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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10K

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

For the fiscal year ended December 31, 2001

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, 2002, was $ $3,255,772 based on the average of the
bid and asked prices of $.16 as reported by the Over The Counter Electronic
Bulletin Board on such date.

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


1

As of March 20, 2002, there were 146,258,978 shares of common stock, $.001 par
value issued and outstanding of which 100,000,000 shares are held in reserve
pursuant to the terms of the Company's Straight Documentary Credit (See Note 8i
to the accompanying financial statements).

As of March 20, 2002, there were 100,000 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


PART I
MATERIAL TECHNOLOGIES, INC.

ITEM 1. BUSINESS

Material Technologies, Inc. ("Matech" or "Company"), is engaged in research and
development of metal fatigue detection, measurement, and monitoring
technologies. As such, the Company is developing a comprehensive system of
monitoring devices for metal fatigue measurement. Matech is a development stage
company doing business as Tensiodyne Scientific Corporation.

The Company's efforts are dedicated to developing devices and systems that
indicate the true fatigue status of a metal component. The Company has developed
two products. The first is a small, extremely simple device that continuously
integrates the effect of fatigue loading in a structural member. It is called a
Fatigue Fuse (FFTM). The second is an instrument that is intended to measure the
amount of fatigue life remaining in an existing structural member. The company
believes that nothing comparable to this instrument currently exists in
materials technology. It is calledan Electrochemical Fatigue Sensor (EFSTM).
Both devices are pioneering technology in the fatigue field that we believe
provides cutting-edge solutions in materials technology. Both products are
protected by patents. Another product currently under development is a Borescope
equipped with an EFS.

The Company was 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., ("Matech 1") and Matech 1
was the successor to the business of Tensiodyne Corporation that began
developing the Fatigue Fuse in 1983. The Company's two predecessors, Tensiodyne
Corporation and Matech 1 were engaged in developing and testing the Fatigue Fuse
and, beginning in 1993, developing the EFS.


DESCRIPTION OF TECHNOLOGIES

BACKGROUND


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Fatigue is a consequence of a metal object undergoing repeated cyclic strain.
In a commercial context this strain and concomitant stress comes about as a
result of a large number of cycles of loading and unloading. Sudden fracture
can result. Fatigue damage and the resulting compromise of stability and
integrity of the member experiencing fatigue presents the potential for
structural failure and extreme danger. Objects such as bridges and airplane
wings are subject to fatigue, and it is obvious that sudden fracture of such
structures would have disastrous results. It is presently not possible, under
any generally acceptable theory of fatigue phenomena, to predict by analysis
alone when the limit is reached and when a fracture may occur. Further, in
normal usage, damage occurs cumulatively, at microscopic levels, and can only be
detected in the early stages at a time when dire results can be avoided by
examining the microscopic structure.

This difficulty has caused designers of structures subject to fatigue to be
extremely conservative by designing structures in a manner which maintains the
stresses presented in critical areas of a structure at a level well below the
known endurance limits of the material employed. In many instances this results
in extreme expense. In spite of this "over designing", catastrophic fatigue
failures still occur. Thus there is a need for a means of measuring the state
of fatigue life since the best available methods of analysis are very
inadequate.

THE FATIGUE FUSE

The Fatigue Fuse is designed to be affixed to a structure to give warnings as
preselected 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. It has been proven to work as
expected; however, additional application engineering is required before
beginning a marketing campaign. It is estimated this effort will cost
approximately $600,000 and will take 6-12 months to complete.

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 history as the member.

Management believes 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 Matech's
successful development and marketing of the Fatigue Fuse, and no assurance can
be given that Matech 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, Matech needs substantial additional capital and no
assurance can be given that needed capital will be available.

In a new structure we can 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, we must determine the fatigue


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status of that structural member so we can design the Fatigue Fuse to monitor
the remaining fatigue life potential. The EFS is dedicated to that purpose.

ELECTROCHEMICAL FATIGUE SENSOR ("EFS")

In August 1993, Tensiodyne, a predecessor of the Company, entered into two
agreements, a license agreement and a development agreement, with the University
of Pennsylvania regarding a new invention designed to measure electrochemically
the status of fatigue of a structure without knowing the structure's past
loading history. Under the license agreement, 12,500 shares of Tensiodyne's
common stock were issued, a 5% royalty on sales of this product was granted, and
under the development agreement Tensiodyne agreed to pay $11,112 per month for
18 months, for a total payment of $200,000. As of this date, no payments have
been made on this obligation. On December 17, 1997, the Company and the
University modified the terms of the licensing agreement and related obligation.
The terms of the modified agreements include an increase in the University's
royalty to 7% of the sale of related products, additional shares of our Common
Stock to equal 5% of the Company's outstanding common stock until the Company
receives an additional $2,000,000 in paid in capital, and to pay to the
University 30% of any amounts the Company raises in excess of $150,000
(excluding amounts received on government grants or contracts) up to $200,000
plus interest at 1.5% per month from June 30, 1997.

The EFS is a device that employs the principle of electrochemical/mechanical
interaction to measure the state of fatigue damage in a metal structural member.
It is expected to provide a means for determining the fatigue status of that
member so that appropriate action (monitor, replacement, or repair) can be taken
before structural failure occurs.

The EFS functions by treating the location of interest (the target) associated
with the structural member as an electrode of an electrochemical cell. To
complete the electro-cellular reaction, an electrolyte, in the form of a low
corrosion gel, is placed in contact with the target. 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.

Stress points are very often located in difficult-to-access places for humans.
Therefore, it has become desirable to miniaturize the process and develop a
means for delivery to inaccessible areas. In order to address this development
issue, the Company utilizes borescope technology, which is a technology that is
currently under development. The Company is highly dependent on this technology
for the marketing of our products.

DEVELOPMENT OF 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. Matech
conducted the Advanced Development, including variations of the adhesive bonding
process, and fabricating a laboratory-grade remote recorder for finger
separation events that monitor the functioning of the Fatigue Fuse. The next
step, Prototype Evaluation, encompassing empirical tailoring of Fuse parameters
to fit the actual spectrum loading expected in specific applications, needs to
be done. The associated tests include both coupon specimens and full-scale
structural tests with attached Fuses. A prototype of a flight qualifiable
operational separation event recorder application was designed, fabricated, and


4

successfully demonstrated. The next tasks will be to prepare a mathematical
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 spectrum loading. 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 for its
flight-qualified application. To begin marketing the Fuse will take from 6 to
12 months and cost approximately $600,000, including technical and beta testing
and final development. If testing, development, and marketing are successful,
management estimates Matech should begin receiving revenue from the sale of the
Fatigue Fuse within a year of receiving these funds. Management cannot estimate
the amount of revenue that may be realized from sales of the Fuse.

To date, certain organizations have included Matech's Fatigue Fuse in test
programs. Already completed are 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 EFS currently has certain limitations. To obtain meaningful measurements,
the device requires that at least 50% of the fatigue life has occurred. Also,
the device has only been perfected for commercial use with mild and soft steels.
This limits the use of EFS presently to such applications as bridges, ships,
cranes, etc. Use in more exotic structures such as aircraft and turbine engines
applications is currently precluded. Although there is a vast body of testing
supporting successful use of this methodology, for selected aluminum alloys, to
date, there has not been any confirmed success in aircraft and turbine engines.
Management cannot assure that the method will work in the field.

GOVERNMENT FUNDED EFS PROGRAMS

In August 1996, the Company executed a teaming agreement with Southwest Research
Institute (SWRI) and the University of Pennsylvania for research, development
and EFS enhancement efforts. On February 25, 1997, SWRI was awarded a $2.5
million Phase I 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." Matech's directly subcontracted share of
this award was approximately $500,000. But, the EFS was enhanced by the entire
funding used by SWRI and UPa. On June 18, 1998 Universal Technology Corporation
(UTC), a new Matech associate, 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." Matech's share of this award was
approximately $538,000, but, the EFS was enhanced by the entire funding used by
UTC, SWRI and other subcontractors to Matech. On February 5, 1999_a third
-----
contract in the amount of $2,000,000 was awarded to UTCto continue and expand
the efforts for turbine engines. Matech's directly subcontracted share was
approximately $382,000. The EFS was similarly enhanced by the entire awarded
program. A fourth contract was awarded to UTC on November 3rd, 2000 to continue
------
the borescope and EFS technologies, as well as alternate means of fatigue
sensing. Matech's directly subcontracted share of this contract is
approximately $700,000.

Accordingly, over the last 4 years approximately $8.5 million was awarded to
conduct extensive engineering to enhance the performance of the EFS for
government aircraft/engine applications. The results of this research are
encouraging and provide a basis for the Company and its partners to obtain
additional funding. No assurance can be given, however, that such funding will
be received.


5

The Company continues in its efforts to raise funds from numerous sources,
including various state and federal governmental agencies and/or private or
public offerings of securities. At this time, however, the Company has no firm
agreements or commitments that sufficient capital will be available in order to
continue our research, development or operations

COMMERCIAL APPLICATIONS OF THE COMPANY'S TECHNOLOGIES

No commercial application of Matech's products has been arranged to date, but
the technology has matured to a point where it can, with further development, in
the opinion of management, be applied to certain markets. Matech's 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." Matech has chosen to begin
commercialization in the bridge market. The second market sector that will be
pursued is aerospace. The aerospace industry is concerned with aluminum alloys
and titanium alloys. This market opportunity will follow a different time line,
budget, and market model. There can be no assurance of success until our
technologies and our products are successfully installed in the field and have
passed required testing and validation.

