Form 10-K for Material Technologies Inc

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

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

                  For the fiscal year ended December 31, 2002

                       Commission file number - 33-23617

                           MATERIAL TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

               Delaware                                95-4622822
      State or other jurisdiction of               (I.R.S. Employer
      incorporation or organization                Identification No.)

                  Suite 707, 11661 San Vicente Boulevard,
                       Los Angeles, California            90049
              (Address of principal executive offices)   (Zip Code)

       Registrant's telephone number, including area code (310) 208-5589

          Securities Registered pursuant to Section 12(b) of the Act:

     Title of each class              Name of each exchange on which registered
            None

           Securities Registered pursuant to section 12(g) of the Act:
                                  Common Stock
                                (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.                       Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.                               [ ]

     State the aggregate market value of the voting stock and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common equity
as of a specified date within the past 60 days. (See definition of affiliate in
Rule 12b-2 of the Exchange Act.)

     The aggregate market value of the common stock held by non-affiliates of
the registrant as of March 20, 2003, was $1,301,361 based on the average of the
bid and asked prices of $.015 as reported by the Over The Counter Electronic
Bulletin Board on such date.


                                       1



     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the last practicable date.

     As of March 20, 2003, there were  117,928,688 shares of common stock, $.001
par value issued and outstanding. In addition, At March 20, 2003, the Company
held in reserve 101,342,800 shares of which 100,000,000 shares were held
pursuant to the terms of the Company's Straight Documentary Credit (See Note 8i
to the accompanying financial statements) and 1,342,800 shares were held in
reserve pursuant to the terms of the settlement with a consultant (see Note 8j
of the financial statements.)

     As of March 20, 2003, there were 300,000 shares of Class B Common Stock,
$.001 par value issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     List hereunder the following documents incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).

     There is no annual report, proxy statement, or prospectus to incorporate by
reference.

     The S-1 Registration Statement for Material Technologies, Inc., effective
July 31, 1997 with exhibits is incorporated by reference. The SB-2 Registration
Statement and related amendment filed on February 7, 2002, for Material
Technologies, Inc., with exhibits is also incorporated by reference, as is the
SB-2 Registration Statement filed by the Company on August 8, 2002, with
exhibits and as amended thereafter.


                                     PART I
                           MATERIAL TECHNOLOGIES, INC.

ITEM 1.-BUSINESS

     We are engaged in research and development of metal fatigue detection,
measurement, and monitoring technologies. As such, we are developing a
comprehensive system of monitoring devices for metal fatigue measurement. We are
a development stage company doing business as Tensiodyne Scientific Corporation.

     Our efforts are dedicated to developing devices and systems that indicate
the true fatigue status of a metal component. We have developed two products,
with a third product now under development. The first is a small, extremely
simple device that continuously integrates the effect of fatigue loading in a
structural member, called a Fatigue Fuse. The second an instrument that detects
very small cracks and is intended to determine crack growth rates, is the
Electrochemical Fatigue Sensor. It has demonstrated that it can detect cracks,
in the laboratory, as small as 10 microns (0.0004 inches), which is smaller than
any other practical technologies, as acknowledged by the United States Air Force
and confirmed by Rockwell Scientific Corporation. We believe that nothing
comparable to this instrument currently exists in materials technology.


                                       2



     Both devices are pioneering technology in the fatigue field that we believe
provide cutting-edge solutions in materials technology. Both products are
protected by patents: we hold the patents on the Fatigue Fuse and license the
technology on the Electrochemical Fatigue Sensor.

     Another product currently under development is a borescope, which comprises
a fiber optic bundle and light source together with a working channel, through
which certain non-destructive test sensors such as ultrasound and/or eddy
current devices can be passed, to inspect visually or manually inaccessible
regions of structures such as the interior of jet turbine engines.

     The fiber optic bundle provides very clear video resolution, utilizing a
video camera integrated in the borescope handle. Images are then displayed on a
monitor and can be recorded. The borescope is derived from similar devices in
wide use in medicine. Its uniqueness is its small diameter and its capability
for applying multiple sensors, such as ultrasound and/or eddy current. Developed
under United States Air Force auspices to inspect internal components of fully
assembled jet turbine engines using the existing inspection holes in assembled
engine outer surfaces, it can be used to access remote areas of bridges and
other structures to monitor fatigue and other cracks, permitting good visual
access to otherwise inaccessible areas.

     We were formed as a Delaware corporation on March 4, 1997. It is 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 the Fatigue
Fuse and, beginning in 1993, developing the Electrochemical Fatigue Sensor.

The Fatigue Fuse

     The Fatigue Fuse is designed to be affixed to a structure to give warnings
as pre-selected portions of the fatigue life have been used up (i.e., how far 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 a design specific notch near the base. By applying the laws
of physics 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 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 load and wear history as the member.
Methods are available for remote indication of Fuse fracturing.


                                       3



     We believe that the Fatigue Fuse will be of value in monitoring aircraft,
ships, bridges, conveyor systems, mining equipment, cranes, etc. No special
training will be 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 development and
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 determine its ability to produce and market the Fatigue Fuse, we need
substantial additional capital and no assurance can be given that needed capital
will be available.

     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.

The Electrochemical fatigue sensor ("EFS")

     The EFS is a device that employs the principle of electrochemical/
mechanical interaction to find cracks. It is an instrument that detects very
small cracks and is intended to determine crack growth rates. The
Electrochemical Fatigue Sensor has demonstrated in the laboratory that it can
detect cracks as small as 10 microns (0.0004 inches), which is smaller than any
other practical technologies, as acknowledged by the United States Air Force and
Rockwell Scientific Corporation. We believe that nothing comparable to this
instrument currently exists in materials technology.

     The EFS functions by treating the location of interest (the target)
associated with the structural member as an electrode of an electrochemical
cell. 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, as normal traffic on the bridge would do. The
results are a specific set of current waveforms and amplitudes that is expected
to characterize and report fatigue damage i.e., fatigue cracks.

The borescope

     Stress points are very often located in difficult-to-get-at places for
humans. Therefore, it has become desirable to miniaturize the process and
develop a means for delivery to inaccessible areas. The borescope comprises a
fiber optic bundle and light source together with a working channel through
which certain non-destructive test sensors such as ultrasound and/or eddy
current devices can be passed, to inspect visually or manually inaccessible
regions of structures. The device as presently implemented has a maximum
diameter of 6 mm (0.236 inches) and length of 1.5m (60 inches.). Contained
within this diameter is a working channel of 2.8 mm (0.11 inches) diameter,
through which proprietary eddy current or ultrasonic sensors may be passed and
used to examine areas of interest.


                                       4



     The borescope's uniqueness is its small diameter and its capability for
applying multiple non-destructive test sensors. Developed under United States
Air Force auspices to inspect internal components of fully assembled jet turbine
engines using the existing inspection holes in assembled engine outer surfaces,
it can be used to access remote areas of bridges and other structures to monitor
fatigue and other cracks, permitting good visual access to otherwise
inaccessible areas.

     During the quarter ended December 31, 2002, we announced preliminary
discussions to launch a joint venture with Optim, Incorporated of Sturbridge,
Massachusetts, which is intended to commercially introduce a new borescope
product known as the OptiSpec Flaw Detection System. This new product combines
remote visual inspection with ultrasonic and eddy current non-destructive
testing methods which rapidly and accurately determine if the observed
indication is, in fact, a flaw that merits evaluation or repair. Optim,
Incorporated designs, manufactures, markets and sells flexible endoscopy
products for both the medical and industrial markets. Our discussions with
Optim, Incorporated have resulted in a preliminary arrangement whereby we may
enter into a formal supply and license agreement with Optim enabling us to
access technology developed by Optim for our planned marketing and distribution
of the OptiSpec Flaw Detection System. Our early planning for our borescope
product includes our recent formation of a wholly-owned subsidiary, Matech
Aerospace, Inc., from which we intend to further develop, market and distribute
our borescope products. We are uncertain at this juncture when a formal supply
and license agreement will be entered into with Optim and if entered into, the
extent to which revenues may be generated from the commercial development of the
OptiSpec Flaw Detection System and when product sales will begin. No assurances
can be given by us at this time that we will be in a position to develop and
market the OptiSpec Flaw Detection System.

Development of our technologies

Status of the fatigue fuse

     The development and application sequence for the Fatigue Fuse and EFS is
(a) basic research, (b) exploratory development, (c) advanced development, (d)
prototype evaluation, (e) application demonstration, and (f) commercial sales
and service. The Fatigue Fuse came first. The inventor, Professor Maurice Brull,
conducted the basic research at the University of Pennsylvania. We conducted the
advanced development, including variations of the adhesive bonding process, and
fabricating a laboratory-grade remote recorder for finger separation events that
constitute proper functioning of the Fatigue Fuse. The next step, prototype
evaluation, that encompasses empirical tailoring of Fuse parameters to fit the
actual spectrum loading expected in specific applications, needs to be done. The
tests associated with further development of the Fatigue Fuse include full-scale
structural tests with attached Fuses. A prototype of the Fatigue Fuse has been
designed, fabricated, and successfully demonstrated. The next tasks will be to
prepare an analysis for more efficient selection of Fuse parameters and to
conduct a comprehensive test program to prove the ability of the Fatigue Fuse to
accurately indicate fatigue damage when subjected to realistically large
variations in measuring stresses and strains in fatiguing metal. The final tasks
prior to marketing will be an even larger group of demonstration tests.

     The Fatigue Fuse is at its final stages of testing and development. To
begin marketing, the Fuse will take from six to 12 months and cost approximately
$600,000, including technical and beta testing and final development. If
testing, development, and marketing are successful, we estimate we should begin
receiving revenue from the sale of the Fatigue Fuse within a year of receiving
the $600,000. However, we cannot estimate the amount of revenue that may be
realized from sales of the Fuse, if any.


                                       5



     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 Fuses failing in sequence as predicted.

Status of the EFS

     The existence and size of very small cracks can be determined by EFS, and
in this regard it appears superior in resolution to other current
non-destructive testing techniques. It has succeeded in regularly detecting
cracks as small as 40 microns in a titanium alloy, in a laboratory environment,
as verified by a scanning electronic microscope, and has proven to be capable of
detecting cracks down to 10 microns, as acknowledged by the Materials Laboratory
at Wright Patterson Air Force and confirmed by evaluations at Rockwell
Scientific Corporation. This is much smaller than the capability of any other
practical non-destructive testing method for structural components. There is
also a vast body of testing supporting successful use of this technology with
selected aluminum alloys. However, additional testing is required to verify EFS'
crack detection capabilities under various industrial environments which are
more representative of actual structures in the field, like a highway bridge or
aircraft fuselage.

Joint Technology Venture with Integrated Technologies, Inc.

     By agreement dated January 1, 2003, a new co joint venture subsidiary we
formed, Integrated Technologies, Inc. a Delaware corporation and Austin Tech,
LLC, a Texas limited liability company, entered into a license agreement. We own
51% of the outstanding capital stock of Integrated Technologies, Inc. and Austin
Tech, LLC owns the remaining 49% of the outstanding capital stock. We jointly
formed Integrated Technologies, Inc. for the purpose of jointly developing,
marketing and licensing a new brand of remote transmittal monitoring products
from our combined technologies. Integrated Technologies, Inc. as the licensee of
the technologies owned by Austin Tech, LLC, has also entered into a form of
license agreement directly with us for the purpose of having access to our
technologies for joint development purposes. The license agreements granted to
Integrated Technologies, Inc. by Austin Tech, LLC and by us, expire on January
1, 2005 unless terminated earlier under the provisions of the agreements. The
terms of the licenses granted to Integrated Technologies, Inc. are exclusive,
royalty free and are geographically limited to certain territories described in
the license agreements, which include the United States, Canada, Middle Eastern
countries, several Northern European countries, Mexico and Brazil.

Government contract funding

     Historically, we have generated contract revenue by seeking research and
development contracts awarded by agencies of the United States government, such
as the U.S. Air Force. In developing our contract revenue, we have enlisted the
assistance of research and development partners that have used us as
subcontractors in the research and development effort. In August 1996, we
executed an agreement entitled, "Teaming Agreement," with the Southwest Research
Institute and the University of Pennsylvania for coordinated research and
development efforts.


                                       6



     We have also entered into similar relationships with Universal Technology
Corporation, which is a government contractor that acts as a pass-through or
monitor of our contracts. Universal Technology Corporation has acted as the
prime contractor with the Air Force, and we function as a first tier
subcontractor. Other than our association with these groups as research and
development partners, we have no other affiliation. Our contract revenue from
all sources of research and development agreements concluded in the third
quarter of fiscal year 2002, and we do not have any additional contract revenue
anticipated during the next 12 months.

     On February 25, 1997, the Southwest Research Institute was awarded from the
United States Air Force, a $2,500,000 phase one contract to determine the
feasibility of the EFS to improve the U.S. Air Force capability to perform
durability assessments of military aircraft, including air frames and engines
through the application of the EFS to specific military aircraft alloys. Our
share of this award was approximately $550,000. On June 18, 1998 Universal
Technology Corporation, one of our contracting partners, was awarded a second
contract in the amount of $2,061,642 to determine the applicability of the EFS
to improve the U. S. Air Force capability to perform durability assessments of
military aircraft, including both air frames and engines through the application
of the EFS to specific military aircraft alloys. Our share of this award was
approximately $538,000. On February 5, 1999, a third contract in the amount of
$2,000,000 was awarded to Universal Technology Corporation to continue and
expand the efforts for turbine engines. Our directly subcontracted share was
approximately $382,000. A fourth contract was awarded to Universal Technology
Corporation on November 3, 2000 in the amount of approximately $2,000,000 to
continue the borescope and EFS technologies, as well as alternate means of
fatigue sensing. This fourth contract has been fully performed. Our directly
subcontracted share is approximately $700,000. Accordingly, over the last four
years we have been awarded approximately $8,500,000 in research and develop
services covering the EFS. The results of this research are encouraging and
provide a basis for us and our contract partners to obtain additional funding.
However, we cannot provide any assurance that additional contract revenue will
be generated by us or received in the future.

Commercial markets for our products and technologies

     No commercial application of our products has been arranged to date, but
the technology has matured to a point where we believe it can be applied to
certain markets. Our technology is applicable to many market sectors such as
bridges and aerospace as well as ships, cranes, power plants, nuclear
facilities, chemical plants, mining equipment, piping systems, and heavy iron.
We anticipate that our planned supply and licensing arrangement with Optim,
Incorporated for the commercial sale and distribution of the OptiSpec Flaw
Detection System, will begin to generate material product sales from the
borescope, in the third quarter of the current fiscal year. We cannot provide
assurances that the marketing and distribution of the OptiSpec Flaw Detection
System will in fact occur at any specific time in the future due to the
possibility that we may not enter into a formal agreements with Optim
Incorporated or if we do, we may experience delays or difficulties in the
initial marketing, sales and distribution of the product. Nor can we provide
assurances that our results of operations and our financial condition will
materially improve from the planned commercial distribution of the OptiSpec Flaw
Detection System.


                                       7



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 recently mandated bridge repair and detection through the passage
of the Intermodal Surface Transportation and Efficiency Act in 1991 and again
recently in the $200 billion, 1998 Transportation Equity Act. We do not
currently have contracts in place to install our fatigue detection products on
bridge structures within the United States.

Our patent protections

     We are the assignee of four patents originally issued to Tensiodyne
Corporation. The first was issued on May 27, 1986, and expires on May 27, 2003.
It is titled "Device for Monitoring Fatigue Life" and bears United States Patent
Office Numbers 4,590,804. The second patent, titled "Method of Making a Device
for Monitoring Fatigue Life" was issued on February 3, 1987 and expires February
3, 2004, United States Patent Office Number 4,639,997. The third patent, titled
"Metal Fatigue Detector" was issued on August 24, 1993 and expires on August 24,
2010, United States Patent Number 5,237,875. The fourth patent, titled "Device
for Monitoring the Fatigue Life of a Structural Member and a Method of Making
Same," was issued on June 14, 1994 and expires on June 14, 2011, United States
Patent Number 5,319,982. In addition, we own a fifth patent, titled "Device for
Monitoring the Fatigue Life of a Structural Member and a Method of Making Same,"
which was issued June 20, 1995, United States Patent Number 5,425,274, and
expires June 20, 2012.

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. At December 31, 2000,
and 2001, the future royalty commitment was limited to $204,639 and $227,149,
respectively. The payment of future royalties is secured by equipment we use in
the development of technology as specified in the funding agreement, however, no
lien against our equipment or our patents in favor of ATC vests until we
generate 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 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, vests in favor of ATC until we
generate royalties from product sales. If we were to default on these payments
to ATC, our obligations relating to these agreements then become secured by our
patents, products and accounts receivable.


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     On May 27, 1994, we borrowed $25,000 from Sherman Baker, one of our
shareholders. We gave Mr. Sherman a promissory note due May 31, 2002 and we
pledged our patents as collateral to secure the repayment of this note. As of
the date of this prospectus, 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 the date of this prospectus, we owe Mr. Baker approximately
$60,000 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 intend to exhibit the Fatigue Fuse and
the Electrochemical Fatigue Sensor at various aerospace trade shows and intend
to also market our products directly to end users, including aircraft
manufacturing and aircraft maintenance companies, crane manufactures and
operators, certain state 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 measure and indicate fatigue damage. Single
cracks larger than a minimum size can be found by nondestructive inspection
methods such as dye penetrate, 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 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-Kermer-Branson,
Dunegan-Endevco, and Micro Measurements. These companies have more substantial
assets, greater experience, and more resources than ours, 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.


