining its boundaries.  Each finger incorporates an application-specific notch near the base.  By applying the laws of physics and fracture mechanics to determine the geometric contour of each notch, the fatigue life of each finger is finite and predictable.  When the fatigue life of a finger (Fuse) is reached, the Fuse breaks.

By implementing different geometry for each finger notch in the array, different increments of fatigue life are observable.  Typically, notches will be designed to facilitate observing increments of fatigue life of 10% to 20%.   By mechanically attaching or bonding these devices to different areas of the structural member of concern, the Fuse undergoes the same fatigue history (strain cycles) as the structural member.  Therefore, breakage of a Fuse indicates that an increment of fatigue life has been reached for the structural member.  The notch and the size and shape of the notch concentrate energy on each finger.  The Fuse is intimately attached to the structural member of interest.  Therefore, the Fuse experiences the same strain and wear history as the member.  Methods are available for remote indication of Fuse fracturing.

In a new structure, we generally assume there is no fatigue and can thus design the Fatigue Fuse for 100% of its life potential.  But in an existing structure, one that has experienced loading and wear, we must determine the fatigue status of that structural member so we can design the Fatigue Fuse to monitor the remaining fatigue life potential.

We believe that the Fatigue Fuse is of value in monitoring aircraft, ships, bridges, conveyor systems, mining equipment, cranes, etc.  Little special training is needed to qualify individuals to report any broken segments of the Fatigue Fuse to the appropriate engineering authority for necessary action.  The success of the device is contingent upon our successful marketing of the Fatigue Fuse, and no assurance can be given that we will be able to overcome the obstacles relating to introducing a new product to the market.  To implement our ability to produce and market the Fatigue Fuse, we need substantial additional capital and no assurance can be given that this needed capital will be available.

The Electrochemical Fatigue Sensor (EFS”)

The EFS is a device that employs the principle of electrochemical/mechanical interaction of metals under repeated loading to find growing cracks.  It is an instrument that detects very small cracks and has the potential to determine crack growth rates.  The

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Electrochemical Fatigue Sensor has demonstrated in the laboratory that it can detect cracks as small as 10 microns (0.0004 inches), which we believe is smaller than any other practical technology.  We believe that nothing comparable to this instrument currently exists in materials technology.  We have inspected approximately 33 bridges to date using this technology.

The EFS functions by treating the location of interest (the target) associated with the structural member as an electrode of an electrochemical cell (similar to a battery).  By imposing a constant voltage-equivalent circuit as the control mechanism for the electrochemical reaction at the target surface, current flows as a function of stress action.  The EFS is always a dynamic process; therefore stress action is required, e.g., to measure a bridge structural member it is necessary that cyclic loads be imposed, such as normal traffic on the bridge would do.  The results are a specific set of current waveforms and amplitudes that characterize and indicate fatigue damage i.e., growing fatigue cracks.

Status of our Technologies

Currently, our primary focus is on the commercialization of the EFS.

Status of the EFS

Within the past twelve months, we have successfully used EFS on 18 highway and railroad bridges.  We are now actively marketing the EFS for bridges.

Status of the Fatigue Fuse

To date, certain organizations have included our Fatigue Fuse in test programs.  We have already completed the tests for welded steel civil bridge members conducted at the University of Rhode Island.  In 1996, Westland Helicopter, a British firm, tested the Fatigue Fuse on helicopters.  That test was successful with the legs of the Fatigue Fuses failing in sequence as predicted. At the present time, we are applying Fatigue Fuses to several portable aluminum bridges for the U.S. Army.

The Fatigue Fuse has been at this stage for the past several years as we have not had the necessary financial resources to finalize our development and commence marketing.  At the present time we have elected to defer future development of the Fatigue Fuse and apply our resources to pursue the EFS technology.

Commercial Markets for our Products and Technologies

Our technology is applicable to many market sectors such as bridges and aerospace as well as ships, cranes, railways, power plants, nuclear facilities, chemical plants, mining equipment, piping systems, and heavy iron.

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Application of Our Technologies For Bridges

Our EFS and Fatigue Fuse products primarily address the detection of fatigue in structures such as bridges.  In the United States alone, there are more than 610,000 bridges of which over 260,000 are rated by the Federal Highway Administration as requiring major repair, rehabilitation, or replacement.  Our EFS and Fatigue Fuse products can be effectively used as fatigue detection devices for all metal bridges located within the United States.  Our detection devices also address maintenance problems associated with bridge structures.

Although there are normal business imperatives, the bridge market is essentially macro-economically and government policy driven.  In our opinion, only technology can provide the solution.  The need for increased spending accelerates significantly each year as infrastructure ages.  The Federal government has mandated bridge repair and detection through the passage of the Intermodal Surface Transportation and Efficiency Act in 1991 and again in the $200 billion, 1998 Transportation Equity Act.  We have completed several contracts to install our fatigue detection products on bridge structures within the United States, and are in negotiations for several others.

Our Patent Protections

We are the owner and/or assignee of eight patents as follows:

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Apparatus for and Method for  Interrogating a Fatigue Fuse		Provisional
Indicator for Fatigue Fuse		Provisional

Our Patents are Encumbered

The patents described in the preceding section are pledged as collateral to secure the repayment of loans extended to us or indebtedness that we currently owe.  On August 30, 1986, we entered into a funding agreement with the Advanced Technology Center, whereby ATC paid $45,000 to us for the purchase of a royalty of 3% of future gross sales and 6% of sublicensing revenue.  The royalty is limited to the $45,000 plus an 11% annual rate of return.  The payment of future royalties was secured by equipment we used in the development of technology as specified in the funding agreement, however, no lien against our equipment or our patents in favor of ATC vested until we generated royalties from product sales.

On May 4, 1987, we entered into a funding agreement with ATC whereby ATC provided $63,775 to us for the purchase of a royalty of an additional 3% of future gross sales and 6% of sublicensing revenue.  The agreement was amended August 28, 1987, and as amended, the royalty cannot exceed the lesser of (1) the amount of the advance plus a 26% annual rate of return or, (2) total royalties earned for a term of 17 years.  As with our first agreement with ATC, no lien or encumbrance against our assets, including our patents, vested in favor of ATC until we generated royalties from product sales.

On September 28, 2006, we entered into an agreement with Ben Franklin Technology, the successor to ATC, to give Ben Franklin 3,334 shares of our common stock, valued at $40,000, in exchange for a general release of the above liabilities.

On May 27, 1994, we borrowed $25,000 from Sherman Baker, one of our shareholders.  We gave Mr. Baker a promissory note due May 31, 2002 and we pledged our patents as collateral to secure the repayment of this note.  As of December 31, 2007, there is a first priority security interest in our patents as collateral for the repayment of the amounts we owe to Mr. Baker.  As additional consideration for this loan, we granted to Mr. Baker a 1% royalty interest in the Fatigue Fuse and a 0.5% royalty interest in the Electrochemical Fatigue Sensor.  We are in default of the repayment terms of the note held by Mr. Baker, and at December 31, 2007, we owe Mr. Baker $56,761 in principal and accrued interest.  Mr. Baker has not taken any action to foreclose his interest in the collateral and we are in discussions with Mr. Baker, with the expectation that we will cure any default in the note he holds and avoid any foreclosure of his security interest held in our patents.  We believe that although we have not yet cured our defaults on the loans to Mr. Baker, our current communications with him suggest that Mr. Baker does not have the present intention of foreclosing on the patents as collateral or the pursuit of legal action against us to collect the balance due under our note.

Distribution of our Products

Subject to available financing, we have and continue to exhibit the Electrochemical Fatigue Sensor, and to a lesser extent the Fatigue Fuse, at various trade shows and intend to also market our products directly to end users including certain state

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regulatory agencies charged with overseeing bridge maintenance, companies engaged in manufacturing and maintaining large ships and tankers, and the military.  Although we intend to undertake marketing, dependent on the availability of funds, within and without the United States, no assurance can be given that any such marketing activities will be implemented.

Competition

Other technologies exist which identify cracks which may be the result of fatigue damage.  Single cracks larger than a minimum size can be found by nondestructive inspection methods such as dye penetrant, radiography, eddy current, acoustic emission, and ultrasonics.  Tracking of load and strain history, to subsequently estimate fatigue damage by computer processing, is possible with recording instruments such as strain gauges and counting accelerometers.  These methods have been used for over 40 years and also offer the advantage of having been accepted in the market, whereas our products remain largely unproven.  Companies marketing these alternate technologies include Magnaflux Corporation, Kraut-Kramer-Branson, Dunegan-Endevco, and Micro Measurements.  These companies have more substantial assets, greater experience, and more resources than us, including, but not limited to, established distribution channels and an established customer base.  The familiarity and loyalty to these technologies may be difficult to dislodge.  Because we are still in the development stage, we are unable to predict whether our technologies will be successfully developed and commercially attractive in potential markets.

Employees

We have six full-time employees.  In addition, we retain consultants on an independent contractor basis for specialized work.

ITEM 2 – DESCRIPTION OF PROPERTY

We lease an office at 11661 San Vicente Blvd., Suite 707, Los Angeles, California, 90049.  The space consists of 830 square feet and will be adequate for our current and foreseeable needs.  The total rent is payable at $2,582 per month on a month-to-month basis.  Either party may cancel the lease on 30 days notice.

ITEM 3 – LEGAL PROCEEDINGS

Stephen Beck

In July 2002, we settled a lawsuit related to a contract dispute with Mr. Stephen Beck.  In March 2006, Mr. Beck filed a lawsuit against us alleging breach of contract related to the lawsuit settlement and sought approximately $135,000 in damages, plus the issuance of 12,989 shares of our common stock plus interest.

In December 2006, we entered into a settlement and release agreement, as well as irrevocable escrow instructions, to settle the lawsuit Mr. Beck filed in March 2006.  As consideration under the settlement, we issued 5,000,000 shares of our

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common stock to Mr. Beck, with the shares to be held by an escrow agent and distributed to Mr. Beck monthly with a trading limit equal to 8% of the previous month’s trading volume of our common stock, until Mr. Beck has received a total of $800,000.  As we have guaranteed this debt to Mr. Beck in the amount of $800,000, we have recorded a liability as of December 31, 2007 for this amount.  As Mr. Beck receives proceeds from the sale of his shares into the market and 7.5% (net of any expenses incurred by us) of any cash raised by us from the sale of equity, we will reduce our guarantee by that amount. We have paid a total of $285,182 to Mr. Beck in cash as part of the settlement.   Mr. Beck also had anti-dilution rights on those shares to maintain his percentage ownership through September 27, 2008.  We issued another 5,000,000 shares to Mr. Beck to be held in escrow until the conditions are met with respect to the anti-dilution shares.  As of the date of this Report, we have issued a total of 1,348,927 shares of common stock to Mr. Beck pursuant to the anti-dilution provision in the settlement arrangement.  In or about February 2008, Mr. Beck reached the $800,000 guarantee from the sale of our common stock and the cash received from us for 7.5% of the capital we raised.  Therefore, as of the date of this Report, we have no further liability to Mr. Beck.

On September 12, 2007, we filed a complaint for declaratory relief against Mr. Beck in the Superior Court of the State of California, County of Los Angeles, Central Judicial District, seeking a judicial determination as to the respective rights and duties of us and Mr. Beck with respect to certain terms and conditions of the settlement agreement and escrow instructions.

On October 1, 2007, Mr. Beck served us with a Motion for Enforcement of Settlement and Entry of Judgment (Motion”).  Mr. Beck’s motion was denied.

On February 7, 2008, we filed a first amended complaint in our action against Mr. Beck for declaratory relief which now also seeks to have the settlement agreement and escrow instructions rescinded.  On March 6, 2008, Mr. Beck filed a cross-complaint against us and Robert M. Bernstein, our President and a Director, for breach of contract, specific performance, declaratory relief, conversion, intentional interference with contract (against Mr. Bernstein only) and, in the alternative, equitable restitution.

Gem Advisors, Inc., GEM Global Emerging Markets, and Global Emerging Markets of North America, Inc.