THE BRIDGE MARKET

In the U.S. alone there are over 610,000 bridges of which over 260,000 are rated
by the Federal Highway Administration as requiring major repair, rehabilitation,
or replacement. Although there are normal business imperatives, the market is
essentially macro-economically and government policy driven. In the opinion of
management, "only technology can provide the solution." The need for increased
spending accelerates significantly each year as infrastructure ages. Analysis
by infrastructure economic experts, including the Federal Highway
Administration, confirms that $9 billion per year, for bridges alone, is the
minimum required to maintain the status quo. Since that amount has not been
available, and a backlogged repair bill of more than $358 billion has already
accrued, greater efficiencies in the management of current budgets are the only
solution. In the 1991 ISTEA initiative (Intermodal Surface Transportation and
Efficiency Act) and recently in the $200 billion 1998 TEA-21 initiative
(Transportation Equity Act) Bridge Management Systems have been mandated as a
matter of policy.

MANUFACTURING

Certain manufacturers are capable of producing the Fatigue Fuse and EFS at
reasonable cost. No assurance can be given, however, that these devices will be
successfully manufactured, that they can be commercially produced, that they
will perform to management's expectations, or that they will be successfully
marketed. Moreover, significant competition may develop.

PATENTS

Matech is 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, the Company owns a fifth patent titled
"Device for Monitoring the Fatigue Life of a Structural Member and a Method of
Making Same" with United States Patent Number 5,425,274.

PRODUCT DISTRIBUTION METHODS

Provided there are funds to support such activities, as to which no assurance
can be given, Matech intends to exhibit the Fatigue Fuse and the Electrochemical


6

Fatigue Sensor at various trade shows and will also market its 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 management
intends to undertake marketing, dependent on the availability of funds, within
and with out the United States, no assurance can be given that any such
marketing activities will be implemented, and accordingly we can make no
assurance that significant revenue can be generated by the Company in the
marketing and sales of the Fatigue Fuse or the EFS.

COMPETITION

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

EMPLOYEES

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 such as an accountant who
oversees the Company's government contracts.

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 May 31, 2002. The Company has extended its lease
through December 31, 2002 at the same rent.

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

a) On April 30, 2001, Stephen Beck, a former consultant filed a complaint
against the Company and its President (Stephen Forest Beck vs. Robert M.
Bernstein, Material Technologies, Inc. etal. Los Angeles Superior Court No.
BC249547, filed April 30, 2001) alleging breach of contract, a declaration
of his contract rights, and fraud. The complaint all relates to a February
8, 1995, consulting agreement and amendments thereto, under which Mr. Beck
was to provide assistance in the Company obtaining a government
appropriations, funding and contracts and/ or private funding for Matech.
Mr. Beck now claims that over $1.5 million in contingent consulting fees
are immediately due, as Matech has obtained funding through four government
programs since 1995. In addition, he is seeking punitive damages in an
unspecified amount.


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Counsel, who is representing the Company in this lawsuit, believes that the
likelihood of Mr. Beck winning any compensation is poor based upon federal
laws and the merits of his case. Trial is set to begin on May 20, 2002.

b) On April 30, 2001, the Company filed a complaint against Mr. Beck (Material
Technologies, Inc. v Stephen Forrest Beck, L.A. Superior Court No BC249495)
for the recission and/or voiding Beck's consulting agreement, and
amendments thereto, the return of 195,542 shares of common stock issued to
him pursuant to the above indicated consulting contract, and attorney's
fees, interest, and the cost of the lawsuit. The case has been consolidated
with the above-reference suit and also goes to trial on May 20, 2002.


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")Its symbol is MTEY.

From January 2000 through December 31, 2001, 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 1999 to December 2001.



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

First Quarter 2000 $ 2.875 $ .343
Second Quarter 2000 $ 1.437 $ .42
Third Quarter 2000 $ .54 $ .22
Fourth Quarter 2000 $ .312 $ .13
First Quarter 2001 $ .23 $ .09
Second Quarter 2001 $ .12 $ .08
Third Quarter 2001 $ .22 $ .084
Fourth Quarter 2001 $ .25 $ .10


(1)All bid prices were supplied to the Company by Smith Barney.

On December 31, 2001, there were 578 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.

No dividends on any of the Company's shares were declared or paid during 1999
nor are any dividends contemplated in the foreseeable future.

At various times during the year 2001 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 ISSUANCE 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, all of
which we believe were exempt from registration under the Securities Act of 1933.
Each of these transactions is described below:



8

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.

Also on March 12, 2002, the Company issued 80,000 shares of its common stock to
a consultant for services rendered.

Also on March 12, 2002, the Company issued 80,000 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 to
a consultant for services rendered.

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
a consultant for services rendered.

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. The option price shall be 100% of


9

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 our last fiscal year, 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.

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.


10

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 issued 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 pertaining 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.

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.

COMMON STOCK ISSUANCE 2000

On January 12, 2000, the Board authorized the issuance of up to 110,000 shares
of Common Stock to a group of approximately 22 investors who were defrauded by a
former consultant to the Corporation in exchange for an assignment of their


11

claims to the Corporation and a release of all claims against the Corporation.
During January, February, and August 2000, the Company issued 65,028 shares of
its common stock to these investors in exchange for an assignment and release of
claims.

On January 27, 2000, the Board authorized the Corporation to issue 40,000 shares
of Class B Common Stock to Robert M. Bernstein in exchange for 40,000 shares of
Common Stock. On March 21, 2000, Mr. Bernstein returned to the Company 40,000
shares of Common stock in exchange for receiving 40,000 shares of Class B common
stock. Mr. Bernstein, therefore, owns 100,000 shares of Class B Common Stock
that has 500 votes per share. Therefore, Mr. Bernstein's Class B Common Stock
has 50 million votes and gives him effective control of the Company.

On January 31, 2000, the Board authorized the issuance of 50,000 shares of
Common Stock to David Haberman, a new member of the Corporation's advisory
board.

On February 8, 2000, the Board authorized the issuance of 10,000 shares of
Common Stock to a consultant for services.

On February 14, 2000, the Board authorized an amendment to the Corporation's
Articles of Incorporation increasing the authorized shares of Common Stock from
30 million to 100 million shares. On that same day, by consent, Mr. Bernstein
and Mr. Freedman voted their shares to so amend the Articles.

On February 14 2000, the Board authorized the Corporation to increase the number
of shares of common stock that may be issued under the Corporation's 1998 Stock
Plan from 800,000 shares to 1,800,000 shares of common stock.

On February 28, 2000, the Company issued 200,000 of common stock to a consultant
for financial services. Also on February 28, 2000, the Company issued 4,500 of
common stock to a public relations consultant.

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.

On March 29, 2000, the Company issued 50,000 shares of common stock to a
consultant for services.

On April 11, 2000, the Company issued 15,000 shares of common stock to
consultant relating to the operations of the Company joint venture.

On April 11, 2000, the Company issued 25,000 shares of common stock for advisory
services.

On April 12, 2000, the Company filed a registration statement to increase the
number of shares of common stock that may be issued under the Corporation's 1998
Stock Plan from 1,800,000 to 6,800,000 shares of common stock.

On April 28, 2000, the Company issued 30,000 shares of common stock for advisory
services.

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 are
due and payable.


12

On July 13, 2000, the Company issued 40,000 shares of its common stock for legal
services.

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.
(See, Exhibit 4.3.)
---

On November 14, 2000, the Company issued 400,000 shares of common stock to a
stockholder in the Company in exchange for $22,490.

On December 13, 2000, the Company's Board authorized the issuance of 250,000
shares of its common stock to an individual to settle a lawsuit brought against
the Company. As that settlement has not been finalized as of the date of this
filing, those shares have not yet been issued.

On December 19, 2000, the Company issued 200,000 shares of its common stock to a
consultant.



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,
- --------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 Inception to
December 31,
2001
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------

Net Sales $ -- $ -- $ -- $ -- $ -- $ --
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------
Income from Research
Development Contract $ 336,410 $ 373,324 $ 924,484 $ 635,868 $ 1,579,823 $ 4,563,489
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------
Income (Loss) from
Continued
Operations $ (133,578) $ (549,187) $ (539,283) $ (459,129) $(2,432,638)) $(6,661,744)
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------
Income (Loss) from
Continued Operations Per
Common Share $ (.03) $ (.06) $ (.04) $ (.02) $ (.07)
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------
Basic Weighted
Average - Common
Shares Outstanding 4,551,258 8,782,808 12,242,534 18,900,019 33,640,393
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------

Total Assets $ 287,257 $ 233,746 $ 250,041 $ 108,776 $ 516,745 $ 516,745
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------

Total Liabilities $ 618,582 $ 719,178 $ 870,586 $ 819,236 $ 1,154.696 $ 1,154,696
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------
Redeemable Preferred
Stock $ 150,000 $ -- $ -- $ -- $ -- $ --
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------
Total
Stockholders'
Equity (Deficit) $ (481,257) $ (485,432) $ (620,545) $ (735,078) $ (680,384) $ (680,384)
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------
Dividends $ -- $ -- $ -- $ -- $ --
- --------------------------- ----------- ----------- ------------ ------------ ------------- ------------



13

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, 1999, 2000, and 2001.

RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001.
- ------------------------------------------------------------------------

In 2001, the Company received $1,579,823 under two subcontracts on programs with
----
the U.S. Air Force for application engineering and enhancement of the EFS. Also
in 2001, the Company accrued interest income relating to the non-recourse notes
to from the Company's President and a Director amounting to $98,297. In 2000,
the Company received $635,868 under two subcontracts on programs with the U.S.
Air Force for application engineering and enhancement of the EFS. Also in 2000,
the Company accrued interest income relating to the non-recourse notes to from
the Company's President and a Director amounting to $96,197. In 1999, the
----
Company received $924,484 under two subcontracts on programs with the federal
government for feasibility studies and application engineering and enhancement
of the EFS.