                                       9



Employee

     The Company has four employees, Robert M. Bernstein, President and Chief
Executive Officer, a Secretary, and two part time engineers.  In addition, the
Company retains consultants for specialized work.

ITEM 2.  PROPERTIES

     The Company leases 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 the Company's current and foreseeable needs. The total rent is
payable at $2,348 per month through June 30, 2003. The Company has an option to
extend the lease at the same rent through December 31, 2003.

     Matech owns a remote monitoring system and certain equipment that is being
used by the University of Pennsylvania for instructional and testing purposes.
The Company determined that the system has no future use and probably cannot be
sold. Therefore, the Company charged its full costs of $97,160 to operations in
1998.

ITEM 3.  LEGAL PROCEEDINGS

     None

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

     None

                                    PART II

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

     The Company's common stock is traded on the Over-the-Counter Electronic
Bulletin Board maintained by the NASD ("Bulletin Board")under the symbol "MTEY."

     From January 2001 through December 31, 2002, Matech's Common Stock was
quoted between a low bid of $.08 per share and a high bid of $2.875 per share on
the Bulletin Board. Such over-the-counter quotations reflect inter-dealer
prices, without retail markup, markdown, or commission and may not necessarily
represent actual transactions. The following chart shows the high and low bid
prices per share per calendar quarter from January 2001 to December 2002.

                            High Bid Price(1)   Low Bid Price(1)

First Quarter 2001              $     .23          $     .09
Second Quarter 2001             $     .12          $     .08
Third Quarter 2001              $     .22          $    .084
Fourth Quarter 2001             $     .25          $     .10
First Quarter 2002              $     .27          $     .10
Second Quarter 2002             $     .10          $     .07
Third Quarter 2002              $     .02          $     .02
Fourth Quarter 2002             $    .015          $    .015

     On December 31, 2002, there were 733 holders of record of the Company's
common stock and one holder of its Class B common stock.  Our Class B common
stock is not quoted on the Bulletin Board.


                                       10



     No dividends on any of the Company's shares were declared or paid during
the years 2001 or 2002, nor are any dividends contemplated in the foreseeable
future.

     At various times during the years 2001 and 2002, the Company issued common
stock to various persons which issuances we believe to be exempt from
registration under Section 4(2) of the Securities Act of 1933 or under
Regulation D promulgated under the Securities Act of 1933, and comparable state
law exemptions. Each and every such person that received shares of our common
stock had a pre-existing relationship with Matech and has been associated with
the Company in some way, is sophisticated in investment and financial matters,
and is familiar with the Company, its business, and its financial position.

Common stock issuances in 2003

     On January 7, 2003, the Company issued 260,000 shares of its common stock
to Mr. Stephen Beck pursuant to the anti-dilution provisions of his settlement
agreement.

     On January 22, 2003, the Company issued 2,000,000 shares of its common
stock for legal services.

     On January 23, 2003, the Company issued 312,500 shares of its common stock
for consulting services.

     On January 30, 2003, the Company issued 2,046,933 shares of its common
stock through its Regulation S offering.

     On February 10, 2003, the Company issued 2,549,620 to various consultants
pertaining to its Regulation S offering.

     On March 4, 2003, the Company issued 1,500,000 shares of its common stock
for legal services.

     On March 11, 2003, the Company issued 300,000 shares of its common stock
for consulting services.

     On March 11, 2003, the Company issued 1,500,000 shares of its common stock
for legal services.

     On March 11, 2003, the Company cancelled 260,000 of its common stock that
was held in reserve for issuance to Mr. Beck pursuant to the anti-dilution
provisions of his settlement agreement.

Common stock issuances in 2002

     Since the end of our last fiscal year, the Company has had a series of
transactions resulting in the issuance of shares of our common stock, some of
which shares are exempt from registration under the Securities Act of 1933, as
amended and some of which shares issued in exchange for services, were the
subject of registration on Form S-8 filed under the Securities Act of 1933.
Each of these transactions are described below:

     On January 9, 2002, the Company issued 14,300 shares of its common stock
through its Regulation S offering.


                                       11




     On January 10, 2002, the Company issued 20,000 shares of its common stock
to a consultant for services rendered.

     On January 17, 2002, the Company issued 213,500 shares of its common stock
through its Regulation S offering.

     On January 22, 2002, the Company issued 40,000,000 shares of its common
stock to Allied Boston pursuant to the terms of the Straight Documentary Credit
as discussed in Note 8(i) to the financial statements.

     On January 25, 2002, the Company issued 15,000 shares of its common stock
to a consultant for services rendered.

     On January 30, 2002, the Company issued 296,500 shares of its common stock
through its Regulation S offering.

     On February 11, 2002, the Company issued 4,000 shares of its common stock
to a consultant for services rendered.

     Also on February 11, 2002, the Company issued 150,000 shares of its common
stock to a consultant for services rendered.

     On February 13, 2002, the Company issued 400,000 shares of its common stock
to a consultant for services rendered.

     On February 20, 2002, the Company issued  195,000 shares of its common
stock through its Regulation S offering.

     On February 27, 2002, the Company issued 50,000 shares of its common stock
to a consultant for services rendered.

     On February 28, 2002, the Company issued 250,000 shares of its common stock
to a consultant for services rendered.

     Also on February 28, 2002, the Company issued 100,000 shares of its common
stock to a consultant for services rendered.

     Also on February 28, 2002, the Company issued its Executive Assistant
25,000 shares of its common stock for services rendered.

     Also on February 28, 2002 the Company issued 50,000 shares of its common
stock to a consultant for services rendered.

     On March 1, 2002, the Company issued 100,000 shares of its common stock to
a consultant for services rendered.

     Also on March 1, 2002, the Company issued 100,000 shares of its common
stock to a consultant for services rendered.

     Also on March 1, 2002, the Company issued  580,824 shares of its common
stock through its Regulation S offering.

     On March 12, 2002, the Company issued 5,000 shares of its common stock to
a consultant for services rendered.



                                       12



     Also on March 12, 2002, the Company issued 180,000 shares of its common
stock to a consultant for services rendered.

     On March 13, 2002, the Company issued 125,000 shares of its common stock
for legal services. Also on March 13, 2002, the Company issued 150,000 shares of
its common stock to a consultant for services rendered.

     On March 19, 2002, the Company issued  150,000 shares of its common stock
through its Regulation S offering.

     On March 20, 2002, the Company issued 25,000 shares of its common stock to
the Company's executive assistant.

     On March 26, 2002, the Company issued to two members of its advisory board
a total of 469,918 shares of its common stock for consulting services rendered.

     On March 26, 2002, the Company issued 1,096,476 shares of its common stock
to the University of Pennsylvania  pursuant to the terms of its licensing
agreement.

     On March 27, 2002, the Company issued its executive assistant 25,000 shares
of its common stock.

     On March 31, 2002, the Company issued 4,000 shares its common stock for
clerical services rendered.

     On April 1, 2002, the Company issued to 120,000 shares of its common stock
for legal services rendered.

     On April 5, 2002, the Company issued 2,046,580 shares of its common stock
through its Regulation S offering.

     On April 10, 2002, the Company issued to 42,100 shares of its common stock
for legal services rendered.

     On April 12, 2002, the Company issued to 105,000 shares of its common stock
for legal services rendered.

     On April 22, 2002, the Company issued 154,100 shares of its common stock
through its Regulation S offering.

     On April 23, 2002, the Company issued 550,000 shares of its common stock
for consulting services rendered.

     On May 6, 2002, the Company issued 674,267 shares of its common stock to
various consultants.

     On May 6, 2002, the Company issued 215,000 shares of its common stock for
legal services rendered.

     On May 8, 2002, the Company issued 415,000 shares of its common stock
through its Regulation S offering.

     On May 10, 2002, the Company issued 115,000 shares of its common stock for
legal services rendered.


                                       13



     On May 17, 2002, the Company issued 400,000 shares of its common stock for
consulting services rendered.

     On May 21, 2002, the Company issued 1,000,000 shares of its common stock
for legal services rendered.

     On May 27, 2002, the Company issued 562,704 shares of its common stock
through its Regulation S offering.

     On May 29, 2002, the Company issued 50,000 shares of its common stock for
consulting services rendered.

     On June 3, 2002, the Company issued 150,000 shares of its common stock for
consulting services rendered.

     On June 3, 2002, the Company issued 50,000 shares of its common stock for
legal services rendered.

     On July 3, 2002, the Company issued 1,000,000 shares of its common stock
for legal services rendered.

     On July 3, 2002, the Company issued 250,000 shares of its common stock for
consulting services rendered.

     On July 8, 2002, the Company issued 200,000 shares of its common stock for
legal services rendered.

     On July 8, 2002, the Company issued 200,000 shares of its common stock for
consulting services rendered.

     On July 26, 2002, the Company issued 1,000,000 shares of its common stock
to Mr. Stephen Beck for services rendered pursuant to a settlement agreement.

     On July 26, 2002, the Company issued 3,563,300 shares of its common stock
through its Regulation S offering.


                                       14



     On August 5, 2002, the Company issued 2,000,000 shares of its common stock
to two employees for services rendered in connection for the development of the
fatigue fuse.

     On August 5, 2002, the Company issued 230,000 shares of its common stock
for legal services.

     On August 14, 2002, the Company issued 1,000,000 shares of its common stock
for legal services.

     On August 16, 2002, the Company issued 749,260 shares of its common stock
through its Regulation S offering.

     On August 29, 2002, the Company issued 1,000,000 shares of its common stock
for legal services.

     On September 5, 2002, the Company issued 300,000 shares of its common stock
for consulting services rendered.

     On September 5, 2002, the Company placed in reserve 2,000,000 shares of its
common stock pursuant to the terms of the settlement agreement with Stephen Beck.

     On September 5, 2002, the Company issued 75,000 shares of its common stock
for legal services.

     On September 5, 2002, the Company issued 771,040 shares of its common stock
for services rendered in connection with its Regulation S offering.

     On September 10, 2002, the Company issued 2,000,000 shares of its common
stock for consulting services.

     On September 11, 2002, the Company issued 1,000,000 shares of its common
stock for legal services.

     On September 11, 2002, the Company issued 2,500,000 shares of its common
stock for legal services.

     On October 7, 2002, the Company issued 2,500,000 shares of its common stock
for consulting services.

     On October 7, 2002, the Company issued its executive assistant 50,000
shares of its common stock.

     On October 10, 2002, the Company issued 500,000 shares of its common stock
for services rendered in connection with its Regulation S offering.

     On October 18, 2002, the Company issued 11,445,872 shares of its common
stock through its Regulation S offering.

     On October 29, 2002, the Company issued 250,000 shares of its common stock
for consulting services.

     On November 6, 2002, the Company issued 1,077,500 shares of its common
stock through its Regulation S offering.

     On November 25, 2002, the Company issued 912,000 shares of its common stock
through its Regulation S offering.

     On December 5, 2002, the Company issued 650,000 shares of its common stock
for consulting services.

     On December 5, 2002, the Company issued 250,000 shares of its common stock
for legal services.

     On December 15, 2002, the Company issued 1,000,000 shares of its common
stock to a member of the Company's advisory board.

     On December 16, 2002, the Company issued 1,000,000 shares of its common
stock for legal services.

     On December 17, 2002, the Company issued 3,950,000 shares of its common
stock through its Regulation S offering.


                                       15



     On December 18, 2002, the Company issued 13,000,000 shares of its common
stock to its president for past services. These shares were issued subject to
forfeiture in the event that our president is no longer employed by the Company.

     In February 2002, the Company adopted the 2002 Stock Issuance/Stock Option
Plan, and reserved 20,000,000 shares of its common stock for distribution under
the Plan. At the date of this report, we have issued all shares of common stock
authorized by us under the 2002 Stock Issuance/Stock Option Plan. On March 4,
2003, we amended the 2002 Stock Issuance/Stock Option Plan by authorizing an
additional 20,000,000 shares of common stock for issuance under the plan.
Eligible Plan participants include employees, advisors, consultants, and
officers who provide services to the Company. The option price shall be 100% of
the fair market value of a share of common stock at either, a) date of grant or
such other day as the as the Board of Directors may determine. Options issued
under this plan expire five years from date of grant.

Common stock issuances in 2001

     During 2001, the Company has had a series of transactions resulting in the
issuance of shares of our common stock, all of which we believe were exempt from
registration under the Securities Act of 1933. Each of these transactions is
described below:

     On January 8, 2001, the Company issued 100,000 shares of its common stock
to Mr. Campbell Laird, a member of the Company's advisory board, for consulting
services.

     Also on January 8, 2001, the Company issued 50,000 shares of its common
stock to a consultant for services rendered.

     On January 9, 2001, the Company issued 100,000 shares each to Mr. John
Goodman and Mr. William Berks, two employees, pertaining to services rendered on
 the Company's research project. Mr. Goodman is also a member of the Company's
Board of Directors.

     On January 11, 2001, the Company issued 100,000 shares of its common stock
to the attorney handling the Beck matter for legal services.

     On February 19, 2001, the Company's Board of Directors authorized the
issuance of 6,000,000 shares of its common stock to the Company's President for
past compensation due.

     On April 6, 2001, the Company issued a consultant 200,000 shares of its
common stock for services rendered.

     On April 17, 2001, the Company issued a consultant 250,000 shares of its
common stock for services rendered.

     On April 20, 2001, the Company issued to two consultant 50,000 shares each
of its common stock for marketing services rendered.

     On May 3, 2001, the Company issued 100,000 shares of its common stock to
Mr. Berks for services rendered on the Company's research project.


                                       16



     Also on May 3, 2001, the Company issued 100,000 shares of its common stock
to Mr. Thomas Root, a member of the Company's advisory board, for consulting
services.

     On June 8, 2001, the Company issued a consultant 1,000,000 shares of its
common stock for past marketing services rendered.

     On June 12, 2001, the Company issued its Executive Assistant 25,000 shares
of its common stock for services rendered.

     On July 5, 2001, the Company issued to an attorney 50,000 shares of its
common stock for legal services rendered.

     On July 26, 2001, the Company issued a consultant 200,000 shares of its
common stock for services rendered.

     On August 6, 2001, the Company issued to Mr. Samuel Schwartz, a member of
the Company's advisory board, 125,000 shares of its common stock for services
rendered.

     On August 9, 2001, the Company issued 265,000 shares of its common stock to
the attorney handling the Beck matter for legal services rendered.

     On August 29, 2001, the Company issued 50,000 shares of its common stock to
one consultant and 300,000 shares of its common stock to Mr. Samuel Schwartz,
for services rendered.

     On September 6, 2001, the Company issued a consultant 37,500 shares of its
common stock for services rendered.

     On September 14, 2001, the Company issued a consultant 50,000 shares of its
common stock for services rendered.

     On September 19, 2001, the Company issued a consultant 125,000 shares of
its common stock for services rendered.

     On October 8, 2001, the Company issued to Mr. Goodman and Mr. Berks,
300,000 shares of its common stock each for services rendered in connection with
the Company's research project.

     On October 16, 2001, the Company issued a consultant 50,000 shares of its
common stock for services rendered.

     On October 18, 2001, the Company issued its Executive Assistant 20,000
shares of its common stock for services rendered.

     On October 23, 2001, the Company issued to the attorney handling the Beck
matter, 150,000 shares of its common stock for services rendered.

     On October 24, 2001, the Company reserved for issuance 60,000,000 shares of
its common stock to Allied Boston pursuant to the terms of the Straight
Documentary Credit as discussed in Note 8(i) to the financial statements.

     On October 25, 2001, the Company issued 697,853 as additional fees p
ertaining to its Regulation S offering.

     On October 30, 2001, the Company issued 4,538,458 shares of its common
stock pursuant to its Regulation S offering.

     On November 5, 2001, the Company issued 84,500 shares of its common stock
pursuant to its Regulation S offering.


                                       17



     On November 6, 2001, the Company issued 350,000 shares of its common stock
to an attorney assisting in the Beck matter for legal services rendered.

     On November 14, 2001, the Company issued a consultant 150,000 shares of its
common stock for services rendered.

     On November 17, 2001, the Company issued to the same consultant 107,500
shares of its common stock for services rendered.

     On November 19, 2001, the Company issued 10,000 shares of its common stock
pursuant to its Regulation S offering.

     On November 20, 2001, the Company issued 144,000 shares of its common stock
pursuant to its Regulation S offering.

     On November 28, 2001, the Company issued 90,000 shares of its common stock
pursuant to its Regulation S offering.

     On December 4, 2001, the Company issued 81,400 shares of its common stock
pursuant to its Regulation S offering.

     On December 20, 2001, the Company issued to three consultants a total of
530,000 shares of its common stock for marketing services rendered.

ITEM 6.  SELECTED FINANCIAL DATA

         The selected financial data for the Company is derived from the Company's
financial statements. The selected financial data should be read in conjunction
with the Company's financial statements and the notes to the financial
statements that are attached hereto.