On June 15, 2005, we filed a Complaint in the Los Angeles Superior Court, State of California, case number BC336689, against Gem Advisors, Inc., GEM Global Emerging Markets, and Global Emerging Markets of North America, Inc., seeking a declaration regarding certain agreements we entered into with the parties.  We did not seek monetary damages.  On November 16, 2005, Gem Advisors, Inc. filed an Answer and Cross-Complaint, seeking approximately $1.9 million in damages arising out of finders fees for certain transactions.  On November 30, 2005, default judgments were entered against the other defendants who failed to respond to our Complaint.  In September 2006, this case was dismissed as to all parties because the parties thought they could agree on the terms of a written settlement agreement.  However, the parties failed to reach a settlement and no formal settlement agreement was ever executed.

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On November 30, 2007, Gem Advisors, Inc. filed a lawsuit against us, Robert M. Bernstein, and Lawrence I. Washor (who represented us in the lawsuit against Gem Advisors, Inc. filed on June 15, 2005), for breach of contract (settlement), breach of contract (for transfer to Gem Advisors, Inc. of 585,000 shares we held in another company), breach of covenant of good faith and fair dealing, and fraud and deceit – promise made without intention to perform (the only cause of action asserted against Robert M. Bernstein and Lawrence I. Washor).  Gem Advisors, Inc. is seeking damages in excess of $250,000.

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

None.

PART II

ITEM 5 – MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock is quoted on the OTC Bulletin Board under the symbol MTTG.  The following table sets forth the high and low bid prices per share of common stock for the last two fiscal years.  These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

The closing price of our common stock on April 8, 2008 was $0.0251.

Holders

As of the date of this Report, we had 192,288,844 shares of our Class A common stock issued and outstanding and held by approximately 1,721 holders of record.  The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.  The transfer agent for our Class A common stock is Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.

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Dividends

We have never declared or paid any cash dividends on our common stock.  We do not anticipate paying any cash dividends to stockholders in the foreseeable future.  In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

On April 18, 2006, our Board of Directors approved the 2006 Non-Qualified Stock Grant and Option Plan (the 2006 Plan”) with 100,000 shares of our common stock available for issuance under the plan.  The plan offers selected employees, directors, and consultants an opportunity to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees.  As of the date of this Report, we have issued all 100,000 shares of common stock under the plan.

On December 1, 2006, our Board of Directors approved the 2006/2007 Non-Qualified Company Stock Grant and Option Plan (the 2006/2007 Plan”) with 3,000,000 shares of our common stock available for issuance under the plan.  The plan offers selected employees, directors, and consultants an opportunity to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees.  As of the date of this Report, we have not issued any options or shares of common stock under the 2006/2007 Plan.

Recent Sales of Unregistered Securities

On September 28, 2007, we issued 400,000 shares of common stock to an employee subject to vesting, which were ultimately forfeited due to the employee’s termination.

On October 2, 2007, we issued 76,300 shares of common stock to one entity in consideration for services.

On October 8, 2007, we issued 1,430,400 shares of common stock to three entities and one individual under Regulation S in consideration for prior investments.

On October 8, 2007, we sold 770,000 shares of common stock to one entity at $0.65 per share for total gross proceeds of $505,000 under Regulation S.

On October 12, 2007, we issued 4,000,000 shares of common stock to an entity in exchange for certain of their shares.  However, the exchange was cancelled and each side returned the other’s shares.

On December 3, 2007, we sold 2,027,900 shares of common stock to 42 individuals and entities at $0.24 per share for total gross proceeds of $486,696.

On December 6, 2007, we sold 62,500 shares of common stock to one entity at $0.40 per share for total gross proceeds of $25,000 under Regulation S.

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On December 10, 2007, we issued 250,000 shares to one individual in exchange for services.

On January 9, 2008, we issued 425,000 shares of common stock to one individual in exchange for consulting services.

On January 14, 2008, we issued a total of 7,000,000 shares of common stock to two entities for investor relations services.

On January 21, 2008, we issued 425,000 shares of common stock to one individual in exchange for services.

On February 19, 2008, we issued 200,000 shares of common stock to one individual in exchange for services.

On February 25, 2008, we issued 150,000 shares of common stock to one individual in exchange for consulting services.

On February 27, 2008, we issued 150,000 shares of common stock to one individual in exchange for consulting services.

On February 27, 2008, we issued 200,000 shares of common stock to one individual in exchange for consulting services.

On February 27, 2008, we issued 25,000 shares of common stock to one individual in exchange for consulting services.

On April 9, 2008, we issued options to purchase a total of 15,390,546 shares of Class A common stock to two individuals at an exercise price of $0.025 per share.

On April 9, 2008, we issued options to purchase a total of 48,000 shares of Class B common stock to two individuals at an exercise price of $0.50 per share.

Unless otherwise indicated, we relied on the exemption from registration relating to offerings that do not involve any public offering pursuant to Section 4(2) under the Securities Act of 1933 (the “Act”) and/or Rule 506 of Regulation D of the Act.  We believe that each investor had adequate access to information about us through the investor’s relationship with us.

ITEM 6 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclaimer Regarding Forward Looking Statements

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities

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Exchange Act of 1934).  Forward-looking statements are, by their very nature, uncertain and risky.  These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

Although the forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them.  Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.  You are urged to carefully review and consider the various disclosures made by us in this Report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

Overview

We research and develop technologies that detect and measure metal fatigue.  We have developed two products.  Our two products are the Fatigue Fuse and Electrochemical Fatigue Sensor.  We generate very little revenue from the sale and licensing of our products, and thus we are a development stage company. 

Our biggest challenge is funding the continued research and development and commercialization of our products until we can generate sufficient revenue to support our operations.  We try to keep our overhead low and utilize outside consultants as much as possible in order to reduce expenses, and thus far we have been successful in raising enough capital through loans and financing to fund operations.  For the foreseeable future, we will continue to raise capital in this manner.

Our consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.  We have sustained operating losses since our inception (October 21, 1983).  In addition, we have used substantial amounts of working capital in our operations.  Further, at December 31, 2007, the deficit accumulated during the development stage amounted to approximately $313,208,402.

In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon our ability to meet our financing requirements and the success of our future operations.  During 2007, we received approximately $4,000,000 in private financing, primarily from the sale of equity and debt securities.  We plan to

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continue to raise funds through the sale of our securities for the foreseeable future.  In addition in 2007, we received contracts to inspect certain bridges with nine states which generated gross revenue of approximately $201,917.  We have begun marketing our current technologies while continuing to develop new methods and applications.  We will need to raise additional capital to finance future activities and no assurances can be made that current or anticipated future sources of funds will enable us to finance future operations.  In light of these circumstances, substantial doubt exists about our ability to continue as a going concern.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or liabilities that might be necessary should we be unable to continue as a going concern.

Results of Operations for the Year Ended December 31, 2007 as Compared to the Year Ended December 31, 2006

Introduction

In 2007, we had revenues from bridge testing.  Our revenues for 2007 totaled $201,917.  We continued to fund the majority of our operations through the issuance of our stock, resulting in large expenses in the areas of research and development and consulting.  The amount of cash used in our operations was approximately $2,664,630 in 2007 compared to approximately $1,779,256 in 2006.  We anticipate that we will continue to fund a substantial portion of our operations through the sale of our securities until such time as we can begin to generate substantial revenue from the sale of our products, and we do not have an estimate of when such revenues will begin.

Revenues and Loss from Operations

Our revenue, research and development costs, general and administrative expenses, and loss from operations for the year ended December 31, 2007 as compared to the year ended December 31, 2006 are as follows:

Our revenues for both 2007 and 2006 were derived exclusively from bridge testing.

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Of the $3,701,966 in research and development costs for 2007, $197,005 was incurred in salaries to our in-house engineering staff which included an officer and director, $359,861 was paid to outside consultants and for related expense reimbursements, and we valued the issuance of 2,116,000 shares of our common stock that was issued to various consultants at $3,145,100.  Of the $1,013,969 in research and development costs for 2006, $111,523 was incurred in salaries to our in-house engineering staff which included an officer and director, $271,279 was paid to outside consultants and for related expense reimbursements, and we valued the issuance of 36,028 shares of our common stock that were issued to various consultants at $631,167. 

General and administrative expenses were $98,557,943 and $138,781,403, respectively, for the years ended December 31, 2007 and 2006.  The major expenses incurred during each of the years were:

Of the $16,855,747 in consulting expense for the year ended December 31, 2007, $12,394,888 was related to the issuance of 8,926,724 shares of common stock.  In addition, the Company charged $1,100,000 in consulting fees through an increase in convertible debt of $1,100,000 and charged $2,845.000 to consulting in connection with the acquisition of shares of Rocket City Automotive. Of the $125,332,072 in consulting expense for the year ended December 31, 2006, $124,543,689 was related to the issuance of 35,021,248 shares of common stock. 

Other Income and Expenses and Net Loss

Our gain on modification of convertible debt, modification of research and development sponsorship agreement, loss on subscription receivables, interest expense, other-than-temporary impairment of marketable securities, change in fair value of derivative and warrant liabilities, loss on settlement of lawsuits, and net loss for the year ended December 31, 2007 as compared to the year ended December 31, 2006 are as follows:

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Our loss of the gain on modification of convertible debt of $1,033,479 from 2006 is related to our modification of the Palisades debt and removal of associated derivative liability.    Our interest expense includes amortization of debt discounts totaling $2,041,213 in 2007 and $968,716 in 2006.  The change in fair value of derivative and warrant liabilities represents the change in derivative values related to warrants and convertible debt with Palisades and Golden Gate.

Liquidity and Capital Resources

Introduction

During the year ended December 31, 2007, as with 2006, we did not generate positive cash flow.  As a result, we funded our operations through the private sale of equity and debt securities, the issuance of our securities in exchange for services, and loans.

Our cash, investments in marketable securities held for trading, investments in marketable securities available for sale, accounts receivable, prepaid services, prepaid expenses and other current assets, total current assets, total assets, total current liabilities, and total liabilities as of December 31, 2007, as compared to December 31, 2006, were as follows:

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Accounts receivable		108,661			116,707
Inventories		62,216			-0-
Prepaid expenses and other		47,962			40,006
Total current assets		2,337,546			421,145
Total assets		2,425,280			432,780
Total current liabilities		691,380			542,802
Total liabilities		34,697,949			46,986,215

Cash Requirements

For the year ended December 31, 2007, our net cash used in operations was $(2,664,630) compared to $(1,779,256) for the year ended December 31, 2006. 

Negative operating cash flows during the year ended December 31, 2007 were primarily created by a net loss from operations of $(73,396,581), offset by impairment losses of $19,257,375 incurred in connection with the acquisition of three subsidiaries, the issuance of stock for services of $16,195,289, other-than-temporary impairment of marketable securities available for sale of amortization of discount on convertible debentures of $3,986,200 and an increase in officer stock based compensation of $60,000,000.  There was also an increase in the fair value of derivative and warrant liabilities of $34,962,617.

Negative operating cash flows during the year ended December 31, 2006 were primarily created by a net loss from operations of $(177,884,101), offset by impairment losses of $1,913,445 incurred in connection with the acquisition of a subsidiary, a loss on write off of subscription receivables of $1,346,010, the issuance of stock for services of $126,199,122, other-than-temporary impairment of marketable securities available for sale of $3,798,516, amortization of discount on convertible debentures of $968,716, a increase in the fair value of derivative and warrant liabilities of $33,780,874 and an increase in accounts payable and accrued expenses of $1,197,776, and an increase in officer stock based compensation 6,575,342.  There was also a gain on modification of convertible debt of $1,033,479.

Because of our need for cash to fund our continuing research and development, we do not have an opinion as to how indicative these results will be of future results.

