10QSB 1 v058512_10qsb.txt =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB |X| Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2006 |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _____________. Commission file number 0-14266 UNIVERSAL DETECTION TECHNOLOGY (Exact Name of Small Business Issuer as Specified in its Charter) CALIFORNIA 95-2746949 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9595 WILSHIRE BOULEVARD, SUITE 700 BEVERLY HILLS, CALIFORNIA 90212 (Address of Principal Executive Offices) (310) 248-3655 (Issuer's Telephone Number, Including Area Code) Copies to: Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, no par value, 139,527,205 shares issued and outstanding as of November 17, 2006. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| ================================================================================ UNIVERSAL DETECTION TECHNOLOGY INDEX PART I FINANCIAL INFORMATION ITEM 1. Financial Statements.............................................. F-1 Unaudited Consolidated Balance Sheet............................ F-1 Unaudited Consolidated Statements of Operations (3 months)...... F-2 Unaudited Consolidated Statements of Operations (9 months)...... F-3 Unaudited Consolidated Statements of Cash Flows................. F-4 Notes to Unaudited Consolidated Financial Statements............ F-5 ITEM 2. Management's Discussion and Analysis or Plan of Operation......... 2 ITEM 3. Controls and Procedures........................................... 17 PART II OTHER INFORMATION................................................. 18 ITEM 1. Legal Proceedings................................................. 18 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 19 ITEM 3. Defaults Upon Senior Securities................................... 20 ITEM 4. Submission of Matters to a Vote of Security Holders............... 20 ITEM 5. Other Information................................................. 20 ITEM 6. Exhibits.......................................................... 21 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2006 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 18,267 Certificate of deposit 1,005 Restricted cash 61,227 Accounts Receivable,net 55,507 Stock subscription receivable 20,000 Prepaid expenses and other current assets 183,626 ------------ Total current assets 339,632 DEPOSITS 10,226 EQUIPMENT, NET 88,582 PATENT COSTS 31,022 ------------ $ 469,462 ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable, trade $ 596,848 Accrued liabilities 1,354,688 Notes payable - related party 2,500 Notes payable 1,005,264 Accrued interest expense 373,064 ------------ Total current liabilities 3,332,364 OTHER LIABILITIES - Note Payable Long term 21,447 ------------ Total Liabilities 3,353,811 ------------ COMMITMENTS AND CONTINGENCIES -- STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value, 20,000,000 shares authorized, -0- issued and outstanding -- Common stock, no par value, 480,000,000 shares authorized, 102,478,416 shares issued and outstanding 25,112,007 Additional paid-in-capital 4,101,605 Accumulated (deficit) (32,097,961) ------------ Total stockholders' equity (deficit) (2,884,349) ------------ Total Liabilities and Stockholders Equity (deficit) $ 469,462 ============ See accompanying notes to unaudited consolidated financial statements. F-1 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September --------------------------- 2006 2005 ------------ ------------ REVENUE $ 111,015 $ -- COST OF GOODS SOLD 99,211 -- ------------ ------------ GROSS PROFIT 11,804 -- ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 496,951 795,537 Marketing 13,139 32,200 Research and development 13,510 -- Depreciation 6,182 5,086 ------------ ------------ Total expenses 529,782 832,823 ------------ ------------ (LOSS) FROM OPERATIONS (517,978) (832,823) OTHER INCOME (EXPENSE): Interest income 470 645 Interest expense (42,071) (42,177) Amortization of loan fees -- (20,942) ------------ ------------ Net other income (expense) (41,601) (62,474) ------------ ------------ (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (559,579) (895,297) NET (LOSS) $ (559,579) $ (895,297) ============ ============ NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: $ (0.01) $ (0.02) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 89,781,511 53,425,296 ============ ============
See accompanying notes to unaudited consolidated financial statements. F-2 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, ------------------------- 2006 2005 ----------- ----------- REVENUE $ 111,515 $ -- COST OF GOODS SOLD 99,211 -- ----------- ----------- GROSS PROFIT 12,304 -- ----------- ----------- OPERATING EXPENSES: Selling, general and administrative 1,672,856 2,321,730 Marketing 166,164 115,514 Research and development 31,338 -- Depreciation 18,545 14,265 ----------- ----------- Total expenses 1,888,903 2,451,509 ----------- ----------- (LOSS) FROM OPERATIONS (1,876,599) (2,451,509) OTHER INCOME (EXPENSE): Interest income 893 3,077 Interest expense (168,729) (114,947) Amortization of loan fees (16,926) (28,442) ----------- ----------- Net other income (expense) (184,762) (140,312) ----------- ----------- (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (2,061,361) (2,591,821) INCOME TAX EXPENSE -- -- ----------- ----------- NET (LOSS) $(2,061,361) $(2,591,821) =========== =========== NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: $ (0.03) $ (0.05) =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 70,853,649 52,532,333 =========== ===========
See accompanying notes to unaudited consolidated financial statements. F-3 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, -------------------------- 2006 2005 ----------- ----------- CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net (loss) $(2,061,361) $(2,591,821) Adjustments to reconcile net (loss) to net cash (used in) operations: Stocks and warrants issued for services 690,150 663,214 Depreciation 18,545 14,265 Changes in operating assets and liabilities: Inventory, Installation in process 52,860 -- Accounts receivable (55,507) (65,000) Prepaid expenses 334,347 468,501 Deferred revenue -- 65,000 Accounts payable and accrued expenses 536,795 409,536 ----------- ----------- Net cash (used in) operating activities (484,171) (1,036,305) ----------- ----------- CASH FLOWS (TO) FROM INVESTING ACTIVITIES: Purchase of equipment -- (17,980) Redemption of certificates of deposit -- 252,340 (Increase)/decrease in restricted cash 19,131 (1,638) ----------- ----------- Net cash provided by investing activities 19,131 232,722 ----------- ----------- CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Bank overdraft (1,113) 40,354 Proceeds from exercise of options - 9,500 Proceeds from sale of common stock 204,000 191,420 Payment of offering costs - (32,942) Proceeds from exercise of warrants 346,500 - Advances from related party 13,819 2,153 Advances on notes payable 89,985 290,000 Payments on Capital Lease (2,491) - Payments on notes payable - related party (136,881) - Payments on notes payable (43,760) (154,000) ----------- ----------- Net cash provided by (used in) financing activities 470,059 346,485 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,019 (457,098) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,248 466,971 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,267 $ 9,873 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest Paid $V 18,959 $ -- =========== ===========