                             Fiscal Year Ending December 31,                              Inception
                                                                                               to
                                                                                          December  31,
                          1998         1999         2000         2001          2002          2002
                                                 (restated)   (restated)
                       ___________  ___________  ___________  ___________    ___________   ___________

Net Sales              $        -   $        -   $        -   $        -     $         -   $       -
                       ___________  ___________  ___________  ___________    ___________   ___________
Income from Research
Development Contract   $   373,324  $   924,484  $   635,868  $ 1,579,823    $   461,323   $ 5,024,812

Income (Loss) from
Continued Operations   $  (549,187) $  (539,283) $(1,241,690) $(3,546,574)   $(3,785,818)  $(12,185,680)
                       ___________  ___________  ___________  ___________    ___________   ___________
Income (Loss) from
Continued Operations
Per Common Share       $      (.06) $      (.04) $      (.06) $      (.11)   $      (.06)
                       ___________  ___________  ___________  ___________    ___________   ___________
Basic Weighted
Average - Common
Shares Outstanding       8,782,808   12,242,534   18,900,019   33,640,393     63,073,970
                       ___________  ___________  ___________  ___________    ___________   ___________


                                       18




Total Assets           $   233,746  $   250,041  $  108,776   $   516,282    $   372,620
                       ___________  ___________  ___________  ___________    ___________   ___________

Total Liabilities      $   618,582  $   719,178  $  870,586   $  1,154,696   $ 2,466,937
                       ___________  ___________  ___________  ___________    ___________   ___________
Redeemable Preferred
Stock                  $        -   $        -   $       -    $        -     $        -
                       ___________  ___________  ___________  ___________    ___________   ___________
Total
Stockholders'
Equity (Deficit)       $  (485,432) $  (620,545) $  (710,459) $  (638,414)   $(2,094,317)
                       ___________  ___________  ___________  ___________    ___________   ___________

Dividends              $        -   $        -   $        -   $        -     $        -
                       ___________  ___________  ___________  ___________    ___________   ___________

     Statements of operations for the years 2000 and 2001 have been restated to
reflect shares issued at the respective share's market value at date of
issuance.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion of results of operations, capital resources, and
liquidity pertains to the activities of the Company for the years ended December
31, 2000, 2001 and 2002.

RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

     In 2002, we completed our two subcontracts on programs with the United
States Air Force for application engineering and enhancement of the EFS and
earned $461,323 in contract revenue. In 2001, and 2000, we earned $1,579,823,
and $635,868, respectively, from the same two subcontracts. In 2002, interest
income totaled $52,782 of which $729 was earned from investments and the
remaining $52,053 was accrued on loans due the Company from its president, and
from stock subscriptions due from the president, a director, and a third party.
In 2001, interest income totaled $102,283, of which $657 was from investments
and the remaining $101,626 was accrued on loans due the Company from its
president, and from stock subscriptions due from the president, a director, and
a third party. In 2000, interest income was $103,419, the majority of which
pertains to interest accruing on subscriptions due from the Company's president
and a director. The major difference in the amount of accrued interest in 2002
as compared to 2001 and 2000 pertains to the June 2001 modification of certain
stock subscription agreements that reduced the amounts due from the president
and a director from $1,995,000 to $495,000. Our sole source of contract revenue
from our research and development contracts with the United States Air Force
concluded in the second quarter of 2002 and we have not replaced any contract
revenue since that contract concluded.

Costs and expenses

     Expenses for 2001 and 2000 have been restated to reflect the value of all
services which were compensated through the issuance of our common stock at the
quoted market price of the shares issued on the date of issuance.

     Research and development costs were $665,435, $1,493,628, and $496,501, for
2002, 2001 and 2000, respectively. Of the research and development costs
incurred, $400,201, $1,069,671, and $409,823 related to subcontractor costs for
the years 2002, 2001 and 2000,respectively. General and administrative costs
were $3,581,706, $3,632,769, and $1,381,047 for 2002, 2001 and 2000,
respectively.


                                       19



     In 2002, actual cash paid to our President, Mr. Bernstein, totaled
$110,018. We also accrued an additional $9,982 in additional compensation to Mr.
Bernstein. In addition, we issued Mr. Bernstein 13,000,000 shares of common
stock for past services having a market value of $260,000. These shares were
issued subject to forfeiture in the event that Mr. Bernstein is no longer
employed by the Company. Legal fees in 2002 amounted to $1,922,861 of which
$1,599,200 relates to the settlement of the litigation that was pending with
Stephen Beck. Of the $1,599,200, $1,481,895 is evidenced by a promissory note,
$112,193 was paid through the issuance of 2,027,639 shares of our common stock,
and $5,112 paid in cash. We also incurred $314,729 in the filing of our
registration statement on Form SB-2, of which $297,500 was paid through the
issuance of 7,750,000 shares and $17,229 was paid in cash. Other expenses in
2002 included consulting services of $940,160, of which $662,098 was paid
through the issuance of 10,881,118 shares of our common stock, office salaries
of $36,968, telephone expense of $23,284, travel expenses of $57,797, accounting
and auditing fees of $71,317 and rent of $28,176.

     In 2001, actual cash compensation paid to our President totaled $90,000. We
also accrued $30,000 in additional compensation due to Mr. Bernstein. We charged
to operations $1,500,000 due to a reduction in the balance of the non-recourse
promissory note due to us by Mr. Bernstein and another Director, Joel Freedman,
in connection with their purchases of our common stock. Initially, we agreed to
issue 4,650,000 and 350,000 shares of our class "A" common stock to Messrs.
Bernstein and Freedman, respectively, in exchange for their issuance to us of
non-recourse promissory notes in the amount of $1,855,350 by Mr. Bernstein and
$139,650 by Mr. Freedman. At the time of their purchase of our shares, the
market price of our common stock was approximately $.60 per share. Both
promissory notes mature on May 25, 2005 and accrue interest at 8% per annum. On
June 18, 2001, we authorized the $1,500,000 reduction of the combined principal
amount of these notes since the market value of our common stock declined to
approximately $.10 per share. This reduction and charge to operations was deemed
to be fair and reasonable under the circumstances.

     We issued 6,000,000 shares of restricted common stock to Mr. Bernstein
during 2001, valued at $1,128,000, for past compensation due to him. Previously,
the financial statements have reflected the value of the shares at $420,000, the
fair market value of the services rendered. We revalued the shares issued to Mr.
Bernstein as a result in the policies adopted by the U.S. Securities and
Exchange Commission indicating that all shares issued in exchange for services
should be valued at the quoted market price of the shares issued on the date of
issuance. These 6,000,000 shares have been issued subject to certain
restrictions limiting the President's ability to sell or transfer the shares.

     Other expenses in 2001 included consulting fees of $477,671, of which
$281,635 was paid through the issuance of 2,275,000 shares of our common stock,
legal fees of $256,736, of which $138,750 was paid through the issuance of
915,000 shares of our common stock, accounting fees of $51,120, travel expenses
of $42,092, office salaries of $36,225, office expense of $34,880, rent of
$29,468, telephone expense of $13,838 and a write off of our $33,000 investment
in Antaeus Research, LLC.


                                       20



     The major costs in 2000 were officers' salaries of $127,183, consulting
fees of $856,202, legal fees of $206,198, accounting and auditing fees of
$23,063 and travel costs of $26,443.

     Interest charged to operations for 2002, 2001 and 2000, amounted to

$118,460, $70,468 and $60,634, respectively. Of the $118,460 incurred in 2002,
$76,078 was accrued on our promissory note due to the University of Pennsylvania
and $37,271 was accrued on the promissory note due for legal fees on the
settlement with Stephen Beck. Of the $70,468 incurred in 2001, $64,472 was
accrued on the promissory note due to the University of Pennsylvania. Of the
$60,634 incurred in 2000, $54,638 was accrued on the promissory note due to the
University of Pennsylvania.

Liquidity and capital resources

     In 2002, we raised $892,261 net of offering costs through the issuance of
28,046,766 shares of our common stock through a Regulation S offering and
through the offer and sale of 143,250 shares of our preferred stock. We also
received $175,646 during 2002 from our subcontracts with the Air Force. Of the
$1,067,907 we received, we used $927,439 in our operations, we advanced $33,547
to our President and paid $29,608 for equipment

     In 2001, we raised a net $286,567 through the issuance of 4,932,358 shares
of its common stock through our Regulation S offering. Also in 2001, we entered
into an agreement with Allied Boston International for a Straight Documentary
Credit for $12,500.000.The funding under this instrument is not guaranteed and
to date, we have not received any funding under this letter of credit
arrangement. If the $12,500,000 under the letter of credit is received, we
believe the amount should be sufficient to fund the completion of our research
projects and bring our products to market. Although Mr. Bernstein intends to
continue to loan us working capital as required while we seeks additional
financing, he is under no obligation to do so. We do not expect to receive any
additional material financing from other long time investors, although we
continue to undertake a variety of efforts to locate suitable debt or equity
financing.

     During 2000, the Company received $746,732 from our research and
development contract, $22,490 from the sale of our common stock, and $251,798
from the sale of DCH Technologies, Inc., shares. Our President advanced $8,000
and received $39,500 back from the Company. In 2000, we spent $1,035,470 in our
operations and $15,000 was invested in Antaeus Research, LLC.

Critical accounting issues

     The discussion and analysis of the Company's financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. In consultation with its
Board of Directors, the Company has identified three 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.


                                       21



     The first critical accounting policy relates to revenue recognition. Income
from the Company's subcontracts with the Air Force is recognized at the time
services are rendered and billed for.

     The second critical accounting policy relates to research and development
expense. Costs incurred in the development of the Company's fatigue fuse and the
electrochemical sensor are expensed as incurred.

     The third critical accounting policy relates to the valuation of non-
monetary consideration issued for services rendered. The Company values all
services rendered in exchange for its common stock at the quoted price of the
shares issued at date of issuance.  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 readably determinable.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not Applicable.

ITEM 8.  FINANCIAL STATEMENTS

     Attached hereto and incorporated herein by reference are audited financial
statements of the Registrant as of December 31, 2002, 2001, and 2000, prepared
in accordance with Regulation S-X (17 CFR Sec.210)

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The name, age, office, and principal occupation of the executive officers
and directors of Matech and certain information relating to their business
experiences are set forth below:

     NAME                  AGE             POSITION

     Robert M. Bernstein    68      President/Chief Executive and Chief Financial
                                    Officer, Chairman of the Board
     Joel R. Freedman       43      Secretary/Director
     Dr. John Goodman       68      Chief Engineer/Director
     William I. Berks       72      Vice President

     The Term of the directors and officers of Matech is until the next annual
meeting or until their successors are elected.

ROBERT M. BERNSTEIN, PRESIDENT/CHIEF FINANCIAL OFFICER/CHAIRMAN OF THE BOARD.
Robert M. Bernstein is 68 years of age.  He 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, PA, an oil and gas exploration company.  In
December 1985, he formed a research and development partnership for Tensiodyne,
funding approximately $750,000 for research on the Fatigue Fuse.  In October
1988 he became Chairman of the Board, President, Chief Financial Officer, and
CEO of Matech 1 and retained these positions with the Company after the spin off
from Matech 1 on July 31, 1997.


                                       22



JOEL R. FREEDMAN, SECRETARY/DIRECTOR.  Joel R. Freedman is 43 years of age. From
October 1989 until the present, Mr. Freedmen holds the position of Secretary and
a Director of the company.  Mr. Freedman attends board meetings and provides
advice to the Company as needed.  Since 1983, he has been president of Genesis
Advisors, Inc., an investment advisory firm in Bala Cynwyd, Pennsylvania.  Since
January 1, 2000, he has been a Senior Vice President of PMG Capital Corp., a
securities brokerage and investment advisory firm in West Conshohocken,
Pennsylvania.  His duties there are a full-time commitment.  Accordingly, he
does not take part in Matech's daily activities.  He is not a director of any
other company.

DR. JOHN W. GOODMAN, CHIEF ENGINEER/DIRECTOR.  Dr. John W. Goodman is 68 years
of age.  He is retired from TRW Space and Electronics and was formerly Chairman
of the Aerospace Division of the American Society of Mechanical Engineers.  He
holds a Doctorate of Philosophy in Materials Science that was awarded with
distinction by the University of California at Los Angeles in 1970.  In 1957, he
received a Masters of Science degree in Engineering Mechanics from Penn State
University and in 1955 he received a Bachelor of Science degree in Mechanical
Engineering from Rutgers University.  From 1972 to 1987, Dr. Goodman was with
the U. S. Air Force as lead Structural Engineer for the B-1 aircraft; Chief of
the Fracture and Durability Branch, and Materials Group Leader, Structures
Department, Aeronautical Systems Center, Wright-Patterson Air Force Base.  From
1987 to December 1993, he was on the Senior Staff, Materials Engineering
Department of TRW Space and Electronics.  He has been Chief Engineer for
Development of Matech's products since May 1993.  Over the last four years he
has consulted part time for the Company.

William Berks- Vice-President of Government Projects. He managed the previous
Matech contracts for the development of EFS at the University of Pennsylvania,
Southwest Research Institute, and Optim, Inc. Mr. Berks has a B. Aero. E and MS
in Applied Mechanics from Polytechnic Institute of New York and MS in Industrial
Eng., Stevens Institute of Technology . With Matech since 1997. He has over 30
years experience in spacecraft mechanical systems engineering. He retired from
TRW in November 1992 where he was employed for 26 years in a variety of
management positions: Manager of the Mechanical Design Laboratory, the
engineering design skill center for the design and development of spacecraft
mechanical systems, which had as many as 350 individuals: Manager of the
Advanced Systems Design Department, which was responsible for mechanical systems
design for all spacecraft project: Assistant Project Manager for Mechanical
Subsystems for a major spacecraft program, which included preparation of plans,
specifications and drawings, supervision of two major subcontracts, and
responsibility for flight hardware fabrication and testing. He holds six
patents.

Our advisory board

         Since 1987, the Company and its predecessors have had an Advisory Board
consisting of very senior experienced businessmen and technologists, most of
whom are nationally prominent. These individuals consult with the Company on an
as needed basis.  Members of the Advisory Board serve at will.  The Advisory
Board advises Matech's 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:


                                       23



ADM. ROBERT P. COOGAN, USN (Ret.). Robert P. Coogan, age 75, retired from a
distinguished naval career spanning 40 years during which he held numerous posts
including: Commander U.S. Third Fleet, Commander Naval Air Force - U.S. Pacific
Fleet, Commandant of Midshipmen - U.S. Naval Academy, and Chief of Staff -
Commander Naval Air Force - U.S. Atlantic Fleet. From 1980 to 1991 he was with
Aerojet General Company and served as Executive Vice President of Aerojet
Electrosystems Co. from 1982-1991. He has his BS in Engineering from the US
Naval Academy and MA in International Affairs from George Washington University.

ROBERT F. CUSHMAN, ESQ. Mr. Cushman is a partner in the Philadelphia office of
Pepper Hamilton LLP, is also the permanent chairman of the Andrews Conference
Group Construction Super Conference, and is the organizing chairman of the
Forbes Magazine Conferences on Worldwide Infrastructure Partnerships, Rebuilding
America's Infrastructure Conference, Alternative Dispute Resolution, the Forbes/
Council of the Americas Latin American Marketing Conference and the Forbes
Environmental Super Conference.

CAMPBELL LAIRD. Campbell Laird, age 63, 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.

T.Y. LIN. Mr. Lin graduated from Tangshan College, Jiaotong University, and
received a M.S. degree in Civil Engineering from the University of California at
Berkeley. Since 1934, he taught and practiced civil engineering in China and
the U.S. and planned and designed highways, railways, and over 1,000 bridges and
buildings in Asia and the Americas. He is known as Mr. Prestressed Concrete in
the U.S., having pioneered both the technology and industry in the 1950s. He
authored and co-authored three textbooks in structural engineering and more than
100 technical papers. He was the founder of T.Y. Lin International that
provides design and analysis for all types of concrete and steel structures and
pioneered the design of long-span structures, prestressing technology, and new
design and construction methods over the past 40 years.

Y.C. YANG. Mr. Yang is a pioneer in "value engineering" which optimized many
projects with economic te-designs. He is a recipient of the 1988 Jiaotong
University Outstanding Alumnus Award, a citation from Engineering News Record,
and the ACI Mason Award. With their partnership dating back to wartime China in
the early 1940s, Mr. Lin and Mr. Yang established their international stature in
the U.S. over the five decades that followed. In 1992, they formed the San
Francisco, CA headquartered firm, Lin Tung-Yen China, Inc., to continue their
tradition of excellence and innovation in structural and civil engineering and
to serve as a bridge between East and West. The firm serves its clients through
various tasks, ranging from planning and designs to construction management and
the introduction of financing.

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, 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.


                                       24



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.),
and Florida (1300 ft.).