COSTS AND EXPENSES

Research and development Costs were $1,284,928 for 2001, $496,501 for 2000, and
$536,237 for 1999. Of the $1,284,928, $496,501 and $536,237 incurred in 2001,
2000 and 1999, $1,069,671, $406,823 and $436,888 related to subcontractor costs,
respectively.

General and Administrative costs were $2,725,548 for 2001, $640,481 for 2000,
and $875,444 for 1999.

In 2001, actual cash compensation paid to the Company's president totaled
$90,000. The Company also accrued $30,000 in additional compensation due him.
The Company charged to operations $1,500.000 due to a reduction in the balance
of the non-recourse promissory notes due in connection with the purchase of the
Company's common stock by the Company's President and a director. The Company
also issued 6,000,000 shares to the President, valued at $420,000, for past
compensation due him. Other expenses in 2001 included consulting fees of
$225,363, legal of $209,486, accounting of $51,120, travel of $42,092, office
salaries of $36,225, office expense of $34,880, rent of $29,468, telephone
expense of $13,838, and the charge off of the Company's $33,000 investment in
Antaeus Research LLC.

The major costs in 2000 were officer's salary of $127,183, consulting fees of
$127,512, legal fees of $197,322, accounting and auditing fees of $23,063,
interest expense of $60,634, and travel costs of $26,443.

The major costs in 1999 were officer's salary of $150,000, legal fees of
$88,791, travel expenses of $60,055, accounting fees of $32,814, rent of
$25,375, and office expense of $20,337.



LIQUIDITY AND CAPITAL RESOURCES

There has been little change in the Company's operations for the past three
years. It still seeks capital for the development of its projects and to
maintain its patents. The Company is still totally dependent on the willingness
of the Company's President, Mr. Bernstein, and long time investors in the
Company to loan the Company money or purchase additional securities from the
Company. Over the next year, the Company hopes to receive additional funds from
the U. S. Air Force. These funds, however, are not guaranteed. In 2001, the


14

Company raised a net $286,567 through the issuance of 4,932,358 shares of its
common stock through its Regulation S Offering. Also in 2001, the Company
entered into an agreement with Allied Boston International for a Straight
Documentary Credit for $12,500.000.The funding under this instrument is also not
guaranteed. If the $12,500,000 is raised, Management believes the amount should
be sufficient to fund the completion of its research projects and bring them to
market. Although Mr. Bernstein intends to continue to loan the Company funds as
required while it seeks additional financing, he is under no obligation to do
so. The Company does not expect to receive any additional material financing
from its other long time investors.

Any prediction of the likelihood or timing of obtaining the required funding
would be highly speculative. The Company's ability to obtain such financing may
depend on the results of the research contracts with the U.S. Air Force.

Cash and cash equivalents at December 31, 2001 were $174,469. During 2001, the
Company received $1,328,079 from its research and development contract, $286,567
from the sale of its common stock, $678 in interest income and $42,800 in
advances from the Company's president. In 2001, the Company spent $1,426,348 in
its operations, $5,961 in the purchase of computer equipment and the development
of a web site, and paid $53,300 to its president.

Cash and cash equivalents at December 31, 2000 were $1,934. During 2000, the
Company received $746,732 from its research and development contract, $22,490
from the sale of its common stock, and $251,798 from the sale of DCH
Technologies, Inc., shares. The Company's president advanced $8,000 and received
$39,500 from the Company. In 2000, the Company spent $1,035,470 in its
operations, and $15,000 was invested in Antaeus Research, LLC. 11

Cash and cash equivalents at December 31,1999 were $62,904. During 1999 the
Company received $1.012,425 from its research and development contract and
$150,000 from sale of its Common Stock. The Company's President advanced
$102,198 of which $71,500 was repaid towards his loan account. The Company also
received $7,405 as a deposit on the future sale of the Company's Common Stock.
In 1999, the Company spent $1,122,550 in its operations.


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, 2001, 2000, and 1999, 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 67 President/Chief Executive and Chief Financial
Officer, Chairman of the Board
Joel R. Freedman 42 Secretary/Director
Dr. John Goodman 67 Chief Engineer/Director
William I. Berks 71 Vice President of Government
Projects
Miles M. Larson 62 Government Contracts Auditor




15

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 67 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.

JOEL R. FREEDMAN, SECRETARY/DIRECTOR. Joel R. Freedman is 42 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 I. BERKS, VICE PRESIDENT OF GOVERNMENT PROJECTS. William Berks retired
from TRW, Inc. in November 1992. Mr. Berks' last assignment was as a project
manager in the Advanced Systems Division of TRW's Space and Technology Group.
He managed the Structures and Mechanism Subsystem of the Universal Test Bed
Project, which is a three axis stabilized advanced bus for large geostationary
satellites. In a collateral assignment, he was responsible for planning a
building and its equipment for the National Space Program Office of Taiwan,
Republic of China, for the design, assembly, integration and test of small three
axis spacecraft and each of their subsystems, and manpower planning for a
spacecraft program. Recently he was the Chief Mechanical Engineer for the Space
and Technology Group's commercial satellite operations. He served six years as
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. For ten years he was Manager of the Advanced Systems
Design Department, which was responsible for mechanical systems design for all
spacecraft project. He was Assistant Projects 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. Mr. Berks has also
managed independent research and development projects (antennas, materials,
solar arrays) and holds six patents. He has over 30 years of experience in
spacecraft mechanical systems engineering. He was with TRW, Inc. for 26 years.

MILES M. LARSON, GOVERNMENT CONTRACTS AUDITOR. Miles Larson is a Certified
Public Accountant in the state of California. In 1990 he was recipient of the
Defense Contract Audit Agency (DCAA) Management Excellence Award which is
bestowed annually to DCAA's most outstanding manager. In addition, Miles was the
recipient of the DCAA Meritorious Service Award for outstanding contributions to
the Agency's audit mission. (DCAA's 2nd highest award). He has twenty-five years
of auditing experience with the DCAA and four years with the US Army Audit
Agency. Mr. Larson has eight years experience working as a consultant with
Pricewaterhouse/Coopers. He received a Master of Business Administration from
the University of Southern California and a Bachelor of Science degree, Business
Administration from California State University, Long Beach. Mr. Larson is also
a graduate of the Senior Defense Management Program at Harvard University.


16

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:


DR. LAWRENCE CHIMERINE. Dr. Chimerine is President of Radnor International
Consulting Inc. in Radnor, PA. an economics consulting firm, and co-founder of
igrandparents.com; from 1993 to 2000, he was Managing Director and Chief
Economist of the Economic Strategy Institute in Washington DC; and He is the
former Chairman, Chief Executive, and Chief Economist of Chase Econometrics and
The WEFA Group. For more than 19 years, Dr. Chimerine has lent his advice and
council to an impressive resume of Fortune 500 companies, financial
institutions, and government agencies, providing private consultation on the
state of the U.S. and world economics, specific industries, and sectors, and the
impact of economic conditions on decision making, budgeting, and strategic
planning. He has served on numerous corporate boards, is a member of various
professional associations, and has held teaching positions at three
universities. From 1965 to 1979, Dr. Chimerine was Manager of the U.S. Economic
Research and Forecasting for the IBM Corporation. He left IBM to assume the
chairmanship at Chase Economics and, in 1987, was appointed Chairman and CEO of
the WEFA Group. Dr. Chimerine has served on numerous governmental advisory
boards including the House of Representatives Task Force on International
Competitiveness, the Census Advisory Committee, and the Economic Policy Board of
the Department of Commerce. He is frequently called upon to testify on key
economic issues before Congressional committees including the House and Senate
Budget Committee, Joint Economic Committee, Senate Finance Committee, Senate
Banking Committee, and the House Committee on Monetary Policy.


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.

DAVID HABERMAN. Mr. Haberman is the former chairman and co-founder of DCH
Technology Inc., a company that specializes in hydrogen technology development,


17

safety, process monitoring, and hydrogen fuel cell power applications. In 1996
William Richardson, then Secretary of the Department of Energy (DOE), appointed
Mr. Haberman to represent the perspectives of commercial product developers and
safety engineers on the Hydrogen Technical Advisory Board (HTAP). This panel,
created by the Hydrogen Futures Act, reports directly to the Secretary of Energy
and is responsible to the U.S. Congress to monitor the DOE's implementation of
the National Hydrogen Program. As a director of the National Hydrogen
Association (NHA), Mr. Haberman chairs the Implementation Planning Committee.
He is a co-founder and president of the California Hydrogen Business Council, an
American delegate and member of the International Standards Organization (ISO)
Working Group on hydrogen system safety, and works to define the commercial
future of hydrogen energy. DCHT's hydrogen sensors contribute to the
Corporation's mission.

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
Berkseley. 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.

THOMAS V. ROOT. Mr. Root is President and CEO of Optim Incorporated, a company
that develops, manufactures, markets, sells, and services flexible endoscopic
products and solutions to medical and industrial markets. Optim Incorporated is
ISO 2001-certified and also manufactures and markets a complete line of
industrial fiberscopes to serve the remote inspection needs of aerospace,
transportation, energy generation, law enforcement, and school security markets.
Mr. Root has had 25 years of experience in all methods of nondestructive testing
and was an NDT, Level III, member of the American Society for Nondestructive
Testing (ASNT) Educational Council and Level III question committee. In
addition, he is past chairman of ASNT CT Yankee, and former member of SAE
Committee (k). His career began at General Dynamics in 1972 and after serving
in the nondestructive test engineering and education departments he joined
Technical Operations as manager of Technical Services in 1976. In 1978, Mr.
Root co-founded Northeast NDE Company, a private distribution and service
company committed to providing products and services for the development of
nondestructive testing applications. After completing a sale transaction to
Northeast NDE's treasurer, in 1990 Mr. Root founded Valtec Systems, a private
firm, for the development and distribution of specialty nondestructive testing
systems. In early 1996, he sold Valtec and became Vice President of Operations


18

and General Manager of the industrial products company of Applied Fiberoptics,
Inc., the predecessor of Optim Inc. In 1997 he became the CEO of Optim.