Sources and Uses of Cash

Net cash provided by (used in) investing activities for the years ended December 31, 2007 and 2006, were $(648,543) and $236,372, respectively.  For the years ended December 31, 2007 and 2006, the net cash came primarily from the sale of securities in the amount of $537,174 and $242,506, respectively, offset by the amount for purchase of securities of $(1,702,038) and $(7,307), respectively.  Net cash from investment activities in 2007 was further increased by the $600,000 cash we received in connection with the acquisition of three subsidiaries, and $400,000 in redemptions of certificate of deposits.

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Net cash provided by financing activities for the years ended December 31, 2007 and 2006, were $3,993,588 and $1,630,734, respectively.  For the year ended December 31, 2007, the net cash came primarily from the sale of common stock and warrants of $4,566,631 and proceeds from convertible debentures and other notes payable of $20,000.  For the year ended December 31, 2006, the net cash came primarily from the sale of common stock and warrants of $1,680,553 and proceeds from convertible debentures and other notes payable of $50,000.

We are not generating sufficient cash flow from operations to fund growth.  We cannot predict when we will begin to generate revenue from the sale of our products, and until that time, we will need to raise additional capital through the sale of our securities.  If we are unsuccessful in raising the required capital, we may have to curtail operations.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated 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.  In consultation with our Board of Directors, we have identified the following accounting policies that it believes are key to an understanding of its financial statements.  These are important accounting policies that require management’s most difficult, subjective judgments.

The first critical accounting policy relates to revenue recognition.  Income from our research is recognized at the time services are rendered and billed.

The second critical accounting policy relates to research and development expense.  Costs incurred in the development of our products are expensed as incurred.

The third critical accounting policy relates to the valuation of non-monetary consideration issued for services rendered. We value all services rendered in exchange for our common stock at the quoted price of the shares issued at date of issuance or at the fair value of the services rendered, which ever is more readily determinable.  All other services provided in exchange for other non-monetary consideration is valued at either the fair value of the services received or the fair value of the consideration relinquished, whichever is more readily determinable.

Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services ” and EITF 00-18,  Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees.”  The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete.  In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance to EITF 00-18, an asset acquired in exchange for the issuance of fully

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vested, nonforfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, we record the fair value of nonforfeitable common stock issued for future consulting services as prepaid services in our consolidated balance sheet.

The fourth critical accounting policy is our accounting for conventional convertible debt.  When the convertible feature of the conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (BCF”).  We record a BCF as a debt discount pursuant to EITF Issue No. 98-5 (EITF 98-05”),  Accounting for Convertible Securities with Beneficial Conversion Features or Contingency Adjustable Conversion Ratio,”  and EITF Issue No. 00-27,  Application of EITF Issue No. 98-5 to Certain Convertible Instrument(s) .”  In those circumstances, the convertible debt will be recorded net of the discount related to the BCF.  We amortize the discount to interest expense over the life of the debt using the effective interest method.

The fifth critical account policy relates to the accounting for non-conventional convertible debt and the related stock purchase warrants.  In the case of non-conventional convertible debt, we bifurcate our embedded derivative instruments and records them under the provisions of SFAS No. 133,  Accounting for Derivative Instruments and Hedging  Activities,” as amended, and EITF Issue No. 00-19,  Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. ” These embedded derivatives include the conversion feature, liquidated damages related to registration rights and default provisions.  The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date.  In addition, under the provisions of EITF Issue No. 00-19, as a result of entering into the non-conventional convertible debenture, we are required to value and classify all other non-employee stock options and warrants as derivative liabilities at that date and mark them to market at each reporting date thereafter.  Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date.  If the fair value of the derivatives is higher at the subsequent balance sheet date, we will record a non-operating, non-cash charge.  If the fair value of the derivatives is lower at the subsequent balance sheet date, we will record non-operating, non-cash income.  We value our derivatives primarily using the Black-Scholes Option Pricing Model.  The derivatives are classified as long-term liabilities.

The sixth critical accounting policy relates to the recording of marketable securities held for trading and available-for-sale.  Marketable securities purchased with the intent of selling them in the near term are classified as trading securities. Trading securities are initially recorded at cost and are adjusted to their fair value, with the change in fair value during the period included in earnings as unrealized gains or losses.  Realized gains or losses on dispositions are based upon the net proceeds and the adjusted book value of the securities sold, using the specific identification method, and are recorded as realized gains or losses in the consolidated statements of operations.  Marketable securities that are not classified as trading securities are classified as available-for-sale securities.  Available-for-sale securities are initially recorded at cost.  Available-for-sale securities with quoted market prices are adjusted to their fair value, subject to an impairment analysis (see below).  Any change in fair value during the period is excluded from earnings and recorded, net of tax, as a component of

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accumulated other comprehensive income (loss).  Any decline in value of available-for-sale securities below cost that is considered to be other than temporary is recorded as a reduction of the cost basis of the security and is included in the statement of operations as a write down of the market value (see below).

The seventh critical accounting policy is our accounting for the fair market value of non-marketable securities we have acquired.  Non-marketable securities are originally recorded at cost.   In the case of non-marketable securities we acquired with our common stock, we value the securities at a significant discount to the stated per share cost based upon our historical experience with similar transactions as to the amount ultimately realized from the sale of the shares.  Such investments are reduced when we have indications that a permanent decline in value has occurred.  At such time as quoted market prices become available, the net cost basis of these securities will be reclassified to the appropriate category of marketable securities.  Until that time, the securities will be recorded at their net cost basis, subject to an impairment analysis (see below).

In accordance with the guidance of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, we assess any decline in value of available-for-sale securities and non-marketable securities below cost as to whether such decline is other than temporary.  If a decline is determined to be other than temporary, the decline is recorded as a reduction of the cost basis of the security and is included in the statement of operations as an impairment write down of the investment. 

ITEM 7 – FINANCIAL STATEMENTS

The financial statements required to be filed pursuant to this Item 7 begin on page F-1 of this Report.

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

Effective September 11, 2007, KMJ/Corbin and Company, LLP (“KMJ”) resigned as our independent registered public accounting firm for the fiscal year ended December 31, 2007.

We engaged KMJ on January 21, 2005.  For the last two fiscal years, KMJ’s reports on our financial statements did not contain an adverse opinion or a disclaimer of opinion, nor were the reports qualified or modified as to audit scope, or accounting principles, but they were modified as to uncertainty about our ability to continue as a going concern.  For the last two fiscal years and any subsequent interim period preceding the dismissal, there were no disagreements with KMJ on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of KMJ would have caused KMJ to make reference to the matter in their reports.

We engaged Weinberg & Company, P.A. (hereinafter “Weinberg”) as our principal accountants to audit our financial statements effective as of September 11, 2007.  Effective November 5, 2007, we dismissed Weinberg as our independent registered public accounting firm for the fiscal year ended December 31, 2007.  Weinberg never issued a report on our

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financial statements.  During their engagement, there were no disagreements with Weinberg on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Weinberg would have caused Weinberg to make reference to the matter in their reports.

We engaged Kabani & Company, Inc. (hereinafter “Kabani”) as our principal accountants to audit our financial statements effective as of November 5, 2007.  Effective March 13, 2008, we dismissed Kabani as our independent registered public accounting firm for the fiscal year ended December 31, 2008.  Kabani’s services were limited to a review of our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007.  During their engagement, there were no disagreements with Kabani on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Kabani would have caused Kabani to make reference to the matter in their reports.

We engaged Gruber & Co. LLC (hereinafter “Gruber”) as the principal accountants to audit our financial statements effective as of March 13, 2008.  We, during our most recent fiscal year and any subsequent interim period to the date hereof, did not have discussions nor have we consulted with Gruber regarding the following: (i) the application of accounting principles to a specified transaction, either completed or proposed or the type of audit opinion to be rendered on the our financial statements, and neither a written report was provided to us nor oral advice was provided that Gruber concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matters that were the subject of a “disagreement,” as that term is defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of Regulation S-B, or a reportable event.

ITEM 8A – CONTROLS AND PROCEDURES

Our President and Chief Financial Officer (the “Certifying Officers”) are responsible for establishing and maintaining our disclosure controls and procedures.  The Certifying Officers have designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared.  The Certifying Officers have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report.  Based on that evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles.  Accordingly, we believe that the consolidated financial statements included in this Report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 2) or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  The Certifying

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Officers have identified the following three material weaknesses which have caused the Certifying Officers to conclude that our disclosure controls and procedures were not effective at the reasonable assurance level:

1.       We do not yet have written documentation of our internal control policies and procedures.  Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act and will be applicable to us for the year ending December 31, 2008.  The Certifying Officers evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

2.       We do not have sufficient segregation of duties within accounting functions, which is a basic internal control.  Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.  The Certifying Officers evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

3.       We had a significant number of audit adjustments last fiscal year.  Audit adjustments are the result of a failure of the internal controls to prevent or detect misstatements of accounting information.  The failure could be due to inadequate design of the internal controls or to a misapplication or override of controls.  The Certifying Officers evaluated the impact of our significant number of audit adjustments last year and have concluded that the control deficiency that resulted represented a material weakness. 

On November 27, 2007, our the Certifying Officers concluded that in valuing previous periods’ non-cash security transactions, we utilized discounts to the respective share’s trading prices as well as its derivative liabilities which they have determined are without foundation.

As a result of this evaluation and conclusion, the Certifying Officers in conjunction with our Board of Directors concluded that previously issued consolidated financial statements included in our Annual Report on Form 10-KSB for the fiscal years ended December 31, 2005 and December 31, 2006, as well as all of our quarterly reports on Form 10-QSB during the 2005 and 2006 fiscal years, can no longer be relied upon.  In this regard, we will amend and restate our financial statements to eliminate all discounts and will refile our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006 and its Form 10-QSB for the quarters ended March 31, 2007 and June 30, 2007.  The net effect of the restatements will be to increase the accumulated deficit at June 30, 2007 from $100,909,477 to $292,944,478.

The Certifying Officers have discussed this matter with our current independent registered public accounting firm.

To remediate the material weaknesses in our disclosure controls and procedures identified above, in addition to working with our independent auditors, we have continued to refine our internal procedures to begin to implement segregation of duties and to reduce the number of audit adjustments.

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ITEM 8B – OTHER INFORMATION

None.

PART III

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

Directors and Executive Officers

The following table sets forth the names, positions, and ages of our current directors and executive officers. Our executive officers are appointed by the Board of Directors.  The directors serve one-year terms until their successors are elected.  The executive officers serve until their death, resignation or removal by the Board of Directors.  Unless described below, there are no family relationships among any of the directors and officers, and none of our officers or directors serves as a director of another reporting issuer.

Robert M. Bernstein, President, CEO, Chief Financial Officer, and Director.  Mr. Bernstein received a Bachelor of Science degree from the Wharton School of the University of Pennsylvania in 1956.  From August 1959 until his certification expired in August 1972, he was a Certified Public Accountant licensed in Pennsylvania.  From 1961 to 1981, he was a consultant specializing in mergers, acquisitions, and financing.  From 1981 to 1986, Mr. Bernstein was Chairman and Chief Executive Officer of Blue Jay Enterprises, Inc. of Philadelphia, Pennsylvania, an oil and gas exploration company.  In December 1985, Mr. Bernstein formed a research and development partnership for our company, funding approximately $750,000 for research on the Fatigue Fuse.  In October 1988, Mr. Bernstein became our President, CEO, and Chief Financial Officer.

Joel R. Freedman, Secretary and Director.  From October 1989 and continuing through the present, Mr. Freedmen has been our Secretary and a Director.  From 1983 through 1999, Mr. Freedmen was President of Genesis Advisors, Inc., an investment advisory firm in Bala Cynwyd, Pennsylvania.  From January 2000 through December 2002, Mr. Freedmen

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was a Senior Vice President of PMG Capital Corp., a securities brokerage and investment advisory firm in West Conshohocken, Pennsylvania.  From December 2002 and continuing through the present, Mr. Freedmen has been Senior Vice President of Wachovia Securities, LLC, a securities brokerage and investment advisory firm in Conshohocken, Pennsylvania.