LIEUTENANT GENERAL JOE N. BALLARD. General Ballard is retired from the United
States Army and has served as President and Chief Executive Officer of The
Ravens Group, Inc., a business development, consulting, and executive level
leadership service company, since March 2001. He received his MS in Engineering
Management from the University of Missouri, BS in Electrical Engineering from
Southern University, and he is a registered professional engineer. He served as
Commanding General, US Army Corps of Engineers from 1996 until 2000, Chief of
Staff US Army Training and Doctrine Command from 1995 until 1996, Commander of
the US Army Engineer Center in Missouri from 1993 until 1995, Director of the
Total Army Basing Study at the Pentagon from 1991 until 1993, and he was
Commander of the 18th Engineering Brigade in Germany from 1988 until 1990. He
has received many honors including the Deans of Historical Black Colleges and
Minority Institutions Black Engineer of the Year in 1998, Honorary Doctorate of
Engineering from the University of Missouri in 1999, Honorary Doctorate of Law
L.L.D. from Lincoln University in 1998, Honorary Doctorate of Engineering from
Southern University in 1999, and Fellow of the Society of American Military
Engineers in 1999.

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 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.

Dr. A.EMIN AKTAN. Dr. Aktan is the John Roebling Professor of Infrastructure
Studies at Drexel University Department of Civil Engineering and Architecture.
He is the director of Drexel Intelligent Infrastructure & Transportation Safety
Institute. His research interest is system identification and health monitoring
for management of civil infrastructure systems (CIS) while generating
fundamental knowledge regarding the actual behavior and loading environments of
constructed facilities. Dr. Aktan received a Ph.D. in Earthquake Structural
Engineering from the University of Illinois at Urbana-Champaign in 1973 and
served as a Post-Doctorate associate at University of California at Berkeley for
five years. Dr. Aktan has held faculty positions at Middle East Technical
University, Louisiana State University and University of Cincinnati before
joining Drexel University.


                                       25



SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     On March 27, 2001, Mr. Robert Bernstein, Chief Executive Officer and
Chairman filed a Form 5 relating to several transactions of stock issued to him
in 2000 and a Form 4 for a January 2001 transaction.  Mr. Bernstein was late in
reporting these transactions.

     On March 27, 2001, Dr. John Goodman, Director filed a Form 4 for a
transaction in January 2001. Dr. Goodman's Form 4 was not timely filed.

The Company is unaware of any other late filings or any other failures to file
any Forms 3, 4, or 5.

ITEM 11.  EXECUTIVE COMPENSATION
________________________________________________________________________________

                                                  Other
Name and                                          Annual      Restricted                          All Other
Principal                                         Compen-      Stock        Options     LTIP       Compen-
Position         Year    Salary ($)   Bonus ($)   sation ($)   Awards ($)    (SARs (#)  Payout($)   sation ($)

Robert M. Bernstein
 CEO             2000    $120,000     $   -       $    -       $    4,183(1)     -      $    -    $   -
                 2001    $120,000     $   -       $    -       $1,128,000(2)     -      $    -    $   -
                                                               $1,395,000(3)     -      $    -    $   -
                 2002    $120,000     $   -       $    -       $      200(4)     -      $    -    $   -
                                                               $  260,000(5)
John W. Goodman  2000    $ 26,614     $   -       $    -       $       -         -      $    -    $   -
Director and     2001    $ 23,076     $   -       $    -       $  147,600(6)     -      $    -    $   -
Engineer         2002    $ 17,945     $   -       $    -       $   40,000(7)     -      $    -    $   -
William Berks    2000    $     -      $   -       $39,235      $       -         -      $    -    $   -
Vice-President   2001    $ 55,388     $   -       $    -       $  147,600(6)     -      $    -    $   -
                 2002    $ 70,301     $   -       $    -       $   40,000(7)     -      $    -    $   -

________________________________________________________________________________
________________________________________________________________________________

(1)  In 2000, the Corporation issued to Mr. Bernstein as escrow holder 4,183,675
     shares of its common stock, in part, for future compensation and subject to
     severe restrictions. The Company included the par value of the shares
     issued in Mr. Bernstein's 2000 compensation amounting to $4,183.

(2)  In 2001, the Corporation issued Mr. Bernstein 6,000,000 shares for past
     compensation (see item 5). The Company valued these shares at $1,128,000.

(3)  In 2001, the Company reduced the obligation from Mr. Bernstein to the
     Company on a non-recourse promissory note relating to the issuance of
     4,650,000 shares of its common stock from $1,855,350 to $460,350.

(4)  In 2002, the Company issued 200,000 shares of its Class B Common stock to
     its president in relinquishment of his interest in the Company's patents.
     The shares were valued at par.

(5)  In 2002, the Company issued 13,000,000 shares of its common stock to Mr.
     Bernstein for past compensation. The shares had a market value of $260,000
     and are subject to forfeiture in the event Mr. Bernstein is no longer
     employed by the Company.


                                       26



(6)  In 2001, the Corporation issued each to Mr. Goodman and Mr. Berks 900,000
     shares of restricted common stock. These shares were valued at $147,500.

(7)  In 2002, the Corporation issued each to Mr. Goodman and to Mr. Berks
     1,000,000 shares of restricted common stock. These shares were valued at
     $40,000.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF DECEMBER 31,
2002

Security Ownership of Certain Beneficial Owners

     The Company does not know of any non-affiliated person or "group" as that
term is used in section 13(d)(3) of the Exchange Act that owns more than five
percent of any class of the Company's voting securities.

Security Ownership of Management

CLASS OF STOCK    NAME AND ADDRESS OF      AMOUNT AND NATURE OF   PERCENT OF
                   BENEFICIAL OWNER        BENEFICIAL OWNERSHIP     CLASS

Common Stock    Robert M. Bernstein, CEO     27,800,966 Shares     25.45%(1)
                Suite 707
                11661 San Vicente Blvd.
                Los Angeles, CA  90049

                Joel R. Freedman, Director      626,471 Shares       .57%
                1 Bala Plaza
                Bala Cynwyd, PA 19004

                John Goodman, Director        2,000,000 Shares      1.83%
                Suite 707
                11661 San Vicente Blvd.
                Los Angeles, CA 90049

                William Berks, Vice President
                Suite 707
                11661 San Vicente Blvd.
                Los Angeles, CA 90049         2,000,000 Shares      1.83%

                Directors and executive      32,427,437 Shares     29.68%
                officers as a group
                (3 persons)

Class B         Robert M. Bernstein             300,000 Shares    100.00%(2)
Common Stock    Suite 707
                11661 San Vicente Blvd.
                Los Angeles, CA 90049
_________________________________________


                                       27



 (1) Of these 26,544,847 shares, Mr. Bernstein has full rights to approximately
     25,339,291 shares. The remaining 2,461,675 shares held are in escrow.  On
     October 27, 2000, the Company issued 4,183,675 shares to Mr. Bernstein
     pursuant to a Stock Escrow/Grant Agreement.  Under the terms of the
     agreement, the President is required to hold these shares in escrow. While
     in escrow, the President cannot vote the shares but has full rights as to
     cash and non-cash dividends, stock splits or other change in shares. Any
     additional shares issued to the President by reason of the ownership of the
     4,183,675 shares will also be escrowed under the same terms of the
     agreement.  Upon the exercise by certain holders of Company options or
     warrants or upon the need by the Company, in the sole discretion of the
     Board, to issue common stock to certain individuals or entities, the number
     of shares required for issuance to these holders will be returned from
     escrow by Mr. Bernstein thereby reducing the number of shares he holds. The
     shares held in escrow are non-transferable and will be granted to Mr.
     Bernstein only upon the exercise or expiration of all of the options and
     warrants, the direction of the Board, in its sole discretion, or the mutual
     agreement of Mr. Bernstein and the Board of Directors to terminate the
     agreement.  The Company valued these shares at par.  Upon the actual grant
     of the remaining shares to Mr. Bernstein, the shares issued will be valued
     at market value when issued and charged to operations as compensation. As
     of the date of this filing, 1,722,000 of these 4,183,675 shares had been
     transferred to satisfy a stock agreement.  Accordingly, 2,461,675 of these
     escrowed shares are included in the total of 27,800,966 shares beneficially
     owned by Mr. Bernstein. (See, Note 11 to Financial Statements.)

(2)  Each of Mr. Bernstein's Class B Common Shares has 1,000 votes per share on
     any matter on which the common stockholders vote. Accordingly, the Class B
     common stock held by Mr. Bernstein equal 100 million shares of voting
     control. These votes give Mr. Bernstein voting control of the Company.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(SEE NOTE 11 TO FINANCIAL STATEMENTS.)

     In August, 1997, the Company's Board of Directors signed a resolution
recognizing the Company's extreme dependence on the experience, contacts, and
efforts of Mr. Bernstein and authorized to pay him a salary of $150,000 a year
since 1991.  In February 2001, the Company's Board of Directors authorized the
issuance of 6,000,000 shares of its Common Stock to the Company's President for
$420,000 of past compensation due to Mr. Bernstein under this resolution.  This
amount represents the difference between the $150,000 a year and the
compensation actually accrued during the years 1991 through 2000.

     On May 25, 2000, the Company issued its President 4,650,000 shares its
common stock in exchange for $4,650 and a $1,855,350 non-recourse promissory
note bearing interest at an annual rate of 8%. Approximately 1,500,000 of these
shares are subject to an option to purchase by a third party. On the same day,
the Company issued 350,000 shares its common stock to a Director Joel Freedman,
in exchange for $350 and a $139,650 non-recourse promissory note bearing
interest at an annual rate of 8%. Both notes mature on May 25, 2005, when the
principal and accrued interest becomes fully due and payable.

     On October 27, 2000, the Company issued 4,183,675 shares to its President
for future compensation pursuant to a Stock Escrow/Grant Agreement. Under the
terms of the agreement, the President is required to hold these shares in
escrow. While in escrow, the President cannot vote the shares but has full
rights as to cash and non-cash dividends, stock splits or other change in
shares. Any additional shares issued to the President by reason of the ownership
of the 4,183,675 shares will also be escrowed under the same terms of the
agreement. Upon the exercise by certain holders of Company options or warrants
or upon the need by the Company, in the sole discretion of the Board, to issue
common stock to certain individuals or entities, the number of shares required
for issuance to these holders will be returned from escrow by the President
thereby reducing the number of shares he holds. The shares held in escrow are
non-transferable and will be granted to the Company's President only upon the
exercise or expiration of all of the options and warrants, the direction of the
Board, in its sole discretion, or the mutual agreement by the President and the
Board of Directors to terminate the agreement. The Company valued these shares
at par. Upon the actual grant of the remaining shares to the President, the
shares issued will be valued its market value when issued and charged to
operations as compensation.


                                       28



     On January 9, 2001, the Company's Board of Directors authorizes the
issuance of 100,000 shares of its common stock to William Berks, a part-time
employee, for engineering and other services rendered to the Company.

     On January 8, 2001, the Company's Board of Directors authorized the
issuance of 100,000 shares of its common stock to Dr. Campbell Laird, an
advisory board member, for services to the Company.

     On January 9, 2001, the Company's Board of Directors authorized the
issuance of 100,000 shares of its common stock to John Goodman, a director and
part-time employee, for engineering and other services rendered to the Company.

     On January 9, 2001, the Company's Board of Directors authorized the
issuance of 100,000 shares of its common stock to William Berks, a part-time
employee, for engineering and other services rendered to the Company.

     On February 19, 2001, the Company's Board of Directors authorized the
issuance of 6,000,000 shares of its common stock to the Company's President for
past compensation due as discussed above.

     On May 3, 2001, the Company's Board of Directors authorized the issuance of
100,000 shares of its common stock to Mr. William Berks for services rendered
to the Company.

     On June 12, 2001, the Company's Board of Directors authorized the issuance
of 25,000 shares of its common stock to the company's executive assistant, for
services rendered to the Company.

     On October 8, 2001, the Company's Board of Directors authorized the
issuance of 300,000 shares of its common stock each to Mr. William Berks and Mr.
John Goodman for services rendered to the Company.

     On October 18, 2001, the Company's Board of Directors authorized the
issuance of 20,000 shares of its common stock to the company's executive
assistant, for services rendered to the Company.

     On November 21, 2001, the Company's Board of Directors authorized the
issuance of 400,000 shares of its common stock each to Mr. William Berks and Mr.
John Goodman for services rendered to the Company.

     Also on February 28, 2002, the Company issued its executive assistant
25,000 shares of its common stock for services rendered.

     On March 20, 2002, the Company issued 25,000 shares of its common stock to
the Company's executive assistant.


                                       29



     On August 5, 2002, the Company's Board of Directors authorized the issuance
of 1,000,000 shares of its common stock each to Dr. John Goodman and Mr. William
Berks for services rendered to the Company.

     On October 7, 2002, the Company issued its executive assistant 50,000
shares of its common stock.

     On December 6, 2002, the Company issued 200,000 shares of its Class B
common stock to its President in consideration for the relinquishment of his
security interest in the Company's patents, which served as collateral for our
repayment to our President of the amounts that we accrued for his compensation
and advances.

     On December 18, 2002, the Company issued 13,000,000 shares of its
restricted common stock to its President in consideration for past services. The
total market value of these shares when issued was $260,000, however, we valued
these shares at $420,000 due to the fact that Mr. Bernstein relinquished that
amount of past due compensation. These shares are subject to forfeiture in the
event that Mr. Bernstein is no longer employed by the Company.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS IN FORM 8-K

a.   Exhibits.

EXHIBIT NO.                DESCRIPTION                              PAGE NO.


3(i)          Certificate of Incorporation of Material Technologies, Inc.(1)

              Certificate of Amendment, February 16, 2000(2)

              Certificate of Amendment, July 12, 2000(2)

              Certificate of Amendment, July 19, 2000(2)

              Certificate of Amendment, July 31, 2000(2)

              Certificate of Amendment, October 16, 2001(2)

              Certificate of Amendment, dated December 2, 2002 (3)

              Certificate of Amendment, dated January 7, 2003 (3)

3(ii)         Bylaws of Material Technologies, Inc.(1)

4.1           Class A Convertible Preferred Stock Certificate of Designations(1)

4.2           Class B Convertible Preferred Stock Certificate of Designations(1)

4.3           Material Technologies, Inc. Stock Escrow/Grant(2)

5.0           Opinion of Legal Counsel (Exhibit 23.0 Included)(3)


                                       30



10.1          License Agreement Between Tensiodyne Corporation and
              the Trustees of the University of Pennsylvania(1)

10.2          Sponsored Research Agreement between Tensiodyne Corporation and
              the Trustees of the University of Pennsylvania(1)

10.3          Amendment 1 to License Agreement Between Tensiodyne Scientific
              Corporation  and the Trustees of the University of Pennsylvania(1)

10.4          Repayment Agreement Between Tensiodyne Scientific Corporation and
              the Trustees of the University of Pennsylvania(1)

10.5          Teaming Agreement Between Tensiodyne Scientific Corporation and
              Southwest Research Institute(1)

10.6          Letter Agreement between Tensiodyne Scientific Corporation,
              Robert M. Bernstein, and Stephen Forrest Beck and Handwritten
              modification(1)

10.7          Agreement Between Tensiodyne Corporation and Tensiodyne 1985-1 R&D
              Partnership(2)

10.8          Amendment to Agreement Between Material Technologies, Inc. and
              Tensiodyne 1985-1 R&D Partnership(2)

10.9          Agreement Between Advanced Technology Center of Southeastern
              Pennsylvania and Material Technology, Inc.(2)

10.10         Addendum to Agreement Between Advanced Technology Center of
              Southeastern Pennsylvania and Material Technologies, Inc.(2)

10.11         Agreement Between Allied Boston International, Inc. and Material
              Technologies,  Inc.(2)

10.12         Securities Subscription Agreement dated June 27, 2002 between the
              Registrant and Gregory Bartko, Esq.(4)

10.13         Specimen Subscription Agreement Used By Registrant in Recent Sales
              Of Common Stock By Private Placement(3)

10.14         Registrant's Stock Issuance/ Stock Option Plan For 2002 (3)

10.15         Settlement Agreement and Mutual Release Between Stephen F.
              Beck and Registrant (3)

10.16         Business Consulting Agreement Between Circle Group
              Internet, Inc. and Registrant (3)

10.17         Securities Subscription Agreement dated August 12, 2002 between
              the Registrant and Gregory Bartko, Esq.(3)

10.18         Securities Subscription Agreement dated August 29, 2002 between
              the Registrant and Gregory Bartko, Esq.(3)


                                       31



10.19         Amended and Restated Stock Option Agreement Between the Registrant
              and E. G. Bud Shuster Dated November 1, 2002(3)

10.20         License Agreement Between Integrated Technologies, Inc.  and
              Austin Tech, LLC  Dated January 3, 2003 (3)

10.21         Non-Statutory Stock Option Agreement between the Registrant and
              Peter Jegou dated October 15, 2002. (3)

10.22         Non-Statutory Stock Option Agreement between the Registrant and
              Richard Margulies dated October 15, 2002. (3)

10.23         Amended and Superceding Securities Subscription Agreement
              between the Registrant and Gregory Bartko dated December 17,
              2002. (3)

10.24         License Agreement Between the Registrant and Integrated
              Technologies, Inc. Dated January 3, 2003 (3)

10.25         Security Agreement (To Pay For Past Legal Services), dated August
              1, 2002 among Robert A. Brunette, Hassel Hill, Jr. and the
              Registrant (3)

23.0          Consent of Jonathan P. Reuben, Certified Public Accountant (4)

99.0          Certification Pursuant to Section 302 (a) of the Sarbanes-Oxley
              Act of 2002 - Robert M. Bernstein, Chief Executive Officer(4)

99.1          Certification Pursuant to Section 302 (a) of the Sarbanes-Oxley
              Act of 2002 - Robert M. Bernstein, Chief Financial Officer(4)


1.   Incorporated by reference to the Registrant's S-1 registration statement
     filed March 9, 1997, bearing File Number 333-23617, and as subsequently
     amended at date of effectiveness on July 28, 1997.