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.

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.

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.

The Company is unaware of any other late filings or any other failures to file
any Form 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. 1999 $ 150,000 $ -- $ -- $ -- -- $ -- $ --
Bernstein CEO 2000 $ 120,000 $ -- $ -- $ 4,183(1) -- $ -- $ --
2001 $ 120,000 $ -- $ -- $ 420,000(2) $ -- $1,395,000(3)
--

John W. Goodman 1999 $ 23,384 $ -- $ -- $ 11,700(4) -- $ -- $ --
Director and 2000 $ 26,614 $ -- $ -- $ -- -- $ -- $ --
Engineer 2001 $ 23,076 $ -- $ -- $ 50,500(5) -- $ -- $ --
=============================================================================================================


(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. (See, Exhibit 4.3.) 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 $420,000.

(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 1999, the Corporation issued Mr. Goodman 142,000 shares of restricted
common stock. These shares were valued at $11,700.


19

(5) In 2001, the Corporation issued Mr. Goodman 800,000 shares of restricted
common stock. These shares were valued at $50,500.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF DECEMBER 31,
2001

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 15,896,022 Shares 37.4%(1)
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049

Joel R. Freedman, Director 826,524 Shares 2.0%
1 Bala Plaza
Bala Cynwyd, PA 19004

John Goodman, Director 1,000,000 Shares 2.3%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049

Directors and executive 17,722,546 Shares 41.7%
officers as a group
(3 persons)

Class B Robert M. Bernstein 100,000 Shares 100.00%(2)
Common Stock Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049


(1) Of these 15,896,022 shares, Mr. Bernstein has full rights to approximately
12,112,347 shares. The remaining 3,783,675 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, 400,000 of these 4,183,675 shares had been transferred to
satisfy a stock agreement. Accordingly, 3,783,675 of these escrowed shares are


20

included in the total of 15,896,022 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.)
---

From time to time, Robert M. Bernstein advanced funds to the Company. At
December 31, 2000, all such advances had been repaid. The Board has approved
paying Mr. Bernstein interest at the rate of 10% per year on his advances.
Robert M. Bernstein is under no obligation to make further advances to the
Company but may continue to so do at his sole discretion. (See, Note 11r 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. (See, Exhibit 4.3.)
---

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.


21

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 Octoer 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.


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 Previously filed in connection
Technologies, Inc. with S-1 Registration Statement that
became effective on July 31, 1997.

Certificate of Amendment, February 16, 2000 1

Certificate of Amendment, July 12, 2000 3

Certificate of Amendment, July 31, 2000 4

3(ii) Bylaws of Material Technologies, Inc. Previously filed with July 31,
1997 S-1

4.1 Class A Convertible Preferred Stock Previously filed with July 31,
Certificate of Designations 1997 S-1

4.2 Class B Convertible Preferred Stock Previously filed with July 31,
Certificate of Designations 1997 S-1

4.3 Material Technologies, Inc. Stock Escrow/Grant 6

10.1 License Agreement Between Tensiodyne Previously filed with July 31,
Corporation and the Trustees of the 1997 S-1
University of Pennsylvania

10.2 Sponsored Research Agreement between Tensiodyne Previously filed with July 31,
Corporation and the Trustees of the University 1997 S-1
of Pennsylvania


22

10.3 Amendment 1 to License Agreement Between Previously filed with July 31,
Tensiodyne Scientific Corporation and the 1997 S-1
Trustees of the University of Pennsylvania

10.4 Repayment Agreement Between Tensiodyne Previously filed with July 31,
Scientific Corporation and the Trustees of the 1997 S-1
University of Pennsylvania

10.5 Teaming Agreement Between Tensiodyne Scientific Previously filed with July 31,
Corporation and Southwest Research Institute 1997 S-1

10.6 Letter Agreement between Tensiodyne Scientific Previously filed with July 31,
Corporation, Robert M. Bernstein, and Stephen 1997 S-1
Forrest Beck and Handwritten modification.

10.7 Agreement Between Tensiodyne Corporation and Previously filed
Tensiodyne 1985-1 R&D Partnership is incorporated
by reference from Exhibit 10.3 of Material
Technology, Inc.'s S-1 Registration Statement,
File No. 33-83526, which became effective on
January 19, 1996.

10.8 Amendment to Agreement Between Material Previously filed
Technology, Inc. and Tensiodyne 1985-1 R&D
Partnership is incorporated by reference from
Exhibit 10.6 of Material Technology, Inc.'s S-1
Registration Statement, File No. 33-83526 which
became effective on January 19, 1996.

10.9 Agreement Between Advanced Technology Center Previously filed
of Southeastern Pennsylvania and Material
Technology, Inc. is incorporated by reference
from Exhibit 10.4 of Material Technology, Inc.'s
S-1 Registration Statement, File No. 33-83526
which became effective on January 19, 1996.

10.10 Addendum to Agreement Between Advanced Previously filed
Technology Center of Southeastern Pennsylvania
and Material Technology, Inc. is incorporated
by reference from Exhibit 10.5 of Material
Technology, Inc.'s S-1 Registration Statement,
File No. 33-83526.

27 Financial Data Schedule


b. Reports on Form 8-K - none.

c. Financial Statements - attached.



23

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 TECHNOLOGY, INC.

By: /s/ Robert M. Bernstein
-------------------------------
Robert M. Bernstein, President

Date: March 27, 2002

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)

Date: March 27, 2002

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

Date: March 27, 2002

By: /s/ John Goodman
-------------------------------
John Goodman, Director

Date: March 27, 2001





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


Contents
--------

Page
----

Independent Auditors' Report F-1

Balance Sheets F-2

Statements of Operations F-4

Statement of Stockholders' Equity (Deficit) F-5

Statements of Cash Flows F-12

Notes to Financial Statements F-14




Independent Auditors' Report


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


We have audited the accompanying balance sheets of Material Technologies, Inc.,
(A Development Stage Company) as of December 31, 2000 and 2001, and the related
statements of operations, stockholders' equity (deficit), and cash flows, for
the years ended December 31, 1999, 2000, and 2001 and for the period from the
Company's inception (October 21, 1983) through December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we 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. We believe that our audits provide a
reasonable basis for our opinion.


In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Material
Technologies, Inc. as of December 31, 2000 and 2001, and the results of
its operations, and its cash flows for the years ended December 31, 1999,
2000, and 2001, and for the period from Company's inception (October 21, 1983)
through December 31, 2001, in conformity with generally accepted accounting
principles.

s/s Jonathon P. Reuben CPA

Jonathon P. Reuben,
Certified Public Accountant
Torrance, California
February 8, 2002


F-1



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

ASSETS

December 31,

2000 2001
--------------- --------------

CURRENT ASSETS
Cash and Cash Equivalents $ 1,954 $ 174,469
Accounts Receivable 33,932 285,677
Advances to Officer 22,052 35,880
--------------- --------------
TOTAL CURRENT ASSETS 57,938 496,026
--------------- --------------

FIXED ASSETS
Property and Equipment, Net
of Accumulated Depreciation 2,990 2,708
--------------- --------------

OTHER ASSETS
Investments 33,000 -
Intangible Assets, Net of
Accumulated Amortization 12,712 15,663
Refundable Deposit 2,136 2,348
--------------- --------------

TOTAL OTHER ASSETS 47,848 18,011
--------------- --------------

TOTAL ASSETS $ 108,776 $ 516,745
=============== ==============


See accompanying notes.


F-2



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


LIABILITIES AND STOCKHOLDERS' (DEFICIT)
----------------------------------------

December 31,
2000 2001
---------------- ---------------

CURRENT LIABILITIES
Legal Fees Payable $ 209,306 $ 282,950
Fees Payable to R&D Subcontractor 20,474 196,043
Consulting Fees Payable 50,000 5,525
Accounting Fees Payable 26,288 42,417
Other Payables 10,157 8,801
Accrued Expenses 24,982 43,213
Accrued Wages Due Officer 40,000 70,000
Notes Payable - Current Portion 79,848 25,688
---------------- ---------------

TOTAL CURRENT LIABILITIES 461,055 674,637
---------------- ---------------

Payable on Research and
Development Sponsorship 358,181 422,653
Notes Payable - Other - 57,406
---------------- ---------------

TOTAL LIABILITIES 819,236 1,154,696
---------------- ---------------


STOCKHOLDERS' (DEFICIT)
Class A Common Stock, $.001 Par Value, Authorized 199,900,000
Shares, 24.618,167 Shares Issued and Outstanding at
December 31, 2000, and 102,433,378 Shares Issued at December
31, 2001, of which 42,433,378 Shares are Outstanding and
60,000,000 Shares are Held In Reserve (Note 8i) 24,618 42,433
Class B Common Stock, $.001 Par Value, Authorized 100,000
Shares, Outstanding 100,000 Shares 100 100
Class A Preferred, $.001 Par Value, Authorized 50,000,000 Shares
of Which 337,471 Shares are Outstanding at December 31, 2000,
and 2001 337 337
Additional Paid in Capital 5,909,782 6,995,412
Less Notes and Subscriptions Receivable - Common Stock (2,133,251) (731,549)
Deficit Accumulated During the Development Stage (4,512,046) (6,944,684)
---------------- ---------------

TOTAL STOCKHOLDERS' (DEFICIT) (735,078) (680,384)
---------------- ---------------

TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 108,776 $ 474,312
================ ===============


See accompanying notes.