Dr. William Berks, Vice President and Director.  Dr. Berks joined us as our Vice President and Director in June 1997.  Dr. Berks holds six patents and has over 30 years experience in spacecraft mechanical systems engineering.  Dr. Berks has a Bachelor of Science in Aeronautical Engineering and a Master of Science in Applied Mechanics from Polytechnic Institute of New York, as well as a Master of Science in Industrial Engineering from Stevens Institute of Technology.  Prior to joining us, Dr. Berks was with TRW Incorporated for 26 years in a variety of management positions, where his duties included flight hardware fabrication and testing and where he was responsible for overseeing 350 employees.

Marybeth Miceli, Chief Operating Officer.  Ms. Miceli has over 12 years experience in nondestructive evaluation and testing of civil infrastructure.  Ms. Miceli joined us as our Chief Operating Officer in July 2007.  From June 2005 through August 2007, Ms. Miceli was Director of Marketing for Sam Schwartz, LLC, Engineering and Planning Consultants, New York, in the areas of infrastructure management, non-destructive testing, and fatigue testing.  From January 2001 through May 2005, Ms. Miceli was with Lucius Pitkin, Inc., Engineering Consultants, where Ms. Miceli’s responsibilities included Quality Assurance Manager, and Assistant Radiation Safety Officer.  Among Ms. Miceli’s duties was the supervision and performance of failure analysis investigations, fatigue testing investigations, and interfacing with government agencies on testing, regulations, and safety.  Ms. Miceli is currently in the first year of a three year term serving as a director of the American Society of Non-destructive Testing, and Chairman in 2003 of the Metropolitan New York Chapter.  Ms. Miceli is a graduate of Johns Hopkins University and has a Master of Science in Materials Science and Engineering, from Virginia Polytechnic Institute.  Ms. Miceli is a member of the American Society of Metals and has published several papers on non-destructive testing of bridge components and other related subjects.

Brent M. Phares, Chief Engineer.  Dr. Phares has over 15 years of management, inspection, research, and testing experience related to bridge structures.  From October 2001 and continuing through the present, Dr. Phares has been the Associate Director for Bridges and Structures at Iowa State University.  In this position, Dr. Phares is responsible for the development and deployment of innovative bridge evaluation and techniques and for the development of applications for innovative materials in bridge engineering.  From June 2001 through October 2004, Dr. Phares served as President and CEO of MGPS, Inc., an engineering firm specializing in the evaluation of civil infrastructure based on innovative sensors and monitoring strategies.  Dr. Phares has served as a consulting Research Engineer at the Federal Highway Administration’s Nondestructive Evaluation Validation Center where he led the execution of several validation and developmental studies.  Dr. Phares is a registered professional engineer and serves as a voting member of many national and international technical committees.  Dr. Phares joined us in June 2007.

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Committees of the Board Of Directors

We presently do not have an audit committee, compensation committee, nominating committee, an executive committee of our board of directors, stock plan committee or any other committee of our board of directors.

Advisory Board

Since 1987, we and our predecessors have had an Advisory Board consisting of very senior experienced businessmen and technologists, most of whom are nationally prominent.  These individuals consult with us on an as needed basis.  Members of the Advisory Board serve at will.  The Advisory Board advises our management on technical, financial, and business matters and may in the future be additionally compensated for these services.  A brief biographical description of the members of the advisory board is as follows:

Campbell Laird. Campbell Laird, age 64, received his Ph.D. in 1963 from the University of Cambridge.  His Ph.D. thesis title was Studies of High Strain Fatigue.”  He is presently Professor and graduate group Chairman in the Department of Materials, Science & Engineering at the University of Pennsylvania.  His research has focused on the strength, structure, and fatigue of materials, in which areas he published in excess of 250 papers.  He is co-inventor of the EFS.

Samuel I. Schwartz. Samuel I. Schwartz, age 50, is presently President of Sam Schwartz Co., consulting engineers, primarily in the bridge industry.  Mr. Schwartz received his BS in Physics from Brooklyn College in 1969, and his Masters in Civil Engineering from the University of Pennsylvania in 1970.  From February 1986 to March 1990, he was the Chief Engineer/First Deputy Commissioner, New York City Department of Transportation and from April 1990 to the present acted as a director of the Infrastructure Institute at the Cooper Union College, New York City, New York.  From April 1990 to 1994 he was a Senior Vice President of Hayden Wegman Consulting Engineers, and is a columnist for the New York Daily News.

Nick Simionescu.  Mr. Simionescu joined HNTB in 1974, one of the largest consulting engineering companies in the world, and is currently Vice President, Director of Business Development in the New York City Office.  He has over 37 years of management, construction, design, inspection and detailing experience.  Mr. Simionescu is very familiar with the New York City infrastructure.  For nearly 28 years he has been working in New York City, primarily on projects with the New York City Department of Transportation and New York State Department of Transportation Regions 10 and 11.  His projects have included management of the inspections of the Williamsburg, Brooklyn, Triborough, Manhattan, and Queensboro bridges. Additionally, he has been the Project Manager of Bridge Inspection for many other arterial and local bridges throughout New York.  Mr. Simionescu’s responsibilities with HNTB have involved a variety of National and International projects.  He has been the Senior Structural Designer and Manager of bridges in South Carolina (800 ft. span), Rhode Island (366 ft. span), Malaysia (740 ft. span), and Florida (1300 ft. span).

Henryka Manes.  Ms. Manes is the founder and President of H. Manes & Associates, a consulting firm that enables environmental and high technology companies to export their products worldwide.  She has a wide-range of experience

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with projects in more than 20 countries in Asia, Africa, Eastern Europe and South America. Prior to founding HMA, Ms. Manes was Director of Operations for the American Jewish Joint Distribution Committee’s International Development Program and has worked with the World Bank, United States Agency for International Development, and the United Nations Development Program.  Ms. Manes received her B.A. from Macalester College in St. Paul, MN, and did her graduate work at the University of Minnesota, Minneapolis, MN.

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

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company.  Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. 

During the most recent fiscal year, to the Company’s knowledge, the following delinquencies occurred:

Code of Ethics

We have not adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  We have not adopted such a code of ethics because all of management's efforts have been directed to building the business of the company; at a later time, such a code of ethics may be adopted by the board of directors.

Terms of Office

Our directors are appointed for a one year term to hold office until the next annual general meeting of the holders of our Common Stock or until removed from office in accordance with our by-laws.  Our officers are appointed by our board of directors and hold office until removed by our board of directors.

On November 17, 2006, we entered into an indemnification agreement with each of our directors.  Under the terms of the indemnification agreements, we agreed to indemnify each director to the fullest extent permitted by law if the director was or is a party or threatened to be made a party to any action or lawsuit by reason of the fact that he is or was a director.  The indemnification shall cover all expenses, penalties, fines and amounts paid in settlement, including attorneys’ fees.  A director will not be indemnified for intentional misconduct for the primary purpose of his own personal benefit.

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ITEM 10 – EXECUTIVE COMPENSATION

Summary Compensation Table

Set forth below is a summary of compensation for our principal executive officer and our two most highly compensated officers other than our principal executive officer (collectively, the “named executive officers”) for our last two fiscal years. There have been no annuity, pension or retirement benefits ever paid to our officers, directors or employees.

With the exception of reimbursement of expenses incurred by our named executive officers during the scope of their employment and unless expressly stated otherwise in a footnote below, none of the named executive officers received other compensation, perquisites and/or personal benefits in excess of $10,000.

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)	Non- equity Incentive Plan Compensa- tion ($)	All Other Compensa- tion ($)	Total ($)
Robert M. Bernstein, CEO, President, CFO	2007	$250,000	$-0-	$-0-	$-0-	$-0-	$-0-	$250,000
	2006	$206,500	$-0-	$180,000,000	$-0-	$-0-	$-0-	$180,206,500
Marybeth Miceli Newton, COO	2007[1]	$250,000	$-0-	$-0-	$-0-	$-0-	$-0-	$250,000
Brent Phares, Chief Engineer	2007[2]	$225,000	$-0-	$-0-	$-0-	$-0-	$-0-	$225,000

Employment Agreements

On October 1, 2006, we entered into an Employment Agreement with Robert M. Bernstein, our Chief Executive Officer, President and Chief Financial Officer, which provides certain terms and conditions with respect to Mr. Bernstein’s employment.  The Employment Agreement is for a three year term.  Under the Employment Agreement, Mr. Bernstein will be paid an annual salary of $250,000, with one year of paid severance if he is terminated without good cause prior to the expiration of the employment term.
_______________________

---

Other Compensation

There are no annuity, pension or retirement benefits proposed to be paid to officers, directors, or employees of our company in the event of retirement at normal retirement date as there was no existing plan as of December 31, 2007 provided for or contributed to by our company.

Director Compensation

Our directors are not compensated for their services, but are entitled for reimbursement of expenses incurred in attending board of directors meetings.

Grants of Plan Based Awards

There were no grants of plan based awards made in 2007.

Outstanding Equity Awards at Fiscal Year-End

There were no outstanding equity awards as of December 31, 2007.

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

The following table sets forth certain information regarding our shares of outstanding common stock beneficially owned as of the date hereof by (i) each of our directors and executive officers, (ii) all directors and executive officers as a group, and (iii) each other person who is known by us to own beneficially more than 5% of our common stock based upon 192,288,844 shares of Class A common stock outstanding.

_______________________
^[1]  C/o our address, 11661 San Vicente Blvd., Suite 707, Los Angeles, CA 90049, unless otherwise noted.
^[2]   Except as otherwise indicated, we believe that the beneficial owners of common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.
^[3]  Each share of Class B common stock has 2,000 votes on any matter which is brought for shareholders vote.  As a result, Mr. Bernstein holds 1,200,000,000 votes represented by the Class B common stock, and 90.85% of the overall votes.

27

---

CFO, Chairman of the Board, and Director
Dr. William Berks, Vice President and Director	2,510,048	1.64%	0	0%
Joel R. Freedman, Secretary and Director	3,500,501	2.28%	0	0%
Marybeth Miceli, Chief Operating Officer	2,037,501	1.33%	0	0%
Brent Phares, Chief Engineer	3,303,334	2.16%	0	0%
All executive officers and directors as a group (five persons)	40,958,391	26.70%	600,000	100%
UTEK Corporation 2109 Palm Avenue Tampa, FL  33605	20,550,180	13.40%	0	0%

ITEM 12 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 13 – EXHIBITS

---

28

29

10.7	Agreement between Tensiodyne Corporation and Tensiodyne 1985-1 R&D Partnership[6]
10.8	Amendment to Agreement between Material Technologies, Inc. and Tensiodyne 1985-1 R&D Partnership[6]
10.9	Agreement between Advanced Technology Center of Southeastern Pennsylvania and Material Technologies[6]
10.10	Addendum to Agreement between Advanced Technology Center of Southeastern Pennsylvania and Material Technologies, Inc.[6]
10.11	Class A senior preferred convertible debenture of Material Technologies, Inc. issued to Palisades Capital, LLC[3]
10.12	Stock Purchase Agreement dated as of April 7, 2005 by and between Material Technologies, Inc. and Birchington Investments Ltd. [7]
10.13	Escrow Agreement by and between Material Technologies, Inc. and Birchington Investments Ltd dated as of April 7, 2005 [7]
10.14	Workout Agreement the with the Trustees of the University of Pennsylvania dated as of August 15, 2005 [7]
10.15	Securities Purchase Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc. dated December 16, 2005[8]
10.16	Convertible Debenture of Material Technologies, Inc. issued to Golden Gate Investors, Inc. dated December 16, 2005[8]
10.17	Common Stock Purchase Warrant of Material Technologies, Inc. issued to Golden Gate Investors, Inc. dated December 16, 2005[8]
10.18	Registration Rights Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc. dated December 16, 2005[8]
10.19	Letter Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc. dated December 16, 2005[8]

_______________________
^[6]  Incorporated by reference from our registration statement on Form S-1 which became effective on January 19, 1996.
^[7]  Incorporated by reference from our Quarterly Report on Form 10-QSB filed with the Commission on November 14, 2005.
^[8]  Incorporated by reference from our Current Report on Form 8-K/A filed with the Commission on January 5, 2006.