2.   Incorporated by reference to the Registrant's SB-2 registration statement
     filed November 30, 2001, bearing File Number 333-74202 and as subsequently
     amended at date of effectiveness on February 7, 2002.

3.   Incorporated by reference to the Registrant's SB-2 registration statement
     filed August 8, 2002, bearing File Number 333-97833 and as subsequently
     amended.

4.   Filed herewith.

b.   Reports on Form 8-K - none.

c.   Financial Statements - attached.


                                       32



                                   SIGNATURES

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


                                          MATERIAL TECHNOLOGIES, INC.


                                          By: /s/ Robert M. Bernstein
                                                  Robert M. Bernstein, Chief
                                                  Executive Officer, President
                                                  and Chairman of the Board
Dated:  March 28, 2003

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


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


                                          By: /s/ Joel Freedman
                                                  Joel Freedman, Secretary and Director


                                          By: /s/ John Goodman
                                                  John Goodman, Director


Dated: March 28, 2003


                                       33




                           MATERIAL TECHNOLOGIES, INC.
                          (A Development Stage Company)
                              FINANCIAL STATEMENTS


                                    Contents


                                                                            Page

     Independent Auditors' Report                                            F-1

     Balance Sheets                                                          F-2

     Statements of Operations                                                F-3

     Statement of Stockholders' Equity (Deficit)                             F-4

     Statements of Cash Flows                                                F-5

     Notes to Financial Statements                                    F-6 - F-20






                          Independent Auditors' Report


Board of Directors
Material Technologies, Inc.
Los Angeles, California

I have audited the accompanying balance sheets of Material Technologies, Inc.,
(A Development Stage Company) as of December 31, 2001 and 2002, and the related
statements of operations, stockholders' equity (deficit), and cash flows, for
the years ended December 31, 2000, 2001, 2002, and for the period from the
Company's inception (October 21, 1983) through December 31, 2002. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.

I conducted my audits in accordance with auditing standards generally accepted
in the United States. These standards require that I plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audits provide a reasonable basis for my
opinion.

In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Material Technologies, Inc. as of
December 31, 2001 and 2002, and the results of its operations, and its cash
flows for the years ended December 31, 2000, 2001, 2002, and for the period from
the Company's inception (October 21, 1983) through December 31, 2002, in
conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discuss in Note 16 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency, which raises substantial doubt about the its ability to
continue as a going concern. Management's plans regarding those matters also are
also described in Note 16. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ Jonathon P. Reuben CPA
    Jonathon P. Reuben,
    Certified Public Accountant
    Torrance, California
    March 7, 2003

                                      F-1





                           MATERIAL TECHNOLOGIES, INC.
                         (A Development Stage Company)
                                 BALANCE SHEETS
________________________________________________________________________________



                                                 December 31,    December 31,
                                                    2001             2002
                                                 _____________   _____________
                                                  (Restated)
                                     ASSETS

      CURRENT ASSETS
        Cash and cash equivalents                $     174,469   $     251,782
         Receivable due on research contract           285,677              -
        Receivable from officer                         35,880          76,109
        Employee receivable                                 -            1,433
        Prepaid expense                                     -            1,179
                                                 _____________   _____________

          TOTAL CURRENT ASSETS                         496,026         330,503
                                                 _____________   _____________

      FIXED ASSETS
        Property and equipment, net
            of accumulated depreciation                  2,708          27,649
                                                 _____________   _____________

      OTHER ASSETS
         Intangible assets:
           Patents and other, subject to amortization   15,200          12,120
        Refundable deposit                               2,348           2,348
                                                 _____________   _____________

          TOTAL OTHER ASSETS                            17,548          14,468
                                                 _____________   _____________

          TOTAL ASSETS                           $     516,282   $     372,620
                                                 =============   =============

                    LIABILITIES AND STOCKHOLDERS' (DEFICIT)

      CURRENT LIABILITIES
        Legal fees payable                       $     282,950   $     216,783
        Fees payable to R&D subcontractor              196,043              -
        Accounting fees payable                         42,417          22,443
        Other accounts payable                          14,326          15,736
        Accrued expenses                                43,213          33,880
        Accrued officer wages                           70,000          75,482
        Notes payable - current portion                 25,688          25,688
        Payable on research and
           development sponsorship                     422,653         498,731
        Loans payable - others                          57,406          59,028
                                                 _____________   _____________

          TOTAL CURRENT LIABILITIES                  1,154,696         947,771

      LONG-TERM DEBT                                        -        1,519,166

      STOCKHOLDERS' EQUITY (DEFICIT)
        Class A Common Stock, $.001 par value,
        authorized 399,700,000 shares, issued and
        outstanding 42,433,378 at December 31, 2001
        and 109,228,185 shares at December 31, 2002,
        Shares held in reserve 60,000,000 at December
        31, 2001 and 101,602,800 at December 31, 2002   42,433         109,228

        Class B Common Stock, $.001 par value,
        authorized 300,000 Shares, issued and
        outstanding 100, 000 shares at December 31,
        2001, and  300,000 at December 31, 2002            100             300

        Preferred stock, $.001 par value, authorized
        50,000,000 Shares, issued and outstanding 337,471
        shares at December 31, 2001, and 480,721 shares
        issued and outstanding at December 31,  2002       337             480

        Additional paid in capital                   8,851,436      11,223,453
        Less notes receivable - common stock          (731,549)       (774,311)
        Deficit accumulated during the development
        stage                                       (8,801,171)    (12,653,467)
                                                 _____________   _____________

        TOTAL STOCKHOLDERS' (DEFICIT)                 (638,414)     (2,094,317)
                                                 _____________   _____________

          TOTAL LIABILITIES AND STOCKHOLDERS'
             (DEFICIT)                           $     516,282   $     372,620
                                                 =============   =============


                                      F-1





                          MATERIAL TECHNOLOGIES, INC.
                         (A Development Stage Company)
                            STATEMENTS OF OPERATIONS
________________________________________________________________________________

                                                                                     From Inception
                                                                                     (October 21, 1983)
                                                 For the Year Ended December 31,          Through
                                               2000          2001          2002       December 31, 2002
                                            __________     __________     __________     __________
                                             (Restated)       (Restated)
 REVENUES
  Sale of fatigue fuses                     $       -      $       -      $       -      $   64,505
  Sale of royalty interests                         -              -              -         198,750
  Research and development revenue             635,868      1,579,823        461,323      5,024,812
  Test services                                     -              -              -          10,870
                                            __________     __________     __________     __________
    TOTAL REVENUES                             635,868      1,579,823        461,323      5,298,937
                                            __________     __________     __________     __________

COSTS AND EXPENSES
  Research and development                     496,501      1,493,628        665,435      5,030,763
  General and administrative                 1,381,047      3,632,769      3,581,706     12,453,854
                                            __________     __________     __________     __________
    TOTAL COSTS AND EXPENSES                 1,877,548      5,126,397      4,247,141     17,484,617
                                            __________     __________     __________     __________
    INCOME (LOSS) FROM OPERATIONS           (1,241,680)    (3,546,574)    (3,785,818)   (12,185,680)
                                            __________     __________     __________     __________

OTHER INCOME (EXPENSE)
  Interest income                              103,419        102,283         52,782        300,600
  Interest expense                             (60,634)       (70,468)      (118,460)      (434,447)
  Loss on abandonment of interest in
     joint venture                                  -         (33,000)            -         (33,000)
                                            __________     __________     __________     __________
    TOTAL OTHER INCOME                          42,785         (1,185)       (65,678)      (166,847)
                                            __________     __________     __________     __________

NET INCOME (LOSS) BEFORE EXTRAORDINARY
  ITEMS AND PROVISION FOR INCOME TAXES      (1,198,895)    (3,547,759)    (3,851,496)   (12,352,527)
PROVISION FOR INCOME TAXES                        (800)          (800)          (800)       (11,000)
                                            __________     __________     __________     __________
    NET INCOME (LOSS) BEFORE
      EXTRAORDINARY ITEMS                   (1,199,695)    (3,548,559)    (3,852,296)   (12,363,527)
 EXTRAORDINARY ITEMS
  Forgiveness of indebtness                         -              -              -        (289,940)
                                            __________     __________     __________     __________
    NET INCOME (LOSS)                      $(1,199,695)   $(3,548,559)   $(3,852,296)  $(12,653,467)
                                            __________     __________     __________     __________
                                            __________     __________     __________     __________

PER SHARE DATA
  Basic income (loss) before
     extraordinary item                    $     (0.06)   $     (0.11)   $     (0.06)
  Basic extraordinary items                         -              -              -
                                            __________     __________     __________
    BASIC NET INCOME (LOSS) PER SHARE      $     (0.06)   $     (0.11)   $     (0.06)
                                            ==========     ==========     ==========
   WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING                            18,900,019     33,640,393     63,073,970
                                            ==========     ==========     ==========
                                      F-2





                           Material Technologies, Inc.
                          (A Development Stage Company)
                   Statement of Stockholders' Equity (Deficit)
________________________________________________________________________________
                                                                                                                                                        Deficit
                                                                                                                                                      Accumulated
                                 Class A Common         Class B Common           Preferred Stock
                          ________________________  _______________________   _______________________     Capital     During the
                             Shares                   Shares                    Shares                 in Excess of  Development
                          Outstanding     Amount    Outstanding    Amount     Outstanding    Amount      Par Value      Stage
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________
Initial Issuance of Common Stock
  October 21, 1983              2,408  $        2            -   $        -            -   $        -         2,498  $        -
Adjustment to Give Effect
   to Recapitalization on
  December 15, 1986
Cancellation of Shares         (2,202)         (2)           -            -            -            -            (2)          -
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

                                  206          -             -            -            -            -         2,496           -
Balance - October 21, 1983
Shares Issued By Tensiodyne
  Corporation in Connection
  with Pooling of Interests    42,334          14            -            -            -            -         4,328           -
Net (Loss), Year Ended
 December 31, 1983                 -           -             -            -            -            -            -        (4,317)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance, January 1, 1984       42,540          14            -            -            -            -         6,824       (4,317)
Capital Contribution               -           28            -            -            -            -        21,727           -
Issuance of Common Stock        4,815           5            -            -            -            -        10,695           -
Costs Incurred in Connection
  with Issuance of Stock           -           -             -            -            -            -        (2,849)          -
Net (Loss), Year Ended
 December 31, 1984                 -           -             -            -            -            -            -       (21,797)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance, January 1, 1985       47,355           47           -            -            -            -        36,397      (26,114)
Shares Contributed Back
  to Company                     (315)          (0)          -            -            -            -            -            -
Capital Contribution               -            -            -            -            -            -       200,555           -
Sale of 12,166 Warrants at
  $1.50 Per Warrant                -            -            -            -            -            -        18,250           -
Shares Cancelled               (8,758)          (9)          -            -            -            -             9           -
Net (Loss), Year Ended
 December 31, 1985                 -            -            -            -            -            -            -      (252,070)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance, January 1, 1986       38,282           38           -            -            -            -       255,211     (278,184)
Net (Loss), Year Ended
 December 31, 1986                 -            -            -            -            -            -            -       (10,365)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance, January 1, 1987       38,282           38           -            -            -            -       255,211     (288,549)
Issuance of Common Stock upon
  Exercise of Warrants            216           -            -            -            -            -        27,082           -
Net (Loss), Year Ended
 December 31, 1987                 -            -            -            -            -            -            -       (45,389)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance, January 1, 1988       38,498           38           -            -            -            -       282,293     (333,938)
Issuance of Common Stock
Sale of Stock                   2,544            3           -            -            -            -       101,749           -
Services Rendered               3,179            3           -            -            -            -        70,597           -
Net (Loss), Year Ended
  December 31, 1988                -            -            -            -            -            -            -      (142,335)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance, January 1, 1989       44,221           44           -            -            -            -       454,639     (476,273)
Issuance of Common Stock
Sale of Stock                   4,000            4           -            -            -            -         1,996           -
Services Rendered              36,000           36           -            -            -            -        17,964           -
Net (Loss), Year Ended
 December 31, 1989                 -            -            -            -            -            -            -       (31,945)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance, January 1, 1990       84,221           84           -            -            -            -       474,599     (508,218)
Issuance of Common Stock
Sale of Stock                   2,370            2           -            -            -            -        59,248           -
Services Rendered               6,480            7           -            -            -            -        32,393           -
Net Income, Year Ended
 December 31, 1990                 -            -            -            -            -            -            -       133,894
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance January 1, 1991        93,071           93           -            -            -            -       566,240     (374,324)
Issuance of Common Stock
Sale of Stock                     647            1           -            -       350,000          350      273,335           -
Services Rendered               4,371            4           -            -            -            -        64,880           -
Conversion of Warrants             30           -                                                                -
Conversion of Stock            (6,000)          (6)      60,000           60           -            -            -            -
Net (Loss), Year Ended
 December 31, 1991                 -            -            -            -            -            -            -      (346,316)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance January 1, 1992        92,119           92       60,000           60      350,000          350      904,455     (720,640)
Issuance of Common Stock
Sale of Stock                  20,000           20           -            -            -            -        15,980           -
Services Rendered               5,400            5           -            -            -            -        15,515           -
Conversion of Warrants          6,000            6           -            -            -            -        14,994           -
Sale of Class B Stock              -            -        60,000           60           -            -        14,940           -
Issuance of Stock to
  Unconsolidated Subsidiary     4,751            5           -            -            -            -        71,659           -
Conversion of Stock             6,000            6      (60,000)         (60)          -            -            -            -
Cancellation of Shares         (6,650)          (7)          -            -            -            -             7           -
Net (Loss), Year Ended
 December 31, 1992                 -            -            -            -            -            -            -      (154,986)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance January 1, 1993       127,620          127       60,000           60      350,000          350    1,037,550     (875,626)
Issuance of Common Stock
Licensing Agreement            12,500           13           -            -            -            -         6,237           -
Services Rendered              67,030           67           -            -            -            -        13,846           -
Warrant Conversion             56,000           56           -            -            -            -       304,943           -
Cancellation of Shares        (31,700)         (32)          -            -            -            -        (7,537)          -
Net (Loss) for Year Ended
 December 31, 1993                 -            -            -            -            -            -            -      (929,900)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance January 1, 1994       231,449          231       60,000           60      350,000          350    1,355,039   (1,805,526)

Adjustment to Give Effect
  to Recapitalization on
 February 1, 1994              30,818           31           -            -            -            -       385,393           -
Issuance of Shares for
Services Rendered             223,000          223           -            -            -            -            -            -
Sale of Stock               1,486,112        1,486           -            -            -            -        23,300           -
Issuance of Shares for
the Modification of Agreements 34,000           34           -            -            -            -           (34)          -
Net (Loss) for the Year
Ended December 31, 1994            -            -            -            -            -            -            -      (377,063)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance January 1, 1995     2,005,380        2,005       60,000           60      350,000          350    1,763,698   (2,182,589)

Issuance of Common Stock
  in Consideration for
  Modification of Agreement   152,500          153           -            -            -            -            -            -
Net (Loss) for the Year
Ended December 31, 1995 -          -            -            -            -            -            -            -      (197,546)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance January 1, 1996     2,157,880        2,157       60,000           60      350,000          350    1,763,698   (2,380,135)

Issuance of Shares for
  Services Rendered           164,666          165           -            -            -            -        16,301           -
Sale of Stock                  70,000           70           -            -            -            -       173,970           -
Issuance of Shares for
  the Modification of
  Agreements                  250,000          250           -            -            -            -          (250)          -
Cancellation of Shares Held
  in Treasury                 (62,000)         (62)          -            -            -            -       (154,538)         -
Net (Loss) for the Year
  Ended December 31, 1996          -            -            -            -            -            -             -     (450,734)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance January 1, 1997     2,580,546        2,580       60,000           60      350,000          350    1,799,181   (2,830,869)


Sale of Stock                 100,000          100           -            -            -            -        99,900           -
Conversion of Indebtedness    800,000          800           -            -            -            -       165,200           -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer   1,499,454        1,500           -            -            -            -       370,500           -
Issuance of Shares for
Services Rendered             247,000          247           -            -            -            -         2,224           -
Adjustment to Give Effect
to Recapitalization on
9-Mar-97                      560,000          560           -            -            -            -          (560)          -
Net (Loss) for the Year
Ended December 31, 1997            -            -            -            -            -            -            -      (133,578)

                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________
                            5,787,000        5,787       60,000           60      350,000          350    2,436,445   (2,964,447)
Shares Issued in Cancellation
of Indebtedness             2,430,000        2,430           -            -            -            -       167,570           -
Conversion of Options         500,000          500           -            -            -            -       124,500           -
Issuance of Shares for
Services Rendered           1,121,617        1,122           -            -            -            -       111,040           -
Shares Issued in Cancellation
of Redeemable Preferred Stock  50,000           50           -            -            -            -       149,950           -
Shares Returned to Treasury
and Cancelled                (560,000)        (560)          -            -            -            -           560           -
Modification  of Royalty
 Agreement                    733,280          733           -            -            -            -         6,599           -
Issuance of Warrants to Officer    -            -            -            -            -            -        27,567           -
Net (Loss) for the Year
Ended December 31, 1998            -            -            -            -            -            -            -      (549,187)