F-3



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


From Inception
(October 21, 1983)
Through
1999 2000 2001 December 31, 2001
------------------- ------------ ------------- -------------------

REVENUES
Sale of Fatigue Fuses $ - $ - $ - $ 64,505
Sale of Royalty Interests - - - 198,750
Income from Research and Development Contract 924,484 635,868 1,579,823 4,563,489
Test Services - - - 10,870
------------------- ------------ ------------- -------------------
TOTAL REVENUES 924,484 635,868 1,579,823 4,837,614
------------------- ------------ ------------- -------------------

COSTS AND EXPENSES
Research and Development 536,237 496,501 1,284,928 4,156,628
General and Administrative 875,444 640,481 2,725,548 7,535,193
------------------- ------------ ------------- -------------------
TOTAL COSTS AND EXPENSES 1,411,681 1,136,982 4,010,476 11,691,821
------------------- ------------ ------------- -------------------
INCOME (LOSS) FROM OPERATIONS (487,197) (501,114) (2,430,653) (6,854,207)
------------------- ------------ ------------- -------------------

OTHER INCOME (EXPENSE)
Expense Reimbursed - - - 4,510
Interest Income 2,613 103,419 102,283 247,818
Miscellaneous Income - - - 25,145
Loss on Sale of Equipment - - - (12,780)
Loss on Abandonment of Interest in Joint Venture - - (33,000) (33,000)
Settlement of Teaming Agreement - - - 50,000
Litigation Settlement - - - 18,095
Interest Expense (58,295) (60,634) (70,468) (315,987)
Modification of Royalty Agreement - - - (7,332)
Gain on Foreclosure - - - 18,697
Gain on Sale of Stock 4,396 - - 207,497
------------------- ------------ ------------- -------------------
TOTAL OTHER INCOME (51,286) 42,785 (1,185) 202,663
------------------- ------------ ------------- -------------------

NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND PROVISION FOR INCOME TAXES (538,483) (458,329) (2,431,838) (6,651,544)
PROVISION FOR INCOME TAXES (800) (800) (800) (10,200)
------------------- ------------ ------------- -------------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (539,283) (459,129) (2,432,638) (6,661,744)
EXTRAORDINARY ITEMS
Forgiveness of Debt - - - (289,940)
Utilization of Operating Loss Carry forward - - - 7,000
------------------- ------------ ------------- -------------------
NET INCOME (LOSS) $ (539,283) $ (459,129) $ (2,432,638) $ (6,944,684)
=================== ============ ============= ===================

PER SHARE DATA
Income (Loss) Before Extraordinary Item $ (0.04) $ (0.02) $ (.07)
Extraordinary Items - - -
------------------- ------------ -------------
NET (LOSS) PER SHARE $ (0.04) $ (0.02) $ (.07)
=================== ============ =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,242,534 18,900,019 33,640,393
=================== ============ =============


See accompanying notes.


F-4



MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK
-------------------------- ---------------------------- ----------------------------
SHARES SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT
------------ ------------ ------------ -------------- ------------ --------------

Initial Issuance of Common Stock
October 21, 1983 2,408 $ 2 - $ - - $ -
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares (2,202) (2) - - - -
------------ ------------ ------------ -------------- ------------ --------------

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

Balance, January 1, 1984 42,540 14 - - - -
Capital Contribution - 28 - - - -
Issuance of Common Stock 4,815 5 - - - -
Costs Incurred in Connection
with Issuance of Stock - - - - - -
Net (Loss), Year Ended
December 31, 1984 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance, January 1, 1985 47,355 47 - - - -
Shares Contributed Back
to Company (315) (0) - - - -
Capital Contribution - - - - - -
Sale of 12,166 Warrants at
$1.50 Per Warrant - - - - - -
Shares Cancelled (8,758) (9) - - - -
Net (Loss), Year Ended
December 31, 1985 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

DEFICIT
CAPITAL ACCUMULATED
IN EXCESS OF DEVELOPMENT
PAR VALUE STAGE
---------------- ------------------

Initial Issuance of Common Stock
October 21, 1983 $ 2,498 $ -
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares (2) -
---------------- ------------------

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

Balance, January 1, 1984 6,824 (4,317)
Capital Contribution 21,727 -
Issuance of Common Stock 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 36,397 (26,114)
Shares Contributed Back
to Company - -
Capital Contribution 200,555 -
Sale of 12,166 Warrants at
$1.50 Per Warrant 18,250 -
Shares Cancelled 9 -
Net (Loss), Year Ended
December 31, 1985 - (252,070)
---------------- ------------------



See accompanying notes and independent accountants' report.

F-5



MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK
-------------------------- ---------------------------- ----------------------------
SHARES SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT
------------ ------------ ------------ -------------- ------------ --------------

Balance, January 1, 1986 38,282 38 - - - -
Net (Loss), Year Ended
December 31, 1986 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance, January 1, 1987 38,282 38 - - - -
Issuance of Common Stock upon
Exercise of Warrants 216 - - - - -
Net (Loss), Year Ended
December 31, 1987 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance, January 1, 1988 38,498 38 - - - -
Issuance of Common Stock
Sale of Stock (Unaudited) 2,544 3 - - - -
Services Rendered (Unaudited) 3,179 3 - - - -
Net (Loss), Year Ended
December 31, 1988 (Unaudited) - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance, January 1, 1989 (Unaudited) 44,221 44 - - - -
Issuance of Common Stock
Sale of Stock 4,000 4 - - - -
Services Rendered 36,000 36 - - - -
Net (Loss), Year Ended
December 31, 1989 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance, January 1, 1990 84,221 84 - - - -
Issuance of Common Stock
Sale of Stock 2,370 2 - - - -
Services Rendered 6,480 7 - - - -
Net Income, Year Ended
December 31, 1990 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance January 1, 1991 93,071 93 - - - -
Issuance of Common Stock

DEFICIT
CAPITAL ACCUMULATED
IN EXCESS OF DEVELOPMENT
PAR VALUE STAGE
---------------- ------------------

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

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

Balance, January 1, 1988 282,293 (333,938)
Issuance of Common Stock
Sale of Stock (Unaudited) 101,749 -
Services Rendered (Unaudited) 70,597 -
Net (Loss), Year Ended
December 31, 1988 (Unaudited) - (142,335)
---------------- ------------------

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

Balance, January 1, 1990 474,599 (508,218)
Issuance of Common Stock
Sale of Stock 59,248 -
Services Rendered 32,393 -
Net Income, Year Ended
December 31, 1990 - 133,894
---------------- ------------------

Balance January 1, 1991 566,240 (374,324)
Issuance of Common Stock



See accompanying notes and independent accountants' report.

F-6



MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK
-------------------------- ---------------------------- ----------------------------
SHARES SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT
------------ ------------ ------------ -------------- ------------ --------------

Sale of Stock 647 1 - - 350,000 350
Services Rendered 4,371 4 - - - -
Conversion of Warrants 30 -
Conversion of Stock (6,000) (6) 60,000 60 - -
Net (Loss), Year Ended
December 31, 1991 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance January 1, 1992 92,119 92 60,000 60 350,000 350
Issuance of Common Stock
Sale of Stock 20,000 20 - - - -
Services Rendered 5,400 5 - - - -
Conversion of Warrants 6,000 6 - - - -
Sale of Class B Stock - - 60,000 60 - -
Issuance of Stock to
Unconsolidated Subsidiary 4,751 5 - - - -
Conversion of Stock 6,000 6 (60,000) (60) - -
Cancellation of Shares (6,650) (7) - - - -
Net (Loss), Year Ended
December 31, 1992 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance January 1, 1993 127,620 127 60,000 60 350,000 350
Issuance of Common Stock
Licensing Agreement 12,500 13 - - - -
Services Rendered 67,030 67 - - - -
Warrant Conversion 56,000 56 - - - -
Cancellation of Shares (31,700) (32) - - - -
Net (Loss) for Year Ended
December 31, 1993 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance January 1, 1994 231,449 231 60,000 60 350,000 350

Adjustment to Give Effect
to Recapitalization on

DEFICIT
CAPITAL ACCUMULATED
IN EXCESS OF DEVELOPMENT
PAR VALUE STAGE
---------------- ------------------

Sale of Stock 273,335 -
Services Rendered 64,880 -
Conversion of Warrants -
Conversion of Stock - -
Net (Loss), Year Ended
December 31, 1991 - (346,316)
---------------- ------------------

Balance January 1, 1992 904,455 (720,640)
Issuance of Common Stock
Sale of Stock 15,980 -
Services Rendered 15,515 -
Conversion of Warrants 14,994 -
Sale of Class B Stock 14,940 -
Issuance of Stock to
Unconsolidated Subsidiary 71,659 -
Conversion of Stock - -
Cancellation of Shares 7 -
Net (Loss), Year Ended
December 31, 1992 - (154,986)
---------------- ------------------

Balance January 1, 1993 1,037,550 (875,626)
Issuance of Common Stock
Licensing Agreement 6,237 -
Services Rendered 13,846 -
Warrant Conversion 304,943 -
Cancellation of Shares (7,537) -
Net (Loss) for Year Ended
December 31, 1993 - (929,900)
---------------- ------------------

Balance January 1, 1994 1,355,039 (1,805,526)

Adjustment to Give Effect
to Recapitalization on



See accompanying notes and independent accountants' report.