30

---

10.20	Letter Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc. dated December 16, 2005[8]
10.21	Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc. dated December 16, 2005[8]
10.22	Addendum to Convertible Debenture and Warrant to Purchase Common Stock by and between Material Technologies, Inc. and Golden Gate Investors, Inc. dated December 16, 2005[8]
10.23	Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement dated as of May 2, 2006 by and between Material Technologies, Inc. and Golden Gate Investors, Inc.[9]
10.24	Securities Purchase Agreement dated as of May 30, 2006 by and between Material Technologies, Inc. and La Jolla Cove Investors, Inc.[10]
10.25	Warrant to Purchase Common Stock of Material Technologies, Inc. issued to La Jolla Cove Investors, Inc. dated May 30, 2006[10]
10.26	Addendum to Warrant to Purchase Common Stock dated as of June 12, 2006 issued to La Jolla Cove Investors, Inc. [11]
10.27	Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement dated as of May 2, 2006[12]
10.28	Regulation S Distribution Agreement and Instruction of Escrow dated May 31, 2006[13]
10.29	Acquisition Agreement with UTEK Corporation and Materials Monitoring Technologies, Inc.[14]
10.30	License Agreement between Material Monitoring Technologies, Inc. and North Carolina A&T State University[14]
10.31	Consulting Agreement with Mannur J. Sundaresan, PhD[14]
10.32	Settlement Agreement and General Release dated August 23, 2006 with Ben

_______________________
^[9]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 17, 2006.
^[10]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on June 8, 2006
^[11]  Incorporated by reference from our Current Report on Form 8-K/A filed with the Commission on June 15, 2006.
^[12]  Incorporated by reference from our registration statement on Form SB-2 filed with the Commission on June 15, 2006.
^[13]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on June 9, 2006.
^[14]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on August 24, 2006.

31

---

	Franklin Technology Partners of Southeastern Pennsylvania[15]
10.33	Settlement Agreement and General Release dated October 27, 2006[16]
10.34	Warrant Agreement dated October 27, 2006 with Palisades Capital, LLC[16]
10.35	Warrant Agreement dated October 27, 2006 with Hyde Investments, Ltd. [16]
10.36	Warrant Agreement dated October 27, 2006 with Livingston Investments, Ltd.[16]
10.37	Warrant Agreement dated October 27, 2006 with Palisades Capital, LLC[16]
10.38	Warrant Agreement dated October 27, 2006 with GCH Capital, Ltd. [16]
10.39	Amendment to Class A Senior Secured Convertible Debenture dated October 27, 2006 with Palisades Capital, LLC[16]
10.40	Amendment to Class A Senior Secured Convertible Debenture dated October 27, 2006 with Hyde Investments, Ltd. [16]
10.41	Amendment to Class A Senior Secured Convertible Debenture dated October 27, 2006 with Livingston Investments, Ltd. [16]
10.42	Stockholder Lockup Agreement dated October 27, 2006 with Robert M. Bernstein[16]
10.43	Escrow Agreement dated October 27, 2006[16]
10.44	Employment Agreement with Robert M. Bernstein dated October 1, 2006[17]
10.45	Stock Grant and General Release Agreement with Robert M. Bernstein dated November 21, 2006[17]
10.46	Settlement Agreement and Release with Stephen F. Beck dated as of December 27, 2006[18]
10.47	Irrevocable Escrow Instructions with Stephen F. Beck dated as of December 27, 2006[18]

_______________________
^[15]  Incorporated by reference from our Quarterly Report on Form 10-QSB filed with the Commission on November 14, 2006.
^[16]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 2, 2006.
^[17]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 28, 2006.
^[18]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 3, 2007.

32

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10.48	Promissory Note dated March 30, 2007 with Nathan J. Esformes[19]
10.49	Acquisition Agreement with UTEK Corporation and Damage Assessment Technologies, Inc. dated May 3, 2007[20]
10.50	Acquisition Agreement with UTEK Corporation and Non-Destructive Assessment Technologies, Inc. dated June 28, 2007[21]
10.51	Agreement with Livingston Investments, Ltd. dated as of July 3, 2007
10.52	Amendment No. 2 to Class A Senior Secured Convertible Debenture dated October 11, 2007 with Palisades Capital, LLC
10.53	Acquisition Agreement with Brent Phares and Bridge Testing Concepts, Inc. dated September 28, 2007[22]
10.54	Amendment to Consulting Agreement with Strategic Advisors, Ltd. dated April 9, 2008
10.55	Consulting Agreement with Bud Shuster dated April 9, 2008
10.56	Consulting Agreement with Kelly Shuster dated April 9, 2008
10.57	Class A Common Stock Option Agreement with Bud Shuster dated April 9, 2008
10.58	Class A Common Stock Option Agreement with Kelly Shuster dated April 9, 2008
10.59	Class B Common Stock Option Agreement with Bud Shuster dated April 9, 2008
10.60	Class B Common Stock Option Agreement with Kelly Shuster dated April 9, 2008
23.1	Consent of Gruber & Company, LLC
31.1	Certification of Chief Executive Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

_______________________
^[19]  Incorporated by reference from our Annual Report on Form 10-KSB filed with the Commission on April 3, 2007.
^[20]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 4, 2007.
^[21]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 3, 2007.
^[22]  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on October 29, 2007.

33

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ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES.

KMJ/Corbin and Company, LLP, Weinberg & Company, P.A., and Kabani & Company, Inc. (the “Independent Auditors”) were each, at various times, our independent auditor and examined our financial statements for the years ended December 31, 2007 and 2006.  The Independent Auditors performed the services listed below and were as paid the aggregate fees listed below for the years ended December 31, 2007 and 2006. Our current auditors are Gruber & Company LLC who audited the financial statements enclosed for 2007, 2006 and inception to 2007. The fees billed were $80,000 for auditing work.

Audit Fees

The Independent Auditors were paid aggregate fees of approximately $40,000 for the fiscal year ended December 31, 2007 and approximately $106,750 for the fiscal year ended December 31, 2006 for professional services rendered for the audit of our annual financial statements and for the reviews of the financial statements included in our quarterly reports on Form 10-QSB during these periods.

Audit Related Fees

The Independent Auditors were not paid additional fees for either the year ended December 31, 2007 or the fiscal year ended December 31, 2006 for assurance and related services reasonably related to the performance of the audit or review of our financial statements.

Tax Fees

The Independent Auditors were not paid fees for the year ended December 31, 2007 or the fiscal year ended December 31, 2006 for professional services rendered for tax compliance, tax advice and tax planning during this fiscal year period.

All Other Fees

The Independent Auditors were not paid any other fees for professional services during the year ended December 31, 2007 or the fiscal year ended December 31, 2006.

34

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SIGNATURES

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

Dated: April 11, 2008                                                                 Material Technologies, Inc.


                                                                                                   /s/ Robert M. Bernstein                                         
                                                                                                   By: Robert M. Bernstein
                                                                                                   Its: Chief Executive Officer, President, and Chief
                                                                                                   Financial Officer
                                                                                                   (Principal Executive Officer, Principal Financial
                                                                                                   Officer and Principal Accounting Officer)

35

---

GRUBER & COMPANY LLC

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Material Technologies, Inc.

We have audited the accompanying balance sheet of Material Technologies, Inc.(A Development Stage Company) as of December 31, 2007 and 2006 and the related statements of operations, stockholders equity and cash flows for the years then ended and for the period of inception October 21, 1983 to December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company  as at December 31, 2007 and 2006 and the results of its’ operations and its’ stockholders equity and  cash flows for the years then ended and for the period of inception October 21, 1983 to December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in the notes to these financial statements the Company has incurred losses. This raises substantial doubt about its ability to continue as a going concern.  These financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Gruber & Company LLC

Gruber & Company LLC 
April 7, 2008

F-1

---

MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
				DECEMBER 31,
				2006			2007
				(Restated)
ASSETS
	Current assets:
		Cash and cash equivalents	$	129,296		$	809,710
		Investments in marketable securities held for trading		135,136			300,000
		Investment in certificate of deposits and commercial paper		-			1,009,267
		Accounts receivable		116,707			108,661
		Inventories		-			62,216
		Prepaid expenses and other current assets		40,006			47,692
		Total current assets		421,145			2,337,546
		Property and equipment, net		5,371			82,546
		Intangible assets, net		3,916			2,840
		Deposit		2,348			2,348
			$	432,780		$	2,425,280
				============			============

Continued . . .
F-2

---

MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
						December 31,
						2006			2007
						(Restated)
LIABILITIES AND STOCKHOLDERS'  DEFICIT
	Current liabilities:
		Accounts payable and accrued expenses			$	427,664		$	599,619
		Current portion of research and development sponsorship payable				25,000			25,000
		Notes payable				90,138			66,761
				Total current liabilities		542,802			691,380
	Accrued legal settlenent					1,050,000			480,000
	Research and development sponsorship payable, net of current portion					747,713			760,650
	Notes payable, long-term					-			213,508
	Convertible debentures and accrued interest payable, net of discount					169,160			1,981,194
	Derivative and warrant liabilities					44,476,540			30,571,217
						46,443,413			34,006,569
				Total liabilities		46,986,215			34,697,949
	Minority interest in consolidated subsidiary					825			825
	Commitments and contingencies
	Stockholders' deficit:
		Class A preferred stock, $0.001 par value, liquidation preference
			of  $720 per share; 350,000 shares authorized; 337 shares issued
			and outstanding as of December 31, 2006 and 2007			-			-
		Class B preferred stock, $0.001 par value, liquidation preference of
			$10,000 per share; 15 shares authorized;  none issued and
			outstanding as of December 31, 2006 and 2007			-			-
		Class C preferred stock, $0.001 par value, liquidation preference of
			$0.001 per share; 25,000,000 shares authorized; 1,517 shares issued
			and outstanding as of December 31, 2006 and 2007			1			1
		Class D preferred stock, $0.001 par value, liquidation preference of
			$0.001 per share; 20,000,000 shares authorized; 0 shares issued
			and outstanding as of December 31, 2006 and 2007			-			-
		Class E  convertible preferred stock, $0.001 par value, no liquidation
			preference; 60,000 shares authorized; 55,000 shares issued and
			outstanding as of December 31, 2007			-			55
		Class A Common Stock, $0.001 par value, 1,699,400,000 shares
			authorized; 99,785,276 shares issued and 72,425,587 shares
			outstanding as of December 31, 2006;  546,173,718 shares issued
			and 126,347,453 outstanding as of December 31, 2007			72,426			126,348
		Class B Common Stock, $0.001 par value, 600,000 shares authorized,
			issued and outstanding as of December 31, 2006 and 2007			600			600
		Warrants subscribed				10,000			10,000
		Additional paid-in-capital				193,188,217			301,348,331
		Deficit accumulated during the development stage				(239,811,823)			(313,208,402)
		Treasury stock ( 2,076 shares at cost at December 31,2006 and
			305 shares at cost at December 31, 2007)			(13,681)			(93,133)
				Total stockholders' deficit		(46,554,260)			(11,816,200)
					$	432,780		$	22,882,574
						============			============