                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________
                           10,061,897  $    10,062       60,000  $        60     350,000   $       350    3,024,231  $(3,513,634)
Shares Issued in Cancellation
  of Indebtedness           2,175,000        2,175           -            -           -             -       164,492           -
Issuance of Shares for
  Services Rendered         1,255,000        1,255           -            -           -             -        93,844           -
Shares Issued in Modification
  of Licensing Agreement      672,205          672           -            -           -             -          (672)          -
Sale of Stock                 433,333          433           -            -           -             -       173,107           -
Net (Loss) for the Year
Ended December 31, 1999            -            -            -            -           -             -            -      (539,283)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

                           14,597,435  $    14,597       60,000  $        60      350,000  $       350    3,455,002  $(4,052,917)

Issuance of Shares for
  Services Rendered - as
    restated                  699,500          699           -            -           -             -       823,817           -
Shares Issued to Investors
  Pursuant to Settlement
    Agreement                  65,028           65           -            -           -             -           (65)          -
Shares Issued for Cash
  and Non-Recourse
  Promissory Notes          5,000,000        5,000           -            -           -             -     1,990,000           -
Shares Issued for Cash        400,000          400           -            -           -             -       281,294           -
Shares Issued in Cancellation
of Indebtedness               100,000          100           -            -           -             -        99,900           -
Shares Issued as Compensation
  Pursuant to Escrow
    Agreement               4,183,675        4,184           -            -           -             -            -            -
Shares Returned from
 Escrow                      (400,000)        (400)          -            -           -             -           400           -
Common Shares Converted
  into Class B Common         (40,000)         (40)      40,000           40          -             -            -            -
Preferred Shares Converted
  into Common                  12,529           13           -            -      (12,529)          (13)
Net (Loss) for the Year                                                                                                                        -                 -
Ended December 31, 2000
   - restated                      -            -            -            -           -             -            -    (1,199,695)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

  Balance December 31,
    2000 - restated        24,618,167  $    24,618      100,000  $       100      337,471  $       337    6,650,348  $(5,252,612)

Issuance of Shares for
  Services Rendered -
    restated                6,185,000        6,185           -            -            -            -       798,151           -
Shares Issued for Cash      4,932,358        4,932           -            -            -            -       281,635           -
Shares Issued in Connection
  with Private Offering       697,853          698           -            -            -            -          (698)          -
Shares Issued to Officer    6,000,000        6,000           -            -            -            -     1,122,000           -
Net (Loss) for the Year
Ended December 31, 2001 -
   restated                        -            -            -            -            -            -            -    (3,548,559)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

                           42,433,378  $    42,433      100,000  $       100      337,471  $       337    8,851,436  $(8,801,171)

Issuance of  Shares for
  Services Rendered        21,835,018       21,835           -            -            -            -     1,163,796           -
Issuance of  Shares to
  University of
    Pennsylvania            1,096,476        1,096                                                           (1,096)
Shares issued in settlement
  of lawsuit                1,397,200        1,398           -            -            -            -        38,602
Shares Issued for Cash     28,046,766       28,047           -            -       143,250          143    1,125,546           -
Offering costs                                               -            -            -            -      (200,412)
Shares issued in canellation of
  President's interest in
     patents                       -            -       200,000          200           -            -            -
Cancellation of shares in
  stock grant              (1,322,000)      (1,322)                                                           1,322
Shares issued to Company's
  president for past
  compensation             13,000,000       13,000                                                          247,000
Shares Issued in
  Connection with Private
  Offering                  2,741,347        2,741           -            -            -            -        (2,741)          -
Net (Loss) for the Year
Ended December 31, 2002            -            -            -            -            -            -            -    (3,852,296)
                          ___________  ___________  ___________  ___________  ___________  ___________  ___________  ___________

Balance -
  December 31, 2002       109,228,185  $   109,228      300,000  $       300      480,721  $       480   11,223,453 $(12,653,467)
                          ===========  ===========  ===========  ===========  ===========  ===========  ===========  ===========

                                      F-3




                          MATERIAL TECHNOLOGIES, INC.
                         (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
________________________________________________________________________________


                                                                                         From Inception
                                                  For the Year Ended December 31,      (October 21, 1983)
                                             ________________________________________       Through
                                                 2000         2001           2002      December 31, 2002
                                             ____________  ____________  ____________   ____________
                                             (Restated)     (Restated)

CASH FLOWS FROM OPERATING ACTIVITIES:

  Net income (loss)                          $ (1,199,695) $ (3,548,559) $ (3,852,296)  $(12,653,467)
                                             ____________  ____________  ____________   ____________
  Adjustments to reconcile net income
    (loss) to net cash provided
    (used) in operating activities

  Depreciation and amortization                     2,948         3,755         7,747        185,612

  Accrued interest income                         (98,557)      (98,298)      (49,444)      (247,731)

  Gain on sale of securities                           -             -             -        (196,596)

  Charge off of investment in joint venture            -         33,000            -          33,000

  Officers' and directors compensation on stock
  subscription modification                            -      1,500,000            -       1,500,000

  Issuance of common  stock to officer for past servicea                      260,000        260,000

  Charge off of deferred offering costs                -             -             -          36,480

  Charge off of long-lived assets due to impairment    -             -             -          92,919

  Modification of royalty agreement                    -             -             -           7,332

  Gain on foreclosure                                  -             -             -         (18,697)

  (Increase) decrease in accounts receivable      112,364      (255,073)      285,677        (50,328)

  (Increase) decrease in employee advances             -             -         (1,433)        (1,433)

  (Increase) decrease in prepaid expense               -           (212)       (1,179)        (1,338)

  Loss on sale of equipment                            -             -                        12,780

  Issuance of common  stock for services          828,699     1,932,336     1,286,894      4,581,656

  Issuance of stock for agreement modification         -             -             -             152

  Forgiveness of Indebtedness                          -             -             -         215,000
  Increase (decrease) in accounts
    payable and accrued expenses                    8,441       267,742      (284,625)       902,989

  Increase in legal fees secured by note payable       -             -      1,481,895      1,481,895

  Interest accrued on note payables                57,062        67,718       114,971        387,726
  Increase in research and development
     sponsorship payable                               -             -                       218,000

  (Increase) in note for litigation settlement         -             -                       (25,753)

  (Increase) in Deposits                               -             -                        (2,189)
                                             ____________  ____________  ____________   ____________
    TOTAL ADJUSTMENTS
                                                  910,957     3,450,968     3,100,503      9,371,476
                                             ____________  ____________  ____________   ____________
  NET CASH PROVIDED (USED) BY
   OPERATING ACTIVITIES                          (288,738)      (97,591)     (751,793)    (3,281,991)
                                             ____________  ____________  ____________   ____________

CASH FLOWS FROM INVESTING ACTIVITIES

  Proceeds From sale of equipment                      -             -                        10,250

  Purchase of property and equipment                   -         (5,961)      (29,608)      (266,472)

  Proceeds from sale of securities                     -             -             -         283,596

  Purchase of securities                               -             -             -         (90,000)

  Proceeds from foreclosure                            -             -             -          44,450

  Investment in joint ventures                    (15,000)           -             -        (102,069)

  Payment for license agreement                        -             -             -          (6,250)
                                             ____________  ____________  ____________   ____________

  NET CASH PROVIDED (USED) BY
   INVESTING ACTIVITIES                           (15,000)       (5,961)      (29,608)      (126,495)
                                             ____________  ____________  ____________   ____________


                                      F-4




                          MATERIAL TECHNOLOGIES, INC.
                         (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
________________________________________________________________________________


                                                                                        From Inception
                                                                                      (October 21, 1983)                                                               (October 21, 1983)
                                                    For the Year Ended December 31,       Through
                                                     2000        2001        2002      December 31, 2002
                                                 ___________  ___________  ___________  ___________
CASH FLOWS FROM FINANCING ACTIVITIES
                                                                                                                                                    $
  Issuance of common stock net of offering costs $   274,288  $   366,126  $ 1,747,733  $ 2,901,468

  Costs incurred in offerings                             -       (79,559)    (261,474)    (372,513)

  Sale of common stock warrants                           -            -            -        18,250

  Sale of preferred stock                                 -            -            -       258,500

  Sale of redeemable preferred stock                      -            -            -       150,000

  Capital contributions                                   -            -            -       301,068

  Payment on proposed reorganization                      -            -            -        (5,000)

  Loans  From  officer                                 8,000       42,800           -       778,805

  Officer advances and repayments                    (39,500)     (53,300)     (33,547)    (542,379)

  Increase in loan payable-others                         -            -            -       172,069
                                                 ___________  ___________  ___________  ___________


CASH FLOWS FROM FINANCING ACTIVITIES:                242,788      276,067      858,714    3,660,268
                                                 ___________  ___________  ___________  ___________

NET INCREASE (DECREASE) IN CASH
      AND CASH EQUIVALENTS                          (60,950)      172,515       77,313      251,782
BEGINNING BALANCE CASH AND
      CASH EQUIVALENTS                               62,904         1,954      174,469           -
                                                 ___________  ___________  ___________  ___________
ENDING BALANCE CASH AND CASH
    EQUIVALENTS                                  $    1,954   $   174,469  $   251,782  $   251,782
                                                 ===========  ===========  ===========  ===========

                                      F-5






                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS


Note 1 - Organization

Material Technologies, Inc. (the "Company") was organized on March 4, 1997,
under the laws of the state of Delaware.

The Company is in the development stage, as defined in FASB Statement 7, with
its principal activity being research and development in the area of metal
fatigue technology with the intent of future commercial application. The Company
has not paid any dividends and dividends that may be paid in the future will
depend on the financial requirements of the Company and other relevant factors.

Note 2 - Summary of Significant Accounting Policies

a Accounts Receivable

Accounts receivable are reported at the customers' outstanding balances less any
allowance for doubtful accounts. Interest is not accrued on overdue accounts
receivable.

b. Allowance for Doubtful Accounts

The allowance for doubtful accounts on accounts receivable is charged to income
in amounts sufficient to maintain the allowance for uncollectible accounts at a
level management believes is adequate to cover any probable losses. Management
determines the adequacy of the allowance based on historical write-off
percentages and information collected from individual customers. Accounts
receivable are charged off against the allowance when collectibility is
determined to be permanently impaired (bankruptcy, lack of contact, account
balance over one year old, etc.).

c. Property and Equipment

Property and equipment are stated at cost. Major renewals and improvements are
charged to the asset accounts while replacements, maintenance and repairs, which
do not improve or extend the lives of the respective assets, are expensed. At
the time property and equipment are retired or otherwise disposed of, the asset
and related accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or charged to
income.

Material Technologies, Inc. depreciates its property and equipment as follows:

                                      F-6



                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



Financial statement reporting - straight line method as follows:

                  Machinery                5 years
                  Computer equipment     3-5 years
                  Office equipment         5 years

Long-Lived Assets

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the historical cost-carrying value of an
asset may no longer be appropriate. The Company assesses recoverability of the
carrying value of an asset by estimating the future net cash flows expected to
result from the asset, including eventual disposition. If the future net cash
flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset's carrying value and fair
value.

b. Net Loss Per Share

The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS") that established
standards for the computation, presentation and disclosure of earnings per
share, replacing the presentation of Primary EPS with a presentation of Basic
EPS.

c. Accounting Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.

d. Fair Value of Financial Instruments

The Company estimates the fair value of its financial instruments at their
current carrying amounts.

e. Stock Based Compensation

For 1998 and subsequent years, the Company has adopted FASB Statement 123 which
establishes a fair value method of accounting for its stock-based compensation
plans. Prior to 1998, the Company used APB Opinion 25.

f. Revenue Recognition

During 2002, Significantly all of the Company's revenue was derived from the
Company's sub-contract with the United States Air Force relating to the further
development of the Electrochemical Fatigue Fuse. Revenue on the sub-contract is
recognized at the time services are rendered. . The Company bills monthly for
services pursuant to this sub-contract at which time revenue is recognized for
the period that the respective invoice relates. The objective of the contract
with the US Air Force is to further develop and validate a prototype
Electrochemical Fatigue Sensor (EFS) to inspect turbine engine blades and
components in the disassembled condition as well as without the need to
disassemble the engine. The project builds on work performed through previous
contracts with the Air Force. As required under the contract and previous
contracts with the Air Force, the technical data and /or commercial computer
software developed under the contracts will be delivered to the Government with
"Other Than Unlimited Rights". Under the contracts, Material Technologies, Inc.
has always maintained a proprietary interest in the development of the data and
software for commercial use. The sub-contract expired in 2002.

                                      F-7





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS

All other income is reported in the period that the income was earned.

g. Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers cash and cash
equivalents to include all stable, highly liquid investments with maturities of
three months or less.

h. Income Taxes

The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards 109 ("SFAS 109"). The method of accounting for
income taxes under SFAS 109 is an asset and liability method. The asset and
liability method requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between tax
bases and financial reporting bases of other assets and liabilities.

i. Recent Accounting Pronouncements

The FASB recently issued the following statements:

     FASB 144 - Accounting for the Impairment or Disposal of Long-Lived Assets
     FASB 145 - Rescission of FASB Statements 4, 44 and 64 and Amendment of  FASB 13
     FASB 146 - Accounting for Costs Associated with Exit or Disposal Activities
     FASB 147 - Acquisitions of Certain Financial Institutions
     FASB 148 - Accounting for Stock-Based Compensation

These FASB statements did not have, or are not expected to have, a material
impact on the Company's financial position and results of operations.


Note 3 - Accounts Receivable

Accounts receivable consists entirely of amounts due under the Company's
research and development sub-contract and consists of the following:

                                                        December 31,
                                                     2001         2002
                                                  _________      _________
         Accounts Receivable                      $ 285,677      $  8,362
         Less allowance for doubtful accounts            -         (8,362)
                                                  _________      _________
                                                  $ 285,677      $     -
                                                  =========      =========

                                      F-8





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS


Note 4 - Intangibles

Intangible assets consist of the following:

                              Period of              December 31,
                            Amortization          2001          2002
                                               _________      _________
     Patent Costs             17 Years         $  28,494      $  28,494
     License Agreement        17 Years             6,250          6,250
          (See Note 4)
     Website                   5 Years             5,200         5,200
                                               _________      _________
                                                  39,944         39,944
         Less Accumulated Amortization           (24,744)       (27,824)
                                               _________      _________
                                               $  15,200      $  12,120
                                               _________      _________
                                               _________      _________

Amortization charged to operations for 2000, 2001, and 2002 were $1,989, and
$2,249, and 3,080 respectively.

Estimated amortization expense for the remaining life of the contract is as
follows:

                  2003              $2,116
                  2004              $2,116
                  2005              $2,116
                  2006              $1,856
                  2007              $ 1076

Note 5 - License Agreement

The Company has entered into a license agreement with the University of
Pennsylvania regarding the development and marketing of the EFS. The EFS is
designed to measure electrochemically the state of fatigue damage in a metal
structural member. The Company is in the initial stage of developing the EFS.

Under the terms of the agreement the Company issued to the University 12,500
shares of its common stock, and a 5% royalty on sales of the product. The
Company valued the licensing agreement at $6,250. The license terminates upon
the expiration of the underlying patents, unless sooner terminated as provided
in the agreement. The Company is amortizing the license over 17 years.

In addition to entering into the licensing agreement, the Company also agreed to
sponsor the development of the EFS. Under the Sponsorship agreement, the Company
agreed to reimburse the University development costs totaling approximately
$200,000 that was to be paid in 18 monthly installments of $11,112.

Under the agreement, the Company reimbursed the University $10,000 in 1996 for
the cost it incurred in the prosecution and maintenance of its patents relating
to the EFS.

The Company and the University agreed to modify the terms of the licensing
agreement and related obligation. The modified agreements increase the
University's royalty to 7% of the sale of related products, the issuance of
additional shares of the Company's Common Stock to equal 5% of the outstanding
stock of the Company as of the effective date of the modified agreements, and to
pay to the University 30% of any amounts raised by the Company in excess of
$150,000 (excluding amounts received on government grants or contracts) up to
the amount owing to the University.

The parties agreed that the balance owed on the Sponsorship Agreement was
$200,000 and commencing June 30, 1997, the balance due will accrue interest at a
rate of 1.5% per month until the loan matures on December 16, 2001, when the
loan balance and accrued interest become fully due and payable. In addition,
under the agreement, Mr. Bernstein agreed to limit his compensation from the
Company to $150,000 per year until the loan and accrued interest is fully paid.
Interest charged to operations for 2000, 2001, and 2002, relating to this
obligation was $54,638, $64,472, and $76,078, respectively. The balance of the
note at December 31, 2001, and 2002, was $422.653 and $498,731, respectively,

As of December 31, 2001, the Company was required to issue an additional
1,404,464 shares to the University pursuant to the revised agreement. The
Company is currently in discussions with the University regarding the issuance
of the shares and other related matters. As indicated, the Note matured on
December 16, 2001 and the Company has not made any payments and under the terms
of the agreement is in default.