F-7



MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK
-------------------------- ---------------------------- ----------------------------
SHARES SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT
------------ ------------ ------------ -------------- ------------ --------------

February 1, 1994 30,818 31 - - - -
Issuance of Shares for
Services Rendered 223,000 223 - - - -
Sale of Stock 1,486,112 1,486 - - - -
Issuance of Shares for
the Modification of Agreements 34,000 34 - - - -
Net (Loss) for the Year
Ended December 31, 1994 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance January 1, 1995 2,005,380 2,005 60,000 60 350,000 350

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

Balance January 1, 1996 2,157,880 2,157 60,000 60 350,000 350

Issuance of Shares for
Services Rendered 164,666 165 - - - -
Sale of Stock 70,000 70 - - - -
Issuance of Shares for
the Modification of Agreements 250,000 250 - - - -
Cancellation of Shares Held
in Treasury (62,000) (62) - - - -
Net (Loss) for the Year
Ended December 31, 1996 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance January 1, 1997 2,580,546 2,580 60,000 60 350,000 350


Sale of Stock 100,000 100 - - - -


DEFICIT
CAPITAL ACCUMULATED
IN EXCESS OF DEVELOPMENT
PAR VALUE STAGE
---------------- ------------------

February 1, 1994 385,393 -
Issuance of Shares for
Services Rendered - -
Sale of Stock 23,300 -
Issuance of Shares for
the Modification of Agreements (34) -
Net (Loss) for the Year
Ended December 31, 1994 - (377,063)
---------------- ------------------

Balance January 1, 1995 1,763,698 (2,182,589)

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

Balance January 1, 1996 1,763,698 (2,380,135)

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

Balance January 1, 1997 1,799,181 (2,830,869)


Sale of Stock 99,900 -



See accompanying notes and independent accountants' report.

F-8



MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK
-------------------------- ---------------------------- ----------------------------
SHARES SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT
------------ ------------ ------------ -------------- ------------ --------------

Conversion of Indebtedness 800,000 800 - - - -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer 1,499,454 1,500 - - - -
Issuance of Shares for
Services Rendered 247,000 247 - - - -
Adjustment to Give Effect
to Recapitalization on
9-Mar-97 560,000 560 - - - -
Net (Loss) for the Year
Ended December 31, 1997 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------
5,787,000 5,787 60,000 60 350,000 350
Shares Issued in Cancellation
of Indebtedness 2,430,000 2,430 - - - -
Conversion of Options 500,000 500 - - - -
Issuance of Shares for
Services Rendered 1,121,617 1,122 - - - -
Shares Issued in Cancellation
of Redeemable Preferred Stock 50,000 50 - - - -
Shares Returned to Treasury
and Cancelled (560,000) (560) - - - -
Modification of Royalty Agreement 733,280 733 - - - -
Issuance of Warrants to Officer - - - - - -
Net (Loss) for the Year
Ended December 31, 1998 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------
10,061,897 $ 10,062 60,000 $ 60 350,000 $ 350
Shares Issued in Cancellation
of Indebtedness 2,175,000 2,175 - - - -
Issuance of Shares for
Services Rendered 1,255,000 1,255 - - - -
Shares Issued in Modification

DEFICIT
CAPITAL ACCUMULATED
IN EXCESS OF DEVELOPMENT
PAR VALUE STAGE
---------------- ------------------

Conversion of Indebtedness 165,200 -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer 370,500 -
Issuance of Shares for
Services Rendered 2,224 -
Adjustment to Give Effect
to Recapitalization on
9-Mar-97 (560) -
Net (Loss) for the Year
Ended December 31, 1997 - (133,578)
---------------- ------------------
2,436,445 (2,964,447)
Shares Issued in Cancellation
of Indebtedness 167,570 -
Conversion of Options 124,500 -
Issuance of Shares for
Services Rendered 111,040 -
Shares Issued in Cancellation
of Redeemable Preferred Stock 149,950 -
Shares Returned to Treasury
and Cancelled 560 -
Modification of Royalty Agreement 6,599 -
Issuance of Warrants to Officer 27,567 -
Net (Loss) for the Year
Ended December 31, 1998 - (549,187)
---------------- ------------------
$ 3,024,231 $ (3,513,634)
Shares Issued in Cancellation
of Indebtedness 164,492 -
Issuance of Shares for
Services Rendered 93,844 -
Shares Issued in Modification



See accompanying notes and independent accountants' report.

F-9



MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK
-------------------------- ---------------------------- ----------------------------
SHARES SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT
------------ ------------ ------------ -------------- ------------ --------------

of Licensing Agreement 672,205 672 - - - -
Sale of Stock 433,333 433 - - - -
Net (Loss) for the Year
Ended December 31, 1999 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

14,597,435 $ 14,597 60,000 $ 60 350,000 $ 350

Issuance of Shares for
Services Rendered 699,500 699 - - - -
Shares Issued to Investors
Pursuant to Settlement Agreement 65,028 65 - - - -
Shares Issued for Cash
and Non-Recourse Promissory Notes 5,000,000 5,000 - - - -
Shares Issued for Cash 400,000 400 - - - -
Shares Issued in Cancellation
of Indebtedness 100,000 100 - - - -
Shares Issued as Compensation
Pursuant to Escrow Agreement 4,183,675 4,184 - - - -
Shares Returned from Escrow (400,000) (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 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------

Balance December 31, 2000 24,618,167 $ 24,618 100,000 $ 100 337,471 $ 337

Issuance of Shares for
Services Rendered 6,185,000 6,185 - - - -
Shares Issued for Cash 4,932,358 4,932 - - - -
Shares Issued in Connection
with Private Offering 697,853 698 - - - -

DEFICIT
CAPITAL ACCUMULATED
IN EXCESS OF DEVELOPMENT
PAR VALUE STAGE
---------------- ------------------

of Licensing Agreement (672) -
Sale of Stock 173,107 -
Net (Loss) for the Year
Ended December 31, 1999 - (539,283)
---------------- ------------------

$ 3,455,002 $ (4,052,917)

Issuance of Shares for
Services Rendered 83,251 -
Shares Issued to Investors
Pursuant to Settlement Agreement (65) -
Shares Issued for Cash
and Non-Recourse Promissory Notes 1,990,000 -
Shares Issued for Cash 281,294 -
Shares Issued in Cancellation
of Indebtedness 99,900 -
Shares Issued as Compensation
Pursuant to Escrow Agreement - -
Shares Returned from Escrow 400 -
Common Shares Converted
into Class B Common - -
Preferred Shares Converted
into Common
Net (Loss) for the Year - -
Ended December 31, 2000 - (459,129)
---------------- ------------------

Balance December 31, 2000 $ 5,909,782 $ (4,512,046)

Issuance of Shares for
Services Rendered 390,693 -
Shares Issued for Cash 281,635 -
Shares Issued in Connection
with Private Offering (698) -



See accompanying notes and independent accountants' report.

F-10



MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK
-------------------------- ---------------------------- ----------------------------
SHARES SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT
------------ ------------ ------------ -------------- ------------ --------------

Shares Issued to Officer 6,000,000 6,000 - - - -
Net (Loss) for the Year
Ended December 31, 2001 - - - - - -
------------ ------------ ------------ -------------- ------------ --------------
Balance December 31, 2001 42,433,378 $ 42,433 100,000 $ 100 337,471 $ 337
============ ============ ============ ============== ============ ==============

DEFICIT
CAPITAL ACCUMULATED
IN EXCESS OF DEVELOPMENT
PAR VALUE STAGE
---------------- ------------------


Shares Issued to Officer 414,000 -
Net (Loss) for the Year
Ended December 31, 2001 - (2,432,638)
---------------- ------------------
Balance December 31, 2001 $ 6,995,412 $ (6,944,684)
================ ==================



See accompanying notes and independent accountants' report.

F-11



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


From Inception
(October 21, 1983)
Through
1999 2000 2001 December 31, 2001
------------------ ---------- ------------ ------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (539,283) $(459,129) $(2,432,638) $ (6,944,684)
------------------ ---------- ------------ ------------------
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided (Used) by Operating Activities
Depreciation and Amortization 2,242 2,948 3,292 177,865
Interest Income Accrued on Stock
Subcription Receivable (1,432) (98,557) (98,298) (198,287)
Bad Debts - 50,000
Gain on Sale of Securities (4,396) - - (196,596)
Charge off of Investment in Joint Venture - - 33,000 33,000
Officer's and Director's Compensation on Stock
Subscription Modification - - 1,500,000 1,500,000
Charge off of Deferred Offering Costs - - - 36,480
Charge off Long-lived Assets due to Impairment - - - 92,919
Gain on Foreclosure - - - (18,697)
Modification of Royalty Agreement - - - 7,332
(Increase) Decrease in Receivables 57,941 112,364 (255,073) (336,005)
(Increase) Decrease in Prepaid Expenses (268) - (212) (159)
Loss on Sale of Equipment - 12,780
Issuance of Common Stock for Services 95,100 88,133 816,878 1,438,275
Issuance of Common Stock for Agreement
Modifications - - - 152
Forgiveness of Indebtedness - - - 165,000
Increase (Decrease) in Accounts
Payable and Accrued Expenses 222,471 8,441 267,742 1,187,614
Interest Accrued on Notes Payable 57,500 57,062 67,718 272,755
Increase in Research and Development
Sponsorship Payable - - - 218,000
(Increase) in Note for Litigation Settlement - - - (25,753)
(Increase) in Deposits - - - (2,189)
------------------ ---------- ------------ ------------------
TOTAL ADJUSTMENTS 429,158 170,391 2,335,047 4,414,486
------------------ ---------- ------------ ------------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (110,125) (288,738) (97,591) (2,530,198)
------------------ ---------- ------------ ------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From Sale of Equipment - - - 10,250
Purchase of Property and Equipment (1,490) - (5,961) (236,864)
Proceeds from Sale of Securities 4,396 - - 283,596
Purchase of Securities - - - (90,000)
Proceeds from Foreclosure - - - 44,450
Investment in Joint Venture (18,000) (15,000) - (102,069)
Payment for License Agreement - - - (6,250)
------------------ ---------- ------------ ------------------

NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (15,094) (15,000) (5,961) (96,887)
------------------ ---------- ------------ ------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 150,000 274,288 366,126 1,747,733
Costs incurred in Offering - - (79,559) (111,039)
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 Officers 102,198 8,000 42,800 778,805
Repayments to Officer (71,500) (39,500) (53,300) (508,832)
Increase in Loan Payable-Others 7,405 - - 172,069
------------------ ---------- ------------ ------------------



See accompanying notes.