See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-3

---

MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
						From October 21, 1983
		For the Year				(Inception)
		Ended				through
		2006		2007		December 31, 2007
		(Restated)
Revenues:
Research and development	$	-	$	-	$	5,392,085
Revenue from bridge testing		39,446		201,917		318,624
Other		-		-		274,125
Total revenues		39,446		201,917		5,984,834
Costs and expenses:
Research and development		1,013,969		3,701,966		20,562,989
General and administrative		138,781,403		98,557,943		303,495,241
Modification of research and development sponsorship     agreement		-		-		5,963,120
Loss on settlement of lawsuits		-		-		1,267,244
Total costs and expenses		139,795,372		102,259,909		331,288,594
Loss from operations		(139,755,926)		(102,057,992)		(325,303,760)
Other income (expense):
Gain on modification of convertible debt		1,033,479		-		586,245
Loss on subcription receivable						(1,368,555)
Interest expense		(1,625,592)		(2,374,032)		(11,740,193)
Other-than-temporary impairment of marketable
securities available for sale				-		(9,785,947)
Net unrealized and realized loss of marketable securities		(3,798,516)		(3,986,553)		(9,398,218)
Change in fair value of investments derivative liability		-		-		(210,953)
Change in fair value of derivative and warrant liabilities		(33,780,874)		34,962,617		43,587,089
Interest income		37,120		60,179		466,882
Other		7,008		-		(25,992)
Other expense, net		(38,127,375)		28,662,211		12,110,358
Loss before provision for income taxes		(177,883,301)		(73,395,781)		(313,193,402)
Provision for income taxes		(800)		(800)		(15,000)
Net loss	$	(177,884,101)	$	(73,396,581)	$	(313,208,402)
		============		============		===============
Per share data:
Basic and diluted net loss per share	$	(40.10)	$	(0.68)
		============		============
Weighted average Class A common shares
outstanding - basic and diluted		4,435,708		107,708,004
		============		============

See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-4

---

MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
							From October 21, 1983
			For the Year Ended				(Inception)
			September 30,				through
			2006		2007		September 30, 2007
			(Restated)		(Restated)		(Unaudited)
							(Restated)
Net loss		$	(177,884,101)	$	(73,396,581)	$	(313,208,402)
Other comprehensive loss:
	Temporary increase (decrease) in market
	value of securities available for sale		-				-
	Reclassification to other-than-temporary
	impairment of marketable securities
	available for sale		-		-		-
			-		-		-
Net comprehensive loss		$	(177,884,101)	$	(73,396,581)	$	(313,208,402)
			============		============		===============

See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-5

---

MATERIAL TECHNOLOGIES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))

Deficit

Accumulated

Class A Common

Class B Common

Class A Preferred Stock

Class B Preferred Stock

Class C Preferred Stock

Class D Preferred Stock

Class E Preferred Stock

Additional

During the

Shares

Shares

Shares

Shares

Shares

Shares

Shares

Paid-in

Development

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Capital

Stage

Initial Issuance of Common Stock
October 21, 1983	-	$	-		-	$	-		-	$	-		-	$	-		-	$	-		-	$	-		-	$	-		2,500	$	-
Adjustment to give effect
to recapitalization on
December 15, 1986
Cancellation of shares	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(4)		-
	-		-		-		-		-		-		-		-		-		-		-		-		-		-		2,496		-
Balance - October 21, 1983
Shares issued By Tensiodyne
Corporation in connection
with pooling of interests	-		-		-		-		-		-		-		-		-		-		-		-		-		-		4,342		-
Net (loss), year ended
December 31, 1983	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(4,317)
Balance December 31, 1983	-		-		-		-		-		-		-		-		-		-		-		-		-		-		6,838		(4,317)
Capital contribution	-		-		-		-		-		-		-		-		-		-		-		-		-		-		21,755		-
Issuance of common stock	-		-		-		-		-		-		-		-		-		-		-		-		-		-		10,700		-
Costs incurred in connection
with issuance of stock	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(2,849)		-
Net (loss), year ended
December 31, 1984	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(21,797)
Balance December 31, 1984	-		-		-		-		-		-		-		-		-		-		-		-		-		-		36,444		(26,114)
Capital contribution	-		-		-		-		-		-		-		-		-		-		-		-		-		-		200,555		-
Sale of 12,166 warrants at
$1.50 Per Warrant	-		-		-		-		-		-		-		-		-		-		-		-		-		-		18,250		-
Shares cancelled	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Net (loss), year ended
December 31, 1985	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(252,070)
Balance December 31, 1985	-		-		-		-		-		-		-		-		-		-		-		-		-		-		255,249		(278,184)
Net (Loss), Year Ended
December 31, 1986	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(10,365)
Balance December 31, 1986	-		-		-		-		-		-		-		-		-		-		-		-		-		-		255,249		(288,549)
Issuance of Common Stock upon
Exercise of Warrants	-		-		-		-		-		-		-		-		-		-		-		-		-		-		27,082		-
Net (Loss), Year Ended
December 31, 1987	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(45,389)
Balance December 31, 1987	-		-		-		-		-		-		-		-		-		-		-		-		-		-		282,331		(333,938)
Issuance of Common Stock
Sale of Stock	-		-		-		-		-		-		-		-		-		-		-		-		-		-		101,752		-
Services Rendered	-		-		-		-		-		-		-		-		-		-		-		-		-		-		70,600		-
Net (Loss), Year Ended
December 31, 1988	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(142,335)
Balance December 31, 1988	-		-		-		-		-		-		-		-		-		-		-		-		-		-		454,683		(476,273)
Issuance of Common Stock
Sale of Stock	-		-		-		-		-		-		-		-		-		-		-		-		-		-		2,000		-
Services Rendered	-		-		-		-		-		-		-		-		-		-		-		-		-		-		18,000		-
Net (Loss), Year Ended
December 31, 1989	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(31,945)
Balance December 31, 1989	-		-		-		-		-		-		-		-		-		-		-		-		-		-		474,683		(508,218)
Sale of Stock	-		-		-		-		-		-		-		-		-		-		-		-		-		-		59,250		-
Services Rendered	-		-		-		-		-		-		-		-		-		-		-		-		-		-		32,400		-
Net Income, Year Ended
December 31, 1990	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		133,894
Balance December 31, 1990	-		-		-		-		-		-		-		-		-		-		-		-		-		-		566,333		(374,324)
Issuance of Common Stock
Sale of Stock	-		-		-		-		350		-		-		-		-		-		-		-		-		-		273,686		-

See accompanying notes and independent accountants' report
F-6

---

MATERIAL TECHNOLOGIES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))

Deficit

Accumulated

Class A Common

Class B Common

Class A Preferred Stock

Class B Preferred Stock

Class C Preferred Stock

Class D Preferred Stock

Class E Preferred Stock

Additional

During the

Shares

Shares

Shares

Shares

Shares

Shares

Shares

Paid-in

Development

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Capital

Stage

Services Rendered	-		-		-		-		-		-		-		-		-		-		-		-		-		-		64,884		-
Conversion of Warrants	-		-																										-
Conversion of Stock	-		-		60,000		60		-		-		-		-		-		-		-		-		-		-		(6)		-
Net (Loss), Year Ended
December 31, 1991	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(346,316)
Balance December 31, 1991	-		-		60,000		60		350		-		-		-		-		-		-		-		-		-		904,897		(720,640)
Issuance of Common Stock
Sale of Stock	-		-		-		-		-		-		-		-		-		-		-		-		-		-		16,000		-
Services Rendered	-		-		-		-		-		-		-		-		-		-		-		-		-		-		15,520		-
Conversion of Warrants	-		-		-		-		-		-		-		-		-		-		-		-		-		-		15,000		-
Sale of Class B Stock	-		-		60,000		60		-		-		-		-		-		-		-		-		-		-		14,940		-
Issuance of Stock to
Unconsolidated Subsidiary	-		-		-		-		-		-		-		-		-		-		-		-		-		-		71,664		-
Conversion of Stock	-		-		(60,000)		(60)		-		-		-		-		-		-		-		-		-		-		6		-
Cancellation of Shares	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Net (Loss), Year Ended
December 31, 1992	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(154,986)
Balance December 31, 1992	-		-		60,000		60		350		-		-		-		-		-		-		-		-		-		1,038,027		(875,626)
Issuance of Common Stock
Licensing Agreement	-		-		-		-		-		-		-		-		-		-		-		-		-		-		6,250		-
Services Rendered	-		-		-		-		-		-		-		-		-		-		-		-		-		-		13,913		-
Warrant Conversion	-		-		-		-		-		-		-		-		-		-		-		-		-		-		304,999		-
Cancellation of Shares	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(7,569)		-
Net (Loss) for Year Ended
December 31, 1993	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(929,900)
Balance December 31, 1993	-		-		60,000		60		350		-		-		-		-		-		-		-		-		-		1,355,620		(1,805,526)
Adjustment to Give Effect
to Recapitalization on
February 1, 1994	-		-		-		-		-		-		-		-		-		-		-		-		-		-		385,424		-
Issuance of Shares for
Services Rendered	1		-		-		-		-		-		-		-		-		-		-		-		-		-		223		-
Sale of Stock	5		-		-		-		-		-		-		-		-		-		-		-		-		-		24,786		-
Issuance of Shares for
the Modification of Agreements	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Net (Loss) for the Year
Ended December 31, 1994	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(377,063)
Balance December 31, 1994	6		-		60,000		60		350		-		-		-		-		-		-		-		-		-		1,766,053		(2,182,589)
Issuance of Common Stock
in Consideration for
Modification of Agreement	1		-		-		-		-		-		-		-		-		-		-		-		-		-		153		-
Net (Loss) for the Year
Ended December 31, 1995	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(197,546)
Balance December 31, 1995	6		-		60,000		60		350		-		-		-		-		-		-		-		-		-		1,766,206		(2,380,135)
Issuance of Shares for
Services Rendered	1		-		-		-		-		-		-		-		-		-		-		-		-		-		16,466		-
Sale of Stock	-		-		-		-		-		-		-		-		-		-		-		-		-		-		174,040		-
Issuance of Shares for
the Modification of Agreements	1		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Cancellation of Shares Held
in Treasury	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(154,600)		-
Net (Loss) for the Year
Ended December 31, 1996	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(450,734)
Balance December 31, 1996	8		-		60,000		60		350		-		-		-		-		-		-		-		-		-		1,802,112		(2,830,869)
Sale of Stock	-		-		-		-		-		-		-		-		-		-		-		-		-		-		100,000		-
Conversion of Indebtedness	3		-		-		-		-		-		-		-		-		-		-		-		-		-		166,000		-
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer	5		-		-		-		-		-		-		-		-		-		-		-		-		-		372,000		-
Issuance of Shares for

See accompanying notes and independent accountants' report
F-7

---

MATERIAL TECHNOLOGIES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))