                                      F-9




                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



Note 6 - Property and Equipment

The following is a summary of property and equipment:




                                                 December 31,
                                             2001            2002
                                           ________       _________
     Office and computer equipment         $ 24,142       $  24,142
     Manufacturing equipment                100,067         129,675
                                           ________       _________
                                            124,209         153,817
         Less: Accumulated
            Depreciation                   (121,501)       (126,168)
                                           ________       _________
                                           $  2,708       $  27,649
                                           ========       =========

Depreciation charged to operations was $959, and $1,044, and $4,667, in 2000,
2001, and 2002, respectively. The Company's equipment has been pledged as
collateral on the agreement with Advanced Technology Center (See Note 8(b)).

Note 7 - Notes Payable

On May 27, 1994, the Company borrowed $25,000 from Mr. Sherman Baker, a current
shareholder. The loan is evidenced by a promissory note that is assessed
interest at major bank prime rate. The note matures on May 31, 2002, when
principal and accrued interest become fully due and payable. The Company has
pledged its patents as collateral against this loan. The loan has not been paid
and is now in default.

As additional consideration for the loan, the Company granted to Mr. Baker, a 1%
royalty interest in the Fatigue Fuse and a 0.5% royalty interest in the
Electrochemical Fatigue Sensor. The Company has not placed a value on the
royalty interest granted. The balance due on this loan as of December 31, 2001,
and 2002, was $57,237, and $58,859, respectively. Interest charged to operations
for 2000, 2001 and 2002 was $3,245, $3,246, and $1,622, respectively.

In October 1996, the Company borrowed $25,000 from an unrelated third party. The
loan was assessed interest at an annual rate of 11% and matured on October 15,
2000. In addition the Company issued warrants to the lender for the purchase of
2,500 shares of the Company's common stock at a price of $1.00 per share. The
loan balance as of December 31, 2000 and 2001 was $25,527 and $25,527,
respectively. Interest charged to operations on this loan in 2000, 2001, and
2002, were $2,750, $2,750, and $2,750, respectively.

The Company did not pay any amounts due on this note when it matured on October
15, 2000, and the note is in default.

Note 8 - Income Taxes

Income taxes are provided based on earnings reported for financial statement
purposes pursuant to the provisions of Statement of Financial Accounting
Standards No. 109 ("FASB 109").

FASB 109 uses the asset and liability method to account for income taxes. That
requires recognizing deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between tax basis and financial
reporting basis of assets and liabilities.

An allowance has been provided for by the Company which reduced the tax benefits
accrued by the Company for its net operating losses to zero, as it cannot be
determined when, or if, the tax benefits derived from these operating losses
will materialize. The allowance for 2000, 2001 and 2002 was $1,199,695,
$3,548,559, and $3,590,712, respectively. As of December 31, 2002, the Company
has unused operating loss carryforwards, which may provide future tax benefits
in the amount of $12,391,883 which expire in various years through 2022.

The Company's use of its net operating losses may be restricted in future years
due to the limitations pursuant to IRC Section 382 on changes in ownership.

Note 9 - Commitments and Contingencies

The Company's commitments and contingencies are as follows:

a. On December 24, 1985, to provide funding for research and development related
   to the Fatigue Fuse, the Company entered into various agreements with the
   Tensiodyne 1985-I R & D Partnership. These agreements were amended on October
   9, 1989, and under the revised terms, obligated the Company to pay the
   Partnership a royalty of 10% of future gross sales. The Company's obligation
   to the Partnership is limited to the capital contributed to it by its
   partners in the amount of approximately $912,500 and accrued interest.

                                      F-10




                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



b.  On August 30, 1986, the Company entered into a funding agreement with the
    Advanced Technology Center ("ATC"), whereby ATC paid $45,000 to the Company
    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. At December 31, 2001, and 2002, the future royalty
    commitment was limited to $227,149 and $249,864, respectively.

The payment of future royalties is secured by equipment used by the Company in
the development of technology as specified in the funding agreement.

c.  On May 4, 1987, the Company entered into a funding agreement with ATC,
    whereby ATC provided $63,775 to the Company for the purchase of a royalty of
    3% of future gross sales and 6% of sublicensing revenues. 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.

At December 31, 2001, and 2002, the total future royalty commitments, including
the accumulated 26% annual rate of return, were limited to approximately
$1,725,234, and $2,173,795, respectively. If the Company defaults on the
agreement, then the obligation relating to this agreement becomes secured by the
Company's patents, products, and accounts receivable, which may be related to
technology developed with the funding.

d.  In 1994, the Company issued to Variety Investments, Ltd. of Vancouver,
    Canada ("Variety"), a 22.5% royalty interest on the Fatigue Fuse in
    consideration for the cash advances made to the Company by Variety.

In December 1996, in exchange for the Company issuing 250,000 shares of its
Common Stock to Variety, Variety reduced its royalty interest to 20%. In 1998,
in exchange for the Company issuing 733,280 shares of its Common Stock to
Variety, Variety reduced its royalty interest to 5%.

e.  As discussed in Note 6, the Company granted a 1% royalty interest in the
    Company's Fatigue Fuse and a .5% royalty interest in its Electrochemical
    Fatigue Sensor to Mr. Sherman Baker as part consideration on a $25,000 loan
    made by Mr. Baker to the Company.

A summary of royalty interests that the Company has granted and are outstanding
as of December 31, 2001, follows:

                                                  Fatigue       Fatigue
                                                    Fuse         Sensor
                                                   _______      _______
         Tensiodyne 1985-1 R&D Partnership            -*            -
         Advanced Technology Center
           Future Gross Sales                      6.00%*           -
           Sublicensing Fees                          -**           -
         Variety Investments, Ltd                  5.00%            -
         University of Pennsylvania
            Net Sales of Licensed Products            -          7.00%
            Net Sales of Services                     -          2.50%
         Sherman Baker                             1.00%         0.50%
                                                   _______      _______
                                                  12.00%        10.00%
                                                   _______      _______
                                                   _______      _______

         *   Royalties limited to specific rates of return as discussed in Notes
             8(a) and (b) above.

         **  The Company granted 12% royalties on sales from sublicensing. These
             royalties are also limited to specific rates of return as discussed
             in Note 8(b) and (c) above.

h. Operating Leases

The Company leases its existing office under a non-cancelable lease, which
expires on June 30, 2003. The lease has a provision allowing the Company to
extend the lease period an additional six months, which the Company intends to
do, making the extended lease term to end on December 31, 2003.

Rental expense charged to operations for the years ended December 31, 2000,
2001, and 2002 was approximately $23,129, $29,468, and $28,176 which consisted
solely of minimum rental payments.

In addition to rent, the Company is obligated to pay property taxes, insurance,
and other related costs associated with the leased office.


                                      F-11





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS


Minimum rental commitments under the noncancelable leases expire as follows:

                  Year Ended 2003        $ 11,740

i. Straight Documentary Credit

On October 10, 2001, the Company entered into an arrangement whereby Allied
Boston Group will provide the Company with a Straight Documentary Credit (a
letter of credit) for $12,500,000. Under the terms of the commitment, the
Company will pledge sufficient shares of its common stock to equal 125% of the
Straight Documentary Credit. Under the initial terms, the shares were valued at
$.27 per share. If the Company's stock price goes lower, then additional shares
will be pledged. If the stock price goes to a $1.00 per share, then Allied
Boston is required to liquidate a sufficient number of shares to pay off the
amount funded through this Straight Documentary Credit. After the amount is paid
off, Allied Boston will retain 25 million shares of the Company's common stock.
Any remaining shares will be returned to the Company;

Upon funding through the Straight Documentary Credit, the Company is required to
pay a Success Fee to Allied Boston in the amount of 8% of the amount funded of
which 50% will be paid in cash and the remainder of the fee will be paid through
the issuance of the Company's common stock to be valued at market value at the
time of issuance. As long as the Documentary Credit is in force, Allied Boston
will have 2 voting seats on the Company's Board. All out-of-pocket expenses
pertaining to the issuance of the instrument will be borne by the Company.

In October 2001, the Company issued 60,000,000 shares of its common stock as
collateral to Allied Boston pursuant to the terms of the agreement, and in
January 2002, the Company issued 40,000,000 shares as additional collateral. As
indicated the selling of these shares are contingent upon the occurrence of
future events. Further, this shares can not be voted on by Allied Boston until
such time as the credit has been funded. Therefore as these shares can not be
sold or voted, the Company treats the shares issued, held in reserve, and not
outstanding.

As of the balance sheet date, the Credit has not been funded, however the
Company is in discussions with funding sources.

j) Litigation

In July 2002, the Company settled its pending lawsuit with Mr. Beck. Under the
terms of the settlement, Mr. Beck received 1,000,000 shares of the Company
common stock. The shares to be issued are non-dilutive for a period of five
years.. The Company valued the shares issued to Mr. Beck at $40,000, the quoted
price of the shares on date of issuance was charged to operations, accordingly.

In addition, pursuant to the agreement that the Company had with the attorneys
who represented it in this matter, a contingent fee of $1,481,895 became due
them upon the settlement of the case. This fee, however, is payable out of the
Company's earnings derived before interest, taxes, depreciation and amortization
(EBIDA), limited each year to 25% of EBIDA. Unpaid amounts owed towards the fee
accrue interest at a rate of 6% per annum until paid in full. The balance of
this obligation at December 31 2002 including accrued interest is $1,519,166.
Interest charged to operations for 2002 totaled $37,271.

As the amounts due the attorneys are paid out of profits and amounts paid
annually are limited as indicated, management does not believe that the
liability to the attorneys will have any impact on the Company's ability to
continue operating. However, payments made to the attorneys will obviously have
a impact on the Company's future cash flow that could limit the amounts spent on
future projects or expansion.

Note 10 - Investments

a)  The Company owns 65,750 shares of Class A Common Stock of Tensiodyne
    Corporation. At December 31, 2002, there was no market for these shares and
    the Company valued its interest at $0.

d)  During 2001, the Company abandoned its 5% interest in Antaeus Research, LLC.
    and charged its total investment of $33,000 to operations. Prior to its
    abandonment, the Company accounts for this investment under the Cost Method.

                                      F-12




                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



Note 11 - Stockholders' Equity

a. Common Stock

The holders of the Company's Common Stock are entitled to one vote per share of
common stock held.

b. Class B Common Stock

The holders of the Company's Class B Common Stock are not entitled to dividends,
nor are they entitled to participate in any proceeds in the event of a
liquidation of the Company. However the holders are entitled to 1,000 votes for
each share of Class B Common held.

c. Class A Preferred Stock

During 1991, the Company sold to a group of 15 individuals, 2,585 shares of $100
par value preferred stock and warrants to purchase 2,000 shares of common stock
for a total consideration of $258,500.

In the Company's 1994 spin off, these shares were exchanged for 350,000 shares
of the Company's Class A Convertible Preferred Stock and 300,000 shares of its
Common Stock. The holders of these shares have a liquidation preference to
receive out of assets of the Company, an amount equal to $.72 per one share of
Class A Preferred Stock. Such amounts shall be paid upon all outstanding shares
before any payment shall be made or any assets distributed to the holders of the
common stock or any other stock of any other series or class ranking junior to
the Shares as to dividends or assets.

These shares are convertible to shares of the Company's common stock at a
conversion price of $.72 ("initial conversion price") per share of Class A
Preferred Stock that will be adjusted depending upon the occurrence of certain
events. The holders of these preferred shares shall have the right to vote and
cast that number of votes which the holder would have been entitled to cast had
such holder converted the shares immediately prior to the record date for such
vote.

The holders of these shares shall participate in all dividends declared and paid
with respect to the Common Stock to the same extent had such holder converted
the shares immediately prior to the record date for such dividend.

In 2000, a holder of 12,259 shares of preferred stock exchanged these shares for
12,259 shares of the Company's common. The 12,259 shares of preferred were
subsequently cancelled.

d. Class C Preferred Stock

During 2002, the Company sold to its legal counsel 143,250 shares of its Class B
preferred stock for $141,250. These shares are convertible to shares of the
Company's common stock at a conversion price of $.50 per share. The shares
accrue interest at 8% payable out of earnings before income tax, depreciation,
and amortization. The accrued interest is cumulative. Dividends accrued but not
actually payable at December 31, 2002 totaled $4,022.

                                      F-13





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



e. Issuances Involving Non-cash Consideration

All issuances of the Company's stock for non-cash consideration have been
assigned a dollar amount equaling the quoted market price of the shares at date
of issuance.

On January 31, 2000, the Company issued 50,000 shares of common stock to a
member of its advisory board. These shares were valued at $59,375. On February
8, 2000, the Company issued 10,000 shares of common stock to a consultant who
assisted in developing the Company's web site. The Company valued these shares
at $26,563. On February 28, 2000, the Company issued 200,000 of common stock to
a consultant for financial services. These shares were valued at $381,250. Also
on February 28, 2000, the Company issued 4,500 of common stock to a public
relations consultant. These shares were valued at $8,578. On March 9, 2000, the
Company issued 100,000 of common stock to a consultant in cancellation of
$100,000 due. On March 13, 2000, the Company issued two consultants a total of
75,000 shares of common stock for services relating to the development of the
fatigue fuse. . These shares were valued at $140,625. On March 21, 2000, the
Company's President returned to the Company 40,000 shares of Common stock in
exchange for receiving 40,000 shares of Class B common stock. On March 29, 2000,
the Company issued 50,000 shares of common stock to a consultant for financial
services. These shares were valued at $81,250. On April 11, 2000, the Company
issued 15,000 shares of common stock to consultant relating to the operations of
the Company joint venture. These shares were valued at $15,469. On April 11,
2000, the Company issued 25,000 shares of common stock for advisory services.
These shares were valued at $25,781. On April 28, 2000, the Company issued
30,000 shares of common stock for advisory services. These shares were valued at
$26,250. On May 4, 2000, the Company issued 12,529 shares of its common stock in
exchange for 12,529 shares of its preferred stock. The preferred shares were
subsequently cancelled. On May 25, 2000, the Company issued its President
4,650,000 shares its common stock in exchange for $4,650 and a $1,855,350
non-recourse promissory note bearing interest at an annual rate of 8%. On the
same day, the Company issued 350,000 shares its common stock to a Director in
exchange for $350 and a $139,650 non-recourse promissory note bearing interest
at an annual rate of 8%. Both notes mature on May 25, 2005, when the principal
and accrued interest becomes fully due and payable. On July 13, 2000, the
Company issued 40,000 shares of its common stock for legal services. These
shares were valued at $21,875. On October 27, 2000, the Company issued 4,183,675
to its President for futures services to be rendered pursuant to a stock grant
and escrow agreement. As discussed further in Note 11, these shares are held in
escrow, subject to substantial  restrictions and the actual shares that may vest
to the President could be substantially less then the number of shares placed in
escrow.  These shares were valued at par. On November 14, 2000,  pursuant to the
stock grant and escrow  agreement,  the  President  returned  400,000  shares of
common stock to the Company that were subsequently  cancelled.  On the same day,
400,000  shares were issued in exchange for $22,490.  On December 19, 2000,  the
Company issued 200,000 shares of its common stock to a consultant.  These shares
were valued at $37,500.  During  January and February  2000,  the Company issued
65,028  shares of its common stock to investors  who were  defrauded by a former
consultant  of the Company.  These shares were valued at par. In February  2000,
the Company  received  $251,798 from the proceeds from the sale of shares of DCH
Technologies,  Inc. These shares were placed in a brokerage account in 1998 by a
shareholder of the Company on the Company's behalf. The Company had no access to
the account.  Due to the  restrictive  covenants of the brokerage  account,  the
Company did not reflect the  transaction  on its financial  statements  prior to
2000, when the shares were sold. The Company credited the proceeds to additional
paid-in capital.