F-12



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


From Inception
(October 21, 1983)
Through
1999 2000 2001 December 31, 2001
------------------- --------- -------- ------------------


NET CASH PROVIDED BY FINANCING ACTIVITIES $ 188,103 $242,788 $276,067 $ 2,801,554
------------------- --------- -------- ------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 62,884 (60,950) 172,515 174,469
BEGINNING BALANCE - CASH AND
CASH EQUIVALENTS 20 62,904 1,954 -
------------------- --------- -------- ------------------
ENDING BALANCE - CASH AND CASH
EQUIVALENTS 62,904 $ 1,954 $174,469 $ 174,469
=================== ========= ======== ==================

SUPPLEMENTAL INFORMATION:

A. Definition of Cash and Cash Equivalents

For the purpose of the statements of cash flows, all highly liquid
investments with a maturity of three months or less are considered
to be cash equivalents.

B. Interest and Income Taxes Paid

Interest Paid During Period $ 2,500 $ 2,565 $ 2,565
=================== ========= ========
Income Taxes Paid $ 0 $ 2,400 $ 800
=================== ========= ========


C. Non Cash Investing and Financing Activities

During 1999, the Company issued 175,000 shares of its Class A Common Stock
in exchange for the cancellation of the $66,667 of indebtedness due
a consultant

During 1999, the Company issued 2,000,000 shares of its Class A Common
Stock to its President in exchange for the cancellation of $100,000 of
indebtedness due him.

During 1999, the Company issued 100,000 shares of its Class A Common Stock
to a consultant for $.35 a share, payable by a non-recourse,
non-interest bearing promissory note payable on or before June 15,
2003, and is secured by the stock.

During 2000, a holder of 12,259 shares of the Company's Preferred Stock
converted all of his shares into 12,259 shares of common.

Under a settlement agreement, during 2000, the Company issued 65,028 shares
of common stock to investors who were defrauded by a former consultant
of the Company.

During 2000, the Company issued to its President 4,650,000 shares of its
common stock in exchange for $4,650 and a $1,855,350 promissory note
bearing interest at 8% due May 2005. Shares issued were valued at $.40
per share.

During 2000, the Company issued to a Director 350,000 shares of its common
stock in exchange for $350 and a $139,650 promissory note bearing
interest at 8% due May 2005. Shares issued were valued at $.40 per
share.

Through a stock grant, the Company in 2000 issued to its President
4,183,675 shares of its common stock for future compensation. These
shares are held in escrow and have restrictive covenants.

During 2001, the Company issued 697,853 shares of its common stock as
additional consideration in the raising of $365,496 through its
private offering.

During 2001, the Company issued as collateral to a financial institution
60,000,000 shares of its common stock in connection with obtaining a
Straight Documentary Credit in the amount of $12,500,000. The shares
can not be sold until certain contingencies lapse (see Note 8i)


See accompanying notes.

F-13

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. Property and Equipment

The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed on the
straight-line method for financial reporting purposes and for income
tax reporting purposes.

b. Intangible Assets

Intangibles are amortized on the straight-line method over periods
ranging from 5 to 20 years (see Note 3).

c. 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.

d. Pervasiveness of 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.

e) Fair Value of Financial Instruments

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


F-14

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


f) Concentration of Credit Risk

Currently, the Company's only source of income comes from its
sub-contracts for Electrochemical Fatigue Sensor ("EFS") research with
the United States Air Force contractors. The Company believes these
contracts will continue through 2002.

g) 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.

h) Investment in Unconsolidated Subsidiaries

Investments in companies in which the Company has less than a 20%
interest are carried at cost. The Company includes dividends received
from those companies in other income. The Company applies dividends
received in excess of the Company's proportionate share of accumulated
earnings as a reduction of the cost of the investment.

i) Revenue Recognition

The Company recognizes revenue at the time services are rendered.


NOTE 3 - INTANGIBLES

Intangible assets consist of the following:



Period of December 31,
Amortization 2000 2001
--------- ---------

Patent Costs 17 Years $ 28,494 $ 28,494
License Agreement 20 Years 6,250 6,250
(See Note 4)
Website 5 Years -- 5,200
--------- ---------
34,744 39,944
Less Accumulated Amortization (22,032) (24,281)
--------- ---------

$ 12,712 $ 15,663
========= =========



F-15

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


Amortization charged to operations for 1999, 2000, and 2001, were $1,989,
$1,989, and $2,249, respectively.


NOTE 4 - 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 status of a structure without
knowing the structure's past loading history. 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 20 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 1999,
2000, and 2001, relating to this obligation was $43,303, $54,638, and
$64,472, respectively. The balance of the note at December 31, 2000, and
2001, was $358,181 and $422.653, respectively,


F-16

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


As of December 31, 2001, the Company was required to issue 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.


NOTE 5 - PROPERTY AND EQUIPMENT

The following is a summary of property and equipment:

December 31,
2000 2001
----------- ------------

Office Equipment $ 23,380 $ 24,142
Remote Monitoring System -- --
Manufacturing Equipment 100,067 100,067
----------- ------------
123,447 124,209
Less: Accumulated
Depreciation (120,457) (121,501)
----------- ------------
$ 2,990 $ 2,708
=========== ============

Depreciation charged to operations was $253, $959, and $1,044, in 1999,
2000, and 2001, respectively. The useful lives of office equipment for the
purpose of computing depreciation are five years. Management will commence
depreciating its manufacturing equipment upon the commencement of the
manufacturing of its products.

The Company's equipment has been pledged as collateral on the agreement
with Advanced Technology Center (See Note 8(b)).


NOTE 6 - 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.

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, 2000, and 2001, was $53,991, and $57,237, respectively. Interest
charged to operations for 1999, 2000 and 200 was $4,640, $3,245, and
$3,246, respectively.


F-17

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


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 1999, 2000, and 2001, 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 7 - 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. As of December 31, 2001, the Company has
unused operating loss carryforwards, which may provide future tax benefits
in the amount of approximately $4,825,000 which expire in various years
through 2021.

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 8 - 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


F-18

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


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.

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, 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 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, 2000, and 2001, the total future royalty commitments,
including the accumulated 26% annual rate of return, were limited to
approximately $1,369,233, and $1,725,234, 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"), and 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. In February 1995, the Company entered into an agreement with an
unrelated third party for providing the idea of pursuing U.S.
government appropriations, funding, and program contracts and
subcontracts for the enhancement and application of the Company's
technologies. He would receive a number of the Company's Common Stock


F-19

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


equal to 1/2% of the number of shares outstanding for his idea, and 2%
of shares outstanding on the date of the first government funding or
contract award, 15% of the amount of the total government program
amounts awarded through August 7, 2001, and an appointment to the
Company's Board of Directors. Funds due him are to be paid only when
such funds become available to the Company from profits before taxes,
interest and depreciation, and not from any U.S. government programs
or appropriations.

The Agreement contains anti-dilution provisions relating to the shares
to be issued that expire once $50,000 is paid. The Company's
obligation to have this person as a Director expires once all amounts
due are paid. The contingent amount due has been personally guaranteed
by the Company's President and is secured by the Company's patents,
subject to a prior lien in favor of the Company's President. The
personal guarantee expires upon the individual receiving $100,000,
which the Company believes occurred on May 1, 1998 when the third
party was issued 244,427 shares of stock (2 % of shares outstanding).

The Company and the third part disagree as to the amount owed and the
timing of payment under the Agreement, and attempted to settle the
disagreements amicably in 2000-2001. But, on April 30, 2001 the third
party sued the Company and its President to recover his 15% contingent
fee immediately out of all government and private funding-which the
Company believes voids the entire agreement, because the company
believes that it violates federal public policy and also federal
empowerment statutes prohibiting such a result, and no money would be
due him. And, the Company counter-sued to recover 195,542 shares (2%
outstanding) issued to him on May 1, 1998.


f. In 1999, the Company was notified that a former consultant used
company materials to sell shares of the Company's stock to the public.
The Consultant defrauded 25 investors out of $112,000. The Company had
no knowledge of his actions. But in order to avoid potential
litigation and have the ability to pursue the claims of these
investors, the Company authorized issuance of up to 110,000 shares of
its restricted Common Stock to these investors in exchange for the
assignment of their respective claims to the Company and a release of
any claims against the Company. During 2000, 65,028 shares of the
Company's common stock were issued to these defrauded investors.

g. 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:


F-20

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




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 May 31, 2002.

Rental expense charged to operations for the years ended December 31,
1999, 2000, and 2001 was approximately $25,375, $23,129, and $29,468,
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.