Deficit

Accumulated

Class A Common

Class B Common

Class A Preferred Stock

Class B Preferred Stock

Class C Preferred Stock

Class D Preferred Stock

Class E Preferred Stock

Additional

During the

Shares

Shares

Shares

Shares

Shares

Shares

Shares

Paid-in

Development

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Capital

Stage

Services Rendered	1		-		-		-		-		-		-		-		-		-		-		-		-		-		2,471		-
Adjustment to Give Effect
to Recapitalization on
9-Mar-97	2		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Net (Loss) for the Year
Ended December 31, 1997	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(133,578)
Balance December 31, 1997	18		-		60,000		60		350		-		-		-		-		-		-		-		-		-		2,442,583		(2,964,447)
Shares Issued in Cancellation
of Indebtedness	8		-		-		-		-		-		-		-		-		-		-		-		-		-		170,000		-
Conversion of Options	2		-		-		-		-		-		-		-		-		-		-		-		-		-		125,000		-
Issuance of Shares for
Services Rendered	4		-		-		-		-		-		-		-		-		-		-		-		-		-		112,162		-
Shares Issued in Cancellation
of Redeemable Preferred Stock	-		-		-		-		-		-		-		-		-		-		-		-		-		-		150,000		-
Shares Returned to Treasury
and Cancelled	(2)		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Modification  of Royalty
Agreement	2		-		-		-		-		-		-		-		-		-		-		-		-		-		7,332		-
Issuance of Warrants to Officer	-		-		-		-		-		-		-		-		-		-		-		-		-		-		27,567		-
Net (Loss) for the Year
Ended December 31, 1998	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(549,187)
Balance December 31, 1998	32		-		60,000		60		350		-		-		-		-		-		-		-		-		-		3,034,644		(3,513,634)
Shares Issued in Cancellation
of Indebtedness	7		-		-		-		-		-		-		-		-		-		-		-		-		-		166,667		-
Issuance of Shares for
Services Rendered	4		-		-		-		-		-		-		-		-		-		-		-		-		-		95,099		-
Shares Issued in Modification
of Licensing Agreement	2		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Sale of Stock	1		-		-		-		-		-		-		-		-		-		-		-		-		-		173,540		-
Net (Loss) for the Year
Ended December 31, 1999	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(539,283)
Balance December 31, 1999	47		-		60,000		60		350		-		-		-		-		-		-		-		-		-		3,469,950		(4,052,917)
Issuance of Shares for
Services Rendered - as restated	2		-		-		-		-		-		-		-		-		-		-		-		-		-		824,516		-
Shares Issued to Investors
Pursuant to Settlement
Agreement	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Shares Issued for Cash and
Non-Recourse Promissory Notes	17		-		-		-		-		-		-		-		-		-		-		-		-		-		1,995,000		-
Shares Issued for Cash	1		-		-		-		-		-		-		-		-		-		-		-		-		-		281,694		-
Shares Issued in Cancellation
of Indebtedness	-		-		-		-		-		-		-		-		-		-		-		-		-		-		100,000		-
Shares Issued as Compensation
Pursuant to Escrow Agreement	14		-		-		-		-		-		-		-		-		-		-		-		-		-		4,184		-
Shares Returned from Escrow	(1)		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Common Shares Converted
into Class B Common	-		-		40,000		40		-		-		-		-		-		-		-		-		-		-		(40)		-
Preferred Shares Converted
into Common	-		-		-		-		(13)		-		-		-		-		-		-		-		-		-		-
Net (Loss) for the Year																													-		-
Ended December 31, 2000	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(1,199,695)
Balance December 31, 2000	80		-		100,000		100		337		-		-		-		-		-		-		-		-		-		6,675,304		(5,252,612)
Issuance of Shares for
Services Rendered	21		-		-		-		-		-		-		-		-		-		-		-		-		-		804,336		-
Shares Issued for Cash	16		-		-		-		-		-		-		-		-		-		-		-		-		-		286,567		-
Shares Issued in Connection
with Private Offering	2		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Shares Issued to Officer	20		-		-		-		-		-		-		-		-		-		-		-		-		-		1,128,000		-
Net (Loss) for the Year
Ended December 31, 2001	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(3,548,559)
Balance December 31, 2001	140		-		100,000		100		337		-		-		-		-		-		-		-		-		-		8,894,207		(8,801,171)
Issuance of  Shares for
Services Rendered	73		-		-		-		-		-		-		-		-		-		-		-		-		-		1,185,631		-
Issuance of  Shares to

See accompanying notes and independent accountants' report
F-8

---

MATERIAL TECHNOLOGIES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))

Deficit

Accumulated

Class A Common

Class B Common

Class A Preferred Stock

Class B Preferred Stock

Class C Preferred Stock

Class D Preferred Stock

Class E Preferred Stock

Additional

During the

Shares

Shares

Shares

Shares

Shares

Shares

Shares

Paid-in

Development

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Capital

Stage

University of Pennsylvania	4		-																										-		-
Shares issued in settlement
of lawsuit	5		-		-		-		-		-		-		-		-		-		-		-		-		-		40,000		-
Shares Issued for Cash	93		-		-		-		-		-		143		-		-		-		-		-		-		-		1,153,736		-
Offering costs					-		-		-		-		-		-		-		-		-		-		-		-		(200,412)		-
Shares issued in cancellation of
President's interest in patents	-		-		200,000		200		-		-		-		-		-		-		-		-		-		-		-		-
Cancellation of shares in stock grant	(4)		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Shares issued to Company's president
for past compensation	43		-		-		-		-		-		-		-		-		-		-		-		-		-		260,000		-
Shares Issued in Connection
with Private Offering	9		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Net (Loss) for the Year
Ended December 31, 2002	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(3,852,296)
Balance - December 31, 2002	362		-		300,000		300		337		-		-		-		143		-		-		-		-		-		11,333,162		(12,653,467)
Issuance of  Shares for
Services Rendered	25,934		26		-		-		-		-		-		-		-		-		-		-		-		-		484,308		-
Issuance of  Shares to
University of Pennsylvania	14		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Shares purchased for cancellation	(4)		-		-		-		-		-		-		-		-		-		-		-		-		-		(24,432)		-
Shares issued in settlement
of lawsuit	1		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Shares issued for cash	113		-		-		-		-		-		-		-		4,074		4		-		-		-		-		235,194		-
Offering costs	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(81,975)		-
Shares issued in cancellation of
legal fee note payable	73,333		73		-		-		-		-		-		-		-		-		-		-		-		-		1,583,054		-
Shares issued to Company's president
for past compensation	106,667		107		-		-		-		-		-		-		-		-		-		-		-		-		319,893		-
Shares issued to Company's president
in consideration for note
receivable	16,667		17		-		-		-		-		-		-		-		-		-		-		-		-		49,983		-
Officer's compensation relating to
cancellation of Oct. 27, 2000
escrow agreement	-		-		-		-		-		-		-		-		-		-		-		-		-		-		19,617		-
Shares issued in cancellation of
indebtedness due on legal fees	3		-																										10,000		-
Shares returned to treasury by
Company officers in consideration
for the cancellation of  notes
due the Company by them on
past stock purchases	(17)		-		-		-		-		-		-		-		-		-		-		-		-		-		(769,823)		-
Exchange of Class A Common
stock for Class B Common	(1)		-		300,000		300																						(300)		-
Exchange of Class A Common
stock for Class D Preferred	(24,800)		(25)		-		-		-		-		-		-		-		-		5,440,000		5,440		-		-		(5,415)		-
Shares Issued in Connection
with Private Offering	23,355		23		-		-		-		-		-		-		-		-		-		-		-		-		(23)		-
Adjustment for equity in
uncosolidated subsidiary	-		-		-		-		-		-		-		-		-		-		-		-		-		-		37,597		-
Net (Loss) for the Year
Ended December 31, 2003	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(1,885,728)
Balance - December 31, 2003	221,628	$	221		600,000	$	600		337	$	-		-	$	-		4,217	$	4		5,440,000	$	5,440		-	$	-		13,190,840	$	(14,539,195)
Issuance of  shares for
services rendered	22,406		22		-		-		-		-		-		-		-		-		-		-		-		-		14,252,173		-
Shares purchased and canceled	(4)		-																										(4,167)		-
Issuance of shares for cancelation of
legal and accounting fees payable	250		-		-		-		-		-		-		-		-		-		-		-		-		-		64,467		-
Exercise of Warrants	11		-		-		-		-		-		-		-		-		-		-		-		-		-		4,550
Shares issued in exchange for shares
in Langely Park Investments PLC	28,889		29		-		-		-		-		-		-		-		-		-		-		-		-		12,973,484		-
Benificial conversion feature
of convertible debenture	-		-		-		-		-		-		-		-		-		-		-				-				1,125,000
Shares issued for cash	4,025		4		-		-		-		-		-		-		-		-		-		-		-		-		207,471		-
Offering costs	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(13,713)		-
Exchange of Class A Common
shares for Class C Preferred shares	9		-		-		-		-		-		-		-		(2,700)		(3)		-		-		-		-		3		-
Exchange of Class A Common
shares for Class D Preferred shares	11,733		12		-		-		-		-		-		-		-		-		(3,520,000)		(3,520)		-		-		3,508		-

See accompanying notes and independent accountants' report
F-9

---

MATERIAL TECHNOLOGIES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))

Deficit

Accumulated

Class A Common

Class B Common

Class A Preferred Stock

Class B Preferred Stock

Class C Preferred Stock

Class D Preferred Stock

Class E Preferred Stock

Additional

During the

Shares

Shares

Shares

Shares

Shares

Shares

Shares

Paid-in

Development

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Outstanding

Amount

Capital

Stage

Net (loss) for the year
ended December 31, 2004	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(25,495,291)
Balance - December 31, 2004	288,947		288		600,000	$	600		337		-		-		-		1,517		1		1,920,000		1,920		-		-		41,803,616		(40,034,486)
Issuance of  shares for
services rendered	111,913		112		-		-		-		-		-		-		-		-		-		-		-		-		4,105,322		-
Exercise of Options	333		-		-		-		-		-		-		-		-		-		-		-		-		-		2,100		-
Shares issued in exchange for shares			-		-		-		-		-		-		-		-		-		-		-		-		-				-
in Birchington Investments PLC	39,500		40		-		-		-		-		-		-		-		-		-		-		-		-		3,582,560		-
Shares issued to University of
Pennslvaniapursuant to
agreement modification	15,173		15		-		-		-		-		-		-		-		-		-		-		-		-		5,963,105		-
Shares issued in connection with
Birchington stock acquisition	3,950		4		-		-		-		-		-		-		-		-		-		-		-		-		(4)		-
Shares issued for cash	7,329		7		-		-		-		-		-		-		-		-		-		-		-		-		313,132		-
Offering costs	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(19,140)		-
Shares issued on conversion of																															-
Class D Preferred Shares	1,667		2		-		-		-		-		-		-		-		-		(500,000)		(500)		-		-		-
Elimination of discount on con-
verted Class D Preferred Shares	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(1,125,000)		-
Net (loss) for the year
ended December 31, 2005	-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		(21,893,236)
	468,813		468	$	600,000	$	600	$	337	$	-	$	-	$	-	$	1,517	$	1	$	1,420,000	$	1,420		-	$	-		54,625,691	$	(61,927,722)
Issuance of  shares for
services rendered	35,199,295		35,200		-		-		-		-		-		-		-		-		-		-		-		-		126,163,933		-
Shares issued in exchange for Notes	21,500		22		-		-		-		-		-		-		-		-		-		-		-		-		257,978		-
Shares issued Beck settlement	3,416		3		-		-		-		-		-		-		-		-		-		-		-		-		173,063		-
Shares issued in cancellation of
royalty obligation	3,333		3		-		-		-		-		-		-		-		-		-		-		-		-		39,997		-
Shares issued in cancellation of
indebtedness	208,333		208		-		-		-		-		-		-		-		-		-		-		-		-		119,792		-
Shares issued for cash	49,689		50		-		-		-		-		-		-		-		-		-		-		-		-		379,646		-
Shares subscribed	83,333		83		-		-		-		-		-		-		-		-		-		-		-		-		1,649,517
Shares returned in cancellation
of note payable	(6,300)		(6)		-		-		-		-		-		-		-		-		-		-		-		-		(62,575)
Shares issued in connection with
various private offerings	19,693		20		-		-		-		-		-		-		-		-		-		-		-		-		384,796
Offering costs	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(410,952)		-
Shares issued  for Class D
Preferred shares	4,733		5		-		-		-		-		-		-		-		-		(1,420,000)		(1,420)		-		-		1,415		-
Shares purchased for cancellation	(929)		(1)		-		-		-		-		-		-		-		-		-		-		-		-		(45,642)		-
Shares issued in acquisition of
Monitoring	119,164		119		-		-		-		-		-		-		-		-		-		-		-		-		2,502,326		-
Shares issued to Utek per agreement	6,245,664		6,246		-		-		-		-		-		-		-		-		-		-		-		-		(6,246)		-
Shares issued to Birchington
per agreement	5,850		6		-		-		-		-		-		-		-		-		-		-		-		-		(6)
Shares issued to Officer pursuant to
settlement and employment
agreement	30,000,000		30,000		-		-		-		-		-		-		-		-		-		-		-		-		(30,000)
Recognized officer's stock based
compensation	-		-		-		-		-		-		-		-		-		-		-		-		-		-		6,575,342
Benificial conversion feature
of convertible debenture	-		-		-		-		-		-		-		-		-		-		-		-		-		-		450,697
Recognized derivative liability	-		-		-		-		-		-		-		-		-		-		-		-		-		-		419,445
Net (loss) for the year					-		-		-		-		-		-		-		-		-		-		-		-		-
ended December 31, 2006			-		-		-		-		-		-		-		-		-		-		-		-		-		-		(177,884,101)
	72,425,587		72,426		600,000		600		337		-		-		-		1,517		1		-		-		-		-		193,188,217		(239,811,823)
Shares issued for cash	12,686,300		12,686		-		-		-		-		-		-		-		-		-		-		-		-		8,712,410		-
Preferred shares issued in acquisition
of subsidiaries	-		-		-		-		-		-		-		-		-		-		-		-		55,000		55		1,072,445
Common shares issued in acqusistion
of subsidiaries	15,412,500		15,413		-		-		-		-		-		-		-		-		-		-		-		-		18,866,963
Common shares issued in purchase of
shares in Rocket City Automotive	10,000,000		10,000		-		-		-		-		-		-		-		-		-		-		-		-		13,822,000
Shares issued in connection with
various private offerings	1,570,000		1,570		-		-		-		-		-		-		-		-		-		-		-		-		1,812,641
Shares issued pursuant to anti-
dilution provisions	2,583,456		2,583		-		-		-		-		-		-		-		-		-		-		-		-		(2,583)
Shares cancelled and returned to
treasury	(418,114)		(418)		-		-		-		-		-		-		-		-		-		-		-		-		418
Shares issued for services	12,037,724		12,038		-		-		-		-		-		-		-		-		-		-		-		-		16,183,251
Shares returned in cancellation of
note payable	10,050,000		10,050		-		-		-		-		-		-		-		-		-		-		-		-		994,950
Offering costs	-		-		-		-		-		-		-		-		-		-		-		-		-		-		(6,861,793)
Reduction on contigient liability
on settlement	-		-		-		-		-		-		-		-		-		-		-		-		-		-		501,412
Return of shares in recission of
purchase of Rocket City
Automotive shares	(10,000,000)		(10,000)		-		-		-		-		-		-		-		-		-		-		-		-		(6,990,000)
Recognized officer's stock based
compensation	-		-		-		-		-		-		-		-		-		-		-		-		-		-		60,048,000
	126,347,453	$	126,348		600,000	$	600		337	$	-		-	$	-		1,517	$	1		-	$	-		55,000	$	55	$	301,348,331
	=======		=====		=======		=====		========		=====		========		=====		========		=====		========		=====		========		=====		=======		==========