                                      F-14





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS


On January 9, 2001, the Company issued 100,000 shares of its common stock to a
member of the Company's advisory board for consulting services. These shares
were valued at $18,800. Also on January 9, 2001, the Company issued 50,000
shares of its common stock to a consultant for services rendered. These shares
were valued at $9,400. On January 10, 2001, the Company issued 100,000 shares
each to two employees pertaining to services rendered on the Company's research
project. These shares were valued at $31,200. On January 11, 2001, the Company
issued 100,000 shares of its common stock to an attorney for legal services.
These shares were valued at $12,500. On March 6, 2001, the Company issued its
President 6,000,000 shares of common stock for services rendered. These shares
were valued at $1,128,000. On April 6, 2001, the Company issued a consultant
200,000 shares of its common stock for services rendered. These shares were
valued at $21,800. On April 17, 2001, the Company issued a consultant 250,000
shares of its common stock for services rendered. These shares were valued at
$22,500. On April 20, 2001, the Company issued to two consultant 50,000 shares
each of its common stock for marketing services rendered. These shares were
valued at $9,000. On May 3, 2001, the Company issued to one of its employee's
100,000 shares of its common stock for services rendered on the Company's
research project. These shares were valued at $9,000. Also May 3, 2001, the
Company issued a consultant 100,000 shares of its common stock for services
rendered. These shares were valued at $9,000. On June 8, 2001, the Company
issued a consultant 1,000,000 shares of its common stock for past marketing
services rendered. These shares were valued at $50,000. The balance due for the
services. On June 12, 2001, the Company issued its executive assistant 25,000
shares of its common stock for services rendered. These shares were valued at
$2,750. On July 5, 2001, the Company issued an attorney 50,000 shares of its
common stock for legal services rendered. These shares were valued at $5,000. On
July 26, 2001, the Company issued a consultant 200,000 shares of its common
stock for services rendered. These shares were valued at $26,000. On August 6,
2001, the Company issued a consultant 125,000 shares of its common stock for
services rendered. These shares were valued at $16,250. On August 9, 2001, the
Company issued an attorney 265,000 shares of its common stock for services
rendered. These shares were valued at $39,750. On August 29, 2001, the Company
issued 50,000 shares of its common stock to one consultant and 300,000 shares of
its common stock to another consultant for services rendered. These shares were
valued at $42,000. On September 6, 2001, the Company issued a consultant 37,500
shares of its common stock for services rendered. These shares were valued at
$3,750. On September 14, 2001, the Company issued a consultant 50,000 shares of
its common stock for services rendered. These shares were valued at $5,000. On
September 19, 2001, the Company issued a consultant 125,000 shares of its common
stock for services rendered.  These shares were valued at $11,250. On October 8,
2001,  the Company  issued to two of its employees  300,000 shares of its common
stock  each for  services  rendered  in  connection  with the  Company  research
project.  These shares were valued at $102,000. On October 16, 2001, the Company
issued a consultant  50,000  shares of its common  stock for services  rendered.
These shares were valued at $4,560.  On October 18, 2001, the Company issued its
executive  assistant  20,000  shares of its common stock for services  rendered.
These shares were valued at $4,000.  On October 23, 2001,  the Company issued an
attorney 150,000 shares of its common stock for services rendered.  These shares
were  valued at $33,000.  On October 25,  2001,  the Company  issued  697,853 as
additional  fees  pertaining  to its  Regulation S offering..  These shares were
valued at $118,635.  On November 6, 2001, the Company issued an attorney 350,000
shares of its common stock for legal services rendered. These shares were valued
at $56,000. On November 14, 2001, the Company issued a consultant 150,000 shares
of its common stock for services rendered.  These shares were valued at $33,000.
On November 17, 2001, the Company issued to the same  consultant  107,500 shares
of its common stock for services rendered.  These shares were valued at $16,125.
On December 20, 2001, the Company issued to three consultants a total of 530,000
shares of its common  stock for services  rendered.  These shares were valued at
$90,325.

                                      F-15





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



The value assigned to shares issued for services were charged to operations.
Additional shares issued to the University of Pennsylvania were issued pursuant
to a non-dilution provision of the agreement between the Company and the
University and were valued at par and charged against paid-in capital. Shares
issued in cancellation of indebtedness were charged against the balance of the
debt owed, and shares issued relating to the Regulation S offering were charged
against the related proceeds received.

On January 11, 2002, the Company issued a consultant 20,000 shares of its common
stock for services rendered. These shares were valued at $3,200. On January 30,
2002, the Company issued a consultant 15,000 shares of its common stock for
services rendered. These shares were valued at $2,850. On February 13, 2002, the
Company issued 4,000 shares its common stock for clerical services rendered.
These shares were valued at $760. On February 14, 2002, the Company issued a
consultant 300,000 shares of its common stock for services rendered. These
shares were valued at $72,000. On March 4, 2002, the Company issued its
executive assistant 25,000 shares of its common stock. These shares were valued
at $6,750. Also on March 4, 2002, the Company issued to six individuals a total
of 650,000 shares of its common stock for consulting services rendered. These
shares were valued at $175,500. On March 15, 2002, the Company issued 150,000
shares of its common stock for consulting services rendered. These shares were
valued at $37,500. On March 18, 2002, the Company issued 150,000 shares of its
common stock for consulting services rendered. These shares were valued at
$22,500. On March 19, 2002, the Company issued to 125,000 shares of its common
stock for legal services rendered. These shares were valued at $20,000. On April
2, 2002, the Company issued to two members of its advisory board a total of
469,918 shares of its common stock for consulting services rendered. These
shares were valued at $65,789. On April 2, 2002, the Company issued its
executive assistant 25,000 shares of its common stock. These shares were valued
at $3,500. On April 4, 2002, the Company issued to 120,000 shares of its common
stock for legal services rendered. These shares were valued at $16,800. On April
4, 2002, the Company issued 4,000 shares its common stock for clerical services
rendered. These shares were valued at $560. On April 10, 2002, the Company
issued to 42,100 shares of its common stock for legal services rendered. These
shares were valued at $5,473. On April 12, 2002, the Company issued to 105,000
shares of its common stock for legal services rendered. These shares were valued
at $14,000. On April 25, 2002, the Company issued 550,000 shares of its common
stock for consulting services rendered. These shares were valued at $49,500. On
May 10, 2002, the Company issued 215,000 shares of its common stock for legal
services rendered. These shares were valued at $32,250. On May 10, 2002, the
Company issued 115,000 shares of its common stock for legal services rendered.
These shares were valued at $17,250. On May 21, 2002, the Company issued 400,000
shares of its common stock for consulting services rendered. These shares were
valued at $36,000. On May 22, 2002, the Company issued 1,000,000 shares of its
common stock for legal services rendered. These shares were valued at $90,000.
On June 5, 2002, the Company issued 150,000 shares of its common stock for
consulting services rendered. These shares were valued at $9,000. On June 5,
2002, the Company issued 50,000 shares of its common stock for legal services
rendered. These shares were valued at $3,000. On June 6, 2002, the Company
issued 50,000 shares of its common stock for consulting services rendered. These
shares were valued at $3,000. On July 3, 2002, the Company issued 1,000,000
shares of its common stock for legal services rendered. These shares were valued
at $50,000. On July 3, 2002, the Company issued 250,000 shares of its common
stock for consulting services rendered. These shares were valued at $12,500. On
July 8, 2002, the Company issued 200,000 shares of its common stock for legal
services rendered. These shares were valued at $8,000. On July 8, 2002, the
Company issued 200,000 shares of its common stock for consulting services
rendered. These shares were valued at $8,000. On July 26, 2002, the Company
issued 1,000,000 shares of its common stock for consulting services rendered.

                                      F-16





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



These shares were valued at 40,000. On August 5, 2002, the Company issued
1,000,000 shares of its common stock to an employee for services rendered in
connection for the development of the fatigue fuse. These shares were valued at
$40,000. On August 5, 2002, the Company issued 1,230,000 shares of its common
stock for legal services. These shares were valued at $49,200. On August 14,
2002, the Company issued 1,000,000 shares of its common stock for legal
services. These shares were valued at $40,000. On August 29, 2002, the Company
issued 1,000,000 shares of its common stock for legal services. These shares
were valued at $30,000. On September 5, 2002, the Company issued 300,000 shares
of its common stock for consulting services rendered. These shares were valued
at $6,000. On September 5, 2002, the Company issued 75,000 shares of its common
stock for legal services. These shares were valued at $1,500. On September 10,
2002, the Company issued 2,000,000 shares of its common stock for consulting
services. These shares were valued at $60,000. On September 11, 2002, the
Company issued 1,000,000 shares of its common stock for legal services. These
shares were valued at $20,000. On September 12, 2002, the Company issued
2,500,000 shares of its common stock for legal services. These shares were
valued at $50,000. On October 7, 2002, the Company issued 2,500,000 shares of
its common stock for consulting services. These shares were valued at $75,000.
On October 9, 2002, the Company issued its executive assistant 50,000 shares of
its common stock. These shares were valued at $1,500. On October 29, 2002, the
Company issued 250,000 shares of its common stock for consulting services. These
shares were valued at $5,000. On December 6, 2002, the Company issued 650,000
shares of its common stock for consulting services. These shares were valued at
$19,500. On December 6, 2002, the Company issued 250,000 shares of its common
stock for legal services. These shares were valued at $7,500.. On December 16,
2002, the Company issued 1,000,000 shares of its common stock to a member of the
Company's advisory board. These shares were valued at $30,000. On December 17,
2002, the Company issued 1,000,000 shares of its common stock for legal
services. These shares were valued at $30,000. On December 18, 2002, the Company
issued 13,000,000 shares of its common stock to its president for past
compensation due to him. These shares were valued at $260,000.

The value assigned to shares issued for services were charged to operations.
Shares issued for legal services included services rendered in connection with
the Beck matter as discussed and preparation of the Company's registration
statement. During 2002, the Company issued 2,042,080 shares of Class A Common
Stock as additional consideration in connection with the Companys Regulation S
offering. In addition, the Company issued 200,000 shares of the Company's Class
B common shares to its President in consideration for the relinquishment of his
total interest in the Company's patents. In addition, during 2002, the Company
cancelled 450,000 shares of its common stock previously issued to consultants.
The value assigned to these cancelled shares was $48,250 was credited against
operations. The Company also issued 1,397,500 shares of its Class A Common Stock
to Mr. Stephen Beck pursuant to the anti-dilution provisions of the settlement
agreement (see note 9(j)). During 2002, the Company cancelled 1,322,000 shares
of originally issued to Mr. Bernstein pursuant to the Stock Escrow/Grant
Agreement.

                                      F-17





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



Note 12 - Transactions with Management

a.  During 1993, Mr. Bernstein exercised warrants to purchase 6,000 shares of
    the Company's common stock. Pursuant to the resolution on April 12, 1993,
    adjusting the per share amount from $10.00 to $2.50, Mr. Bernstein paid $60
    and executed a five year non-interest bearing note to the Company for
    $14,940. The Note is non-recourse and the only security pledged for the
    obligation is the stock purchased. The promissory note was extended to the
    year 2003.

b.  During 2000, the President advanced the Company $8,000 and received $39,500
    from the Company. The outstanding amount due from the President as of
    December 31, 2000 is $22,052. The amount of interest credited to operations
    for 2000 totaled $822.

    As of December 31, 2000, the Company accrued $40,000 of unpaid compensation
    owed its President.

c.  On May 25, 2000, the Company issued its President 4,650,000 shares its
    common  stock in exchange for $4,650 and a $1,855,350 non-recourse
    promissory note bearing interest at an annual rate of 8%. On the same day,
    the Company issued 350,000 shares its common stock to a Director in exchange
    for $350 and a $139,650 non-recourse promissory note bearing interest at an
    annual rate of 8%. Both notes mature on May 25, 2005, when the principal and
    accrued interest becomes fully due and payable. At the date of issuance, the
    shares were valued by the Company at $.40 per share.

d.  On October 27, 2000, the Company issued 4,183,675 shares to its President
    for future compensation pursuant to a Stock Escrow/Grant Agreement. Under
    the terms of the agreement, the President is required to hold these shares
    in escrow. While in escrow, the President cannot vote the shares but has
    full rights as to cash and non-cash dividends, stock splits or other change
    in shares. Any additional shares issued to the President by reason of the
    ownership of the 4,183,675 shares will also be escrowed under the same terms
    of the agreement.

    Upon the exercise by certain holders of Company options or warrants or upon
    the need by the Company, in the sole discretion of the Board, to issue
    common stock to certain individuals or entities, the number of shares
    required for issuance to these holders will be returned from escrow by the
    President thereby reducing the number of shares he holds. The shares held in
    escrow are non-transferable and will be granted to the Company's President
    only upon the exercise or expiration of all of the options and warrants, the
    direction of the Board, in its sole discretion, or the mutual agreement by
    the President and the Board of Directors to terminate the agreement. The
    Company valued these shares at par. Upon the actual grant of the remaining
    shares to the President, the shares issued will be valued their market value
    when issued and charged to operations as compensation. As of December 31,
    2002, 1,150,000 of these shares were issued to an unrelated third party.

    The original issuance of these shares had no impact on the financial
    condition of the Company. As shares are issued out of escrow, the Company
    will value the shares at their fair market value or the value of the
    consideration received for the shares, whichever is more readably
    determinable. Currently, any shares issued to the President are contingent
    as discussed above.

e.  On February 19, 2001, the Company issued its President 6,000,000 shares of
    common stock for services rendered. These shares were valued at $1,128,000.

f.  In June 2001, the Company's Board of Directors authorized the reduction in
    the amount owed by the President and a Director on non-recourse promissory
    notes referred to in footnote (d) above to $460,350 and $34,650,
    respectively. The reduction was due to the substantial reduction in the
    market value of the Company's stock. The $1,500,000 reduction was charged to
    general and administrative expenses as compensation to the President.

g.  During 2001, the President advanced the Company $42,000 and received $53,300
    from the Company. The outstanding amount due from the President as of
    December 31, 2001 is $35,880. The amount of interest credited to operations
    for 2001 totaled $3,327.

    For 2001, the Company accrued $30,000 of unpaid compensation owed its
    President.

                                      F-18





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



h.  During 2002, the Company issued 200,000 shares of its Class B common stock
    in exchange for the Company's President relinquishing all of the interest
    that he had in the Company's patents.

i.  On December 18, 2002, the Company issued 13,000,000 shares of its common
    stock to its president for past compensation due hom. These shares had a
    total market value of $260,000, but the Company valued these shares at
    $420,000, the amount of past due compensation relinquished by Mr. Bernstein
    in exchange for the shares.

j.  During 2002, the Company cancelled 1,322,000 shares of originally issued to
    Mr. Bernstein pursuant to the Stock Escrow/Grant Agreement.

k.  During 2002, the Company made advances to its President amounting to
    $34,826. The outstanding amount due from the President as of December 31,
    2001 and 2002, is $35,880 and $76,109. The amount of interest credited to
    operations for 2001 and 20002 was $3,327 and $6,682, respectively.

Note 13 - Stock-Based Compensation Plans

a.  In 1996, the Company adopted the 1996 Stock Option Plan and reserved
    1,700,000 shares of Common Stock for distribution under the Plan. Eligible
    Plan participants include employees, advisors, consultants, and officers who
    provide services to the Company. A Committee appointed by the Company's
    Board of Directors determines the option price and the number of shares
    subject to each option granted. In the case of Incentive Stock Options
    granted to an optionee who owns more than 10% of the Company's outstanding
    stock, the option price shall be at least 110% of the fair market value of a
    share of common stock at date of grant. In 2000, the Company increased the
    number of reserved shares to 6,800,000.

    In 1998, the Company granted options to acquire 900,000 shares of which
    500,000 shares were exercised for $125,000. In addition, under the Plan, the
    Company issued additional 50,000 shares for consulting services. The Company
    charged the fair value of the 50,000 shares of $5,000 to operations.

    In 1999, the Company granted options to acquire 775,000 shares of Common
    Stock through the Plan. The Company did not issue any shares in 1999 under
    the Plan.

b.  In 1998, the Company adopted the 1998 Stock Plan and reserved 800,000 shares
    of Common Stock for distribution under the plan. The Plan was adopted to
    provide a means by which the Company could compensate key employees,
    advisors, and consultants by issuing them stock in exchange for services and
    thereby conserve the Company's cash resources. A Committee of the Board of
    Directors determines the value of the services rendered and the related
    number of shares to be issued through the Plan for these services. In 2000,
    the Company increased the number of reserved shares to 6,800,000. The
    remaining outstanding options under this plan expired in 2002.

    In February 2002, the Company adopted the 2002 Stock Issuance/Stock Plan,
    and reserved 20,000,000 shares of its common stock for distribution under
    the Plan. Eligible Plan participants include employees, advisors,
    consultants, and officers who provide services to the Company. On March 4,
    2003, the Company amended the 2002 Stock Issuance/Stock Option Plan to
    authorize the issuance of an additional 20,000,000 shares of common stock
    under the plan. The option price shall be 100% of the fair market value of a
    share of common stock at either, a) date of grant or such other day as the
    as the Board may determine.

                                      F-19





                          MATERIAL TECHNOLOGIES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS



The following is a summary of the various plans' activities :

In determining the fair value of the options granted during the respective
years, the Black Scholes Option Pricing Model was used with the following
assumptions determined:



                                       2000        2001        2002
                                      _______     _______     _______

     Risk free interest rate:            5%         n/a          4%
     Expected life:                      3 years    n/a          1.5 years
     Expected volatility                 80%        n/a          34%

Note 14 - Adjustments to Prior Periods

For the years 2000 and 2001, the Company changed its method in determining the
value of the shares of stock it issued for non-monetary consideration to the
quoted market price of the shares on date of issue. In addition, in 2001, the
Company changed the life of its license for amortization purposes to 17 years.
The following is a reconciliation of net loss as restated for the 2000 and 2001
two years.

                                                    2000             2001
                                               ___________       ___________
     Net loss as originally reported           $  (459,129)      $(2,432,638)
     Increase in operating loss due to
     changes in valuation of non-monetary
     consideration and amortization               (740,566)       (1,158,074)
                                               ___________       ___________
     Net loss as adjusted                      $(1,199,695)      $(3,590,712)
                                               ___________       ___________
                                               ___________       ___________
     Loss Per Share - as originally reported   $      (.02)      $      (.07)
     Change due to adjustment                         (.04)             (.04)
     Loss per share as adjusted                $      (.06)      $      (.11)
                                               ___________       ___________
                                               ___________       ___________


Note 15 - Management's Discussion on Future Operations

Since its inception, the Company has had recurring losses totaling $12,391,883.
The Company has enough cash resources to meet its obligation for the next
six-months. The Company is attempting to raise additional funding through the
offering of its convertible preferred stock in a private placement. Management
is also attempting to seek additional funding through debt offerings.

                                      F-20