Minimum rental commitments under the noncancelable leases expire as
follows:

Year Ended 2002 $ 11,740

i. Straight Documentary Credit

On October 10, 2001, the Company entered into an arrangement whereby


F-21

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


Allied Boston Group will provide the Company with a Straight
Documentary 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. Therefore the Company
treats these shares as issued but not outstanding.

j) Litigation

1) On April 30, 2001, Stephen Beck, a former consultant filed a
complaint against the Company and its President (Stephen Forest
Beck vs. Robert M. Bernstein, Material Technologies, Inc. etal.
Los Angeles Superior Court No. BC249547, filed April 30, 2001)
alleging breach of contract a declaration of his contract rights,
and fraud. The complaint all relates to a February 8, 1995,
consulting agreement under which Mr. Beck was to provide
assistance in the Company obtaining a government contract private
funding. Mr. Beck claims that over $1.5 million in contingent
consulting fees are immediately due, as Matech has obtained
funding through four since 1995. In addition, he is seeking
punitive damages in an unspecified amount.

Counsel, who is representing the Company in this lawsuit,
believes that the likelihood of Mr. Beck winning any compensation
is poor based upon the merits of his case. Trial is set to begin
on May 20, 2002.

2) On April 30, 2001, the Company filed a complaint against Mr. Beck
(Material Technologies, Inc. v Stephen Forrest Beck, L.A.
Superior Court No BC249495) for the recission of the consulting
agreement the return of 195,542 shares of common stock issued to


F-22

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


him pursuant to the above indicated consulting contract, and
attorney's fees, interest, and the cost of the lawsuit. The case
has been consolidated with the above-reference suit and also goes
to trial on May 20, 2002.


NOTE 9 - INVESTMENTS

a) The Company owns 65,750 shares of Class A Common Stock of Tensiodyne
Corporation. At December 31, 2001, 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.


NOTE 10 - 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.


F-23

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


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. Issuances Involving Non-cash Consideration

All issuances of the Company's stock for non-cash consideration have
been assigned a dollar amount equaling either the market value of the
shares issued or the value of consideration received whichever is more
readily determinable. The majority of the non-cash consideration
received pertains to services rendered by consultants and others.

On February 4, 1999, the Company issued 175,000 shares in exchange for
the cancellation of $66,667 of indebtedness due to a consultant. On
March 5, 1999, the Company issued 50,000 shares to Mr. John Goodman
for services rendered relating to the research and development
projects. These shares were valued at $2,500. Also on March 5, 1999,
the Company issued 50,000 shares to a consultant. These shares were
valued at $2,500. On April 15, 1999, the Company issued 50,000 shares
to a consultant. These shares were valued at $2,500. On June 9, 1999,
the Company issued 2,000,000 shares to its President in exchange for
canceling $100,000 of indebtedness due him. On May 27, 1999, the
Company issued its director, Joel Freedman, 200,000 shares of stock
from services. These shares were valued at $10,000. On June 21, 1999,
the Company issued 100,000 shares to a consultant for $.35 a share
payable by a non-recourse, non-interest bearing promissory note
payable on or before June 15, 2003 and is secured by the 100,000
shares. The shares were valued at the present value of the note of
$23,541. On June 12, 1999, the Company issued 200,000 shares to an
attorney for services. These shares were valued at $10,000. On July 7,
1999, the Company issued 672,205 shares to the University of
Pennsylvania pursuant to the terms of the modified licensing agreement
as discussed in Note 4. These shares were valued at par. On August 23,


F-24

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


1999, the Company issued 50,000 shares to a consultant. These shares
were valued at $2,500. On September 29, 1999, the Company issued 8,000
shares for public relations services. These shares were valued at
$400. On October 27, 1999, the Company issued 300,000 to its board of
advisors. These shares were valued at $30,000. On November 12, 1999,
the Company issued 25,000 shares to a consultant. These shares were
valued at $2,500. On November 14, 1999, the Company issued 92,000
shares to Mr. John Goodman for services rendered in connection with
the development of the fatigue fuse. These shares were valued at
$9,200. On December 14, 1999, the Company issued 50,000 shares to a
consultant. These shares were valued at $5,000. On December 21, 1999,
the Company issued 20,000 shares to a consultant for public relations
services. These shares were valued at $1,500. On December 21, 1999,
the Company issued 10,000 shares to an individual who is on the
Company's advisory board. These shares were valued at $1,000. On
December 30, 1999, the Company issued 150,000 shares to a consultant.
These shares were valued at $15,000.

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 $5,000.
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 $1,000. On February 28, 2000, the
Company issued 200,000 of common stock to a consultant for financial
services. These shares were valued at $20,000. Also on February 28,
2000, the Company issued 4,500 of common stock to a public relations
consultant. These shares were valued at $4,500. 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 $7,500.
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 $10,000. 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 $3,000. On
April 11, 2000, the Company issued 25,000 shares of common stock for
advisory services. These shares were valued at $5,000. On April 28,
2000, the Company issued 30,000 shares of common stock for advisory
services. These shares were valued at $12,000. 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


F-25

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


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 $10,000. 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 $10,000. 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.


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 $5,000. 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 $2,500. 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 $10,000. 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 $10,000. On March 6, 2001, the
Company issued its President 6,000,000 shares of common stock for
services rendered. These shares were valued at $420,000. On April 6,
2001, the Company issued a consultant 200,000 shares of its common
stock for services rendered. These shares were valued at $10,000. On
April 17, 2001, the Company issued a consultant 250,000 shares of its
common stock for services rendered. These shares were valued at
$12,500. 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 $5,000. On May 3, 2001, the
Company issued to one of employees 100,000 shares of its common stock
for services rendered on the Company's research project. These shares
were valued at $5,000. Also May 3, 2001, the Company issued a
consultant 100,000 shares of its common stock for services rendered.
These shares were valued at $5,000. On June 8, 2001, the Company
issued a consultant 1,000,000 shares of its common stock for past


F-26

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


marketing services rendered. These shares were valued at $50,000. 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 $1,250. 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 $10,000. On July 26, 2001, the Company issued a
consultant 200,000 shares of its common stock for services rendered.
These shares were valued at $9,100. On August 6, 2001, the Company
issued a consultant 125,000 shares of its common stock for services
rendered. These shares were valued at $8,125. On August 9, 2001, the
Company issued an attorney 265,000 shares of its common stock for
services rendered. These shares were valued at $26,500. 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 $22,750.
On September 6, 2001, the Company issued a consultant 37,500 shares of
its common stock for services rendered. These shares were valued at
$2,438. On September 14, 2001, the Company issued a consultant 50,000
shares of its common stock for services rendered. These shares were
valued at $3,250. On September 19, 2001, the Company issued a
consultant 125,000 shares of its common stock for services rendered.
These shares were valued at $8,125. 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 $39,000. On October 16, 2001, the Company
issued a consultant 50,000 shares of its common stock for services
rendered. These shares were valued at $1,853. 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 $1,300. On
October 23, 2001, the Company issued an attorney 150,000 shares of its
common stock for services rendered. These shares were valued at
$15,000. On October 25, 2001, the Company issued 697,853 as additional
fees pertaining to its Regulation S offeringThese shares were valued
at $48,850. 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 $35,000. On November 14, 2001, the Company
issued a consultant 150,000 shares of its common stock for services
rendered. These shares were valued at $9,750. 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 $6,988. 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 $34,450.


F-27

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


NOTE 11 - 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. In 1999, the Company issued 2,000,000 shares of its Common Stock in
exchange for the cancellation of $100,000 of indebtedness owed its
President.

c. 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.

d. 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.

e. 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. As of December 31, 2001, 400,000 of these shares were
issued to a unrelated third part


F-28

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


f. On February 19, 2001, the Company issued its President 6,000,000
shares of common stock for services rendered. These shares were valued
at $420,000.

g. 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.

h. 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.


NOTE 12 - 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


F-29

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


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.


In 1998, the Company issued 310,000 shares of Common Stock through the
plan in exchange for consulting services. The Company valued these
shares at $31,000, the fair value of the services rendered.

c) 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. 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. Options issued under this plan
expire 5 years from date of grant.

The following is summary of the 1996 and 1998 Stock option plans:



1996 STOCK OPTION PLAN 1998 STOCK OPTION PLAN 1998 STOCK PLAN
------------------------ -------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE

OUTSTANDING DEC 31, 1998 - $ - 350,000.00 $ - - $ -
========== ============ ============ ============ ============= =========
GRANTED - $ - 750,000.00 $ 0.25 - $ -
EXERCISED - $ - 100,000.00 $ 0.35 - $ -
FORFIETED - $ - - $ - $ -
---------- ------------ ------------ ------------ ------------- ---------
OUTSTANDING DEC 31, 1999 - $ - 1,000,000.00 $ - $ - $ -
========== ============ ============ ============ ============= =========
GRANTED - $ - - $6,800,000.00 $ -
EXERCISED - $ - 50,000.00 $ 0.25 $5,894,500.00 $ 0.41
FORFIETED - $ - - $ - -
---------- ------------ ------------ ------------ ------------- ---------
OUTSTANDING DEC 31, 2000 - $ - 950,000.00 $ - $ 905,500.00 $ -
========== ============ ============ ============ ============= =========

GRANTED - $ - - $ -
EXERCISED - $ - 950,000.00 $ 0.10 $ 905,500.00 $ 0.10
FORFIETED - $ - - $ - $ -
---------- ------------ ------------ ------------ ------------- ---------
OUTSTANDING DEC 31, 2001 - $ - - $ - $ - $ -
========== ============ ============ ============ ============= =========




WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED
DURING 1999 $ 0.00
============

WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED
DURING 2000 $ 0.00
============

WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED
DURING 2001 $ 0.00
============




NOTE 13 - SUBSEQUENT EVENTS

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

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.


F-30

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


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.

Also on March 12, 2002, the Company issued 80,000 shares of its common stock to
a consultant for services rendered.

Also on March 12, 2002, the Company issued 80,000 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 to
a consultant for services rendered.

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
a consultant for services rendered.


F-31