See accompanying notes and independent accountants' report
F-10

---

MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
								From October 21, 1983
				For the Year  Ended				(Inception)
				December				through
				2006		2007		December 31, 2007
				(Restated)
Cash flows from operating activities:
Net loss			$	(177,884,101)	$	(73,396,581)	$	(313,208,402)
Adjustments to reconcile net loss to net cash used in
in operating activities:
	Gain on modification of convertible debt			(1,033,479)		-		(586,245)
	Impairment loss			1,913,445		19,257,375		21,391,528
	Loss on charge off of subscription receivables			1,346,010				1,368,555
	Issuance of common stock for services			126,199,122		16,195,289		206,484,840
	Increase in debt for services and fees			462,826		3,993,799		4,456,625
	Officer's stock based compensation			6,575,342		60,000,000		66,575,342
	Issuance of common stock for modification of
	research and development sponsorship agreement					-		7,738,400
	Change in fair value of derivative and warrant liabilities					(34,962,617)		(41,351,889)
	Net realized and unrealized loss on marketable securities			3,798,516		3,986,200		7,895,705
	Other-than-temporary impairment of marketable
	securities available for sale			-				9,785,946
	Legal fees incurred for note payable							1,456,142
	Accrued interest expense added to principal			615,988		328,891		1,495,005
	Amortization of discount on convertible debentures			968,716		2,041,213		10,106,277
	Change in fair value of investments derivative liability			33,780,874		-		3,223,323
	Accrued interest income added to principal			(22,559)		(1,177)		(304,998)
	Depreciation and amortization			8,219		7,581		227,784
	Other non-cash adjustments			66,341		-		(114,730)
	(Increase) decrease in trade receivables			(45,883)		8,046		(158,989)
	(Increase) decrease in inventories			-		(62,216)		(62,216)
	(Increase) decrease in prepaid expenses and other							-
	current assets			273,591		9,225		242,573
	Increase in deposits							(2,348)
	(Decrease) increase in accounts payable and accrued							-
	expenses			1,197,776		(69,658)		2,508,896
		Net cash used in operating activities		(1,779,256)		(2,664,630)		(10,832,876)
Cash flows from investing activities:
Proceeds from the sale of marketable securities				242,506		137,174		3,458,476
Purchase of marketable securities				(7,307)		(302,038)		(2,206,379)
Investment in certificate of deposits and commerical paper				-		(1,400,000)		(1,400,000)
Redemptions of certificate of deposits and commercial paper				-		400,000		400,000
Payment received on officer loans				(5,000)		-		876,255
Funds advanced to officers				-		-		(549,379)
Proceeds received in acquisition of consolidated subsidiaries						600,000		600,000
Purchase of property and equipment				(2,827)		(83,679)		(356,252)
Investment in joint ventures				-		-		(102,069)
Proceeds from foreclosure				-		-		44,450
Proceeds from the sale of property and equipment				9,000		-		19,250
Payment for license agreement				-		-		(6,250)
		Net cash provided by investing activities		236,372		(648,543)		778,102

Continued . . .
F-11

---

MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
						From October 21, 1983
		For the Year  Ended				(Inception)
		December				through
		2006		2007		December 31, 2007
		(Restated)
Cash flow from financing activities:
Proceeds from the sale of  common stock and warrants	$	1,680,553	$	4,566,631	$	9,445,953
Proceeds from convertible debentures and other
notes payable		50,000		200,000		2,047,766
Proceeds from the sale of preferred stock		-		-		473,005
Costs incurred in offerings		(22,530)		(643,591)		(1,130,932)
Capital contributions		-		-		301,068
Purchase of treasury stock		(33,188)		(79,452)		(167,375)
Principal reduction on notes payable		(50,000)		(50,000)		(100,000)
Payment on proposed reorganization		-		-		(5,000)
Net cash provided by financing activities		1,624,835		3,993,588		10,864,485
Net change in cash and cash equivalents		81,951		680,415		809,711
Cash and cash equivalents, beginning of period		47,345		129,296		-
Cash and cash equivalents, end of period	$	129,296	$	809,711	$	809,711
		===========		===========		===============
Supplemental disclosure of cash flow information:
Interest paid during the period	$	2,669	$	3,838
		===========		===========
Income taxes paid during the period	$	800	$	800
		===========		===========
Supplemental disclosures of non-cash investing and financing activities:
2007
During the year ended December 31, 2007, the Company issued 12,037,724 shares of its Class A common stock
for consulting  and other services valued at $16,195,289. Included in the 12,037,724 shares issued, 2,970,000 shares were
issued to current officers of the company which were valued at $4,398,500.
During 2007, the Company received $1,000,000 in consideration of issuing 2,500,000 units.
Each unit consists of one share of the Company's Class A common stock and a warrant to purchase
one share of the Company's common stock at a price of $.60 per share. In connection with the private offering
the Company paid $239,065 in fees and issued warrants to purchase 2,118,334 shares of the Company's
common stock at a price of $.60 per share. In other private offerings, the Company received $1,634,154
through the issuance of 5,686,300 shares of common stock and warrants. Also during 2007,
4,500,000 of common stock were issued through the exercise of the 4,500,000 warrants. Through the exercise
of the warrants, the Company received $2,171,542 net of $528,458 in closing costs.
In connection with the above indicated private offering and related exercise of the warrants, the Company issued
1,570,000 shares of its Class A common stock. The 1,570,000 shares were valued at $1,814,213 and charged against the
proceeds received.
During 2007, the Company issued 50,000 shares its Class E Series convertible preferred stock
in exchange for recieiving all of the outstanding shares of Stress Analysis Technologies, Inc.  ("SATI").
The Company valued the acquisition at $975,000 and charged off $875,000 as it deemed the intangible
assets acquired  to be fully impaired. In connection with this transaction, the Company issued an additional
5,000 preferred shares valued at $97,500 for fees in connection with the purchase. The $97,500 was
charged to equity.
During 2007, the Company issued 13,912,500 shares of its common stock in the acquisition of two subsidiaries.
The assets acquired included $500,000 cash and licenses originally valued at $18,380,875. The Company
charged off the full costs assigned to the licenses as being impaired.

See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-12

---

During 2007, the Company issued 10,000,000 shares of its common stock in exchange for 3,000,000 shares in
a company whose shares are traded on the OTC pink sheets). The Company valued the shares received
at $10,986,000. In October 2007, the Company and the other party to the share exchange decided to return
the shares received. The Company received the 10,000,000 shares it orignally issued and cancelled them.
The Company recognized a loss of $3,986,000 which was charged to operations on the return of the shares.
During 2007, the Company issued 10,800,000 shares in escrow pursuant to an agreement it has with its convertible debenture
holders. During 2007, 10,050,000 shares of Class A common stock were issued  to certain debenture holders in the conversion
of $1,005,000 of indebtedness. In addition, for services rendered by certain debenture holders, the amount due on the
debentures was increased by $1,100,000.
During 2007, the Company received 418,114 shares of prior issued common stock which was subsequently cancelled.
During 2007, the Company acquired all of the outstanding shares of Bridge Concept Inc; a corporation wholy owned by its
chief engineer. In consideration for the shares received in Bridge, the Company issued 1,500,000 of its common stock and
$37,500 which was paid inOctober 2007. The Company treated the acqusition as a related party transaction and valued the
entire acquisition at $39,000. The $39,000 was assigned to the intellectual property of Bridge which was charged off to operations as being impaired.
During 2007, the Company issued 2,583,456 shares of its common stock pursuant to anti-dilution provisions in two
agreements.
2006
In November 2006, the Company authorized a 1 for 300 reverse stock split. All issuances of shares have been restated to reflect
the impact of reverse stock split.
During 2006, the Company issued 35,190,742  shares of its Class A common stock for consulting services valued at $126,199,125.
During 2006, the Company issued 3,416 shares of its Class A common stock in connection with a  legal settlement. The shares
were valued at $173,066.
During 2006. the Company issued 4,733 shares of its Class A common stock through the conversion of 1,420,000 shares of
Class D preferred stock.
In 2006, the Company issued 12,000,0000 Class A common shares in connection with a proposed financing. In addition,
10,000,000 shares were placed in escrow pursuant ot the Beck Settlement agreement. In addiiton, the Company issued
40,000,000 shares to  current shareholders for services rendered, of the 40,000,000 shares, 5,358,689 shares were not issued,
but held by the Company at December 31, 2006. These 27,358,689 share are considered issued, but not outstading as of December 31, 2006.
During 2006, the Company issued 229,833 shares in exchange for the cancellation for $378,000 of indebtedness.
During 2006, the Company issued 3,333 shares of its common stock in exchange for the cancellation of  its obligation to
pay royalties on future sales to Advances Technology Center (see Note 10). The 3,333 shares were valued at $40,000.
During 2006, the Company agreed to increase an obligation to the debtholder from $1,331,860 to $2,000,000.
The increase in the amount due pertained to services rendered by the debt holder and for other consideration
and was charged to interest expense during the period.
During 2006, the Company recorded a debt discount related to the beneficial conversion feature of a convertible debt
issued in the amount of $450,697.
During 2006, the Company issued 119,164 shares, of common stock for $500,000 in cash and licensed technology valued at
$1,913,445. The Company deemed the technology received impaired and charged off the $1,913,445 to operations in 2006.
During 2006, the Company issued 19,693 shares of its common stock in conection with various offerings. The 19,693 shares
were valued at $418,812 which was charged against the proceeds received.
During 2006, the Company purchased 929 shares of its common stock for $45,643.
During 2006, certain shareholders returned to the Company 12,967  shares of common stock which were subsequently
canceled.

See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-13

---

During 2006, the Company issued 6,245,664 shares pursuant to antidilution provisions of various agreements.
During 2006, the Company issued 5,850 shares to Birchington pursuant to the downside price protection
provision of the exchange agreement.
During 2006, the Company issued 30,000,000 shares of its common stock to its President pursuant to an
employment agreement. The shares vest over a three year period. For the year ended December 31, 2006,
$6,575,342 was recognized as compenastion and charged to operations.

See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-14

---