See accompanying notes to unaudited consolidated financial statements. F-4 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Universal Detection Technology included in Form 10-KSB for the fiscal year ended December 31, 2005. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MANAGEMENT PLANS AND GOING CONCERN As of September 30, 2006, the Company had a working capital deficit of $2,992,732 and an accumulated deficit of $32,097,961. These conditions raise substantial doubt about its ability to continue as a going concern. Its ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and ultimately achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is currently devoting its effort to raising capital, and to the development, field-testing and marketing of its bio-terrorism detection device, known as BSM-2000. The Company entered into a technology affiliates agreement and a license agreement. The Company unveiled the first functional prototype of its BSM-2000 in May 2004. Although the Company continues to engage in testing of BSM-2000 to improve its functionality, BSM-2000 is currently available for sale. The Company plans to continue marketing BSM-2000 to private and government sectors in the US and internationally. Since the beginning of 2006 management has started focusing on various ways to increase the Company's visibility by not only marketing through traditional channels and showcasing the Company's products and services but also providing value added services such as training of security personnel and law enforcement staff with the goal of increasing knowledge about bio-terrorism and feasible measures that can be taken to reduce potential casualties and damages. F-5 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 The Company plans to generate revenues through sales of BSM-2000. The Company also plans to conduct more research and development aimed at developing alternative products using its current technologies as well as licensing new technologies that can potentially be commercialized. In February 2006, the Company entered into an investment agreement whereby an investor shall invest up to ten million dollars to purchase the Company's stock until January 2009. Under the agreement, the Company may order the investor to purchase a limited number of shares based on recent trading price and volume. As of September 30, 2006, 20,925,561 shares have been issued for an aggregate price of $300,991. The Company received $204,000 of the proceeds during the second and third quarters of 2006 and $20,000 in October 2006. The remaining $76,991 was used to pay off outstanding notes payable and accrued interest during 2006. The note was paid directly by the investor. In June 2006, the Company registered 25,000,000 shares of its common stock for future issuances in an S-8. As of September 30, 2006, 9,270,869 of these shares had been issued. STOCK-BASED COMPENSATION In December 2004 the Financial Accounting Standards Board issued FAS 123-R. FAS 123-R is a revision of FAS No. 123, as amended, Accounting for Stock-Based Compensation ("FAS 123") and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. FAS 123-R eliminates the alternative to use the intrinsic value method of accounting that was provided in FAS 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees. FAS 123-R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. FAS 123-R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for generally all share-based payment transactions with employees. The Company has adopted FAS 123-R and will apply its provisions for stock-based compensation awards. VALUATION OF THE COMPANY'S COMMON STOCK Unless otherwise disclosed, all stock based transactions entered into by the Company have been valued at the market value of the Company's common stock on the date the transaction was entered into or have been valued using the Black-Scholes Model to estimate the fair market value. F-6 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 REVENUE RECOGNITION Product revenue is recognized once certain obligations after shipment and acceptance of products and devices have occurred. Title of goods is transferred when the products are shipped from the Company's facility and accepted by the purchaser. Income not earned is recorded as deferred revenue. Service revenue, including event security, is recognized when services are preformed. PATENTS Patents and other intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. In accordance with Statement of Financial Accounting Standard (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142"), the Company periodically evaluates its long-lived assets by measuring the carrying amounts of assets against the estimated undiscounted future cash flows associated with them. At the time the carrying value of such assets exceeds the fair value of such assets, impairment is recognized. To date, no adjustments to the carrying value of the assets have been made. EARNINGS PER SHARE The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). The Statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted loss per share is similar to the basic loss per share computation except the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the, numerator is adjusted for any changes in income or loss that would result from the assumed conversions of those potential shares. However, such presentation is not required if the effect is anti-dilutive. INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of the assets and liabilities and their financial statement amounts at the end of each reporting period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the current period and the change during the period in deferred tax assets and liabilities. The deferred tax assets and liabilities have been netted to reflect the tax impact of temporary differences. At September 30, 2006, a full valuation allowance has been established for the deferred tax asset as management believes that it is more likely than not that a tax benefit will not be realized. F-7 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts in the prior quarter's financial statements have been reclassified for comparative purposes to conform to the presentation in the current period's financial statements. RECENTLY ISSUED ACCOUNTING PRONUNCMENTS In September 2006, FASB issued SFAS 157 `Fair Value Measurements'. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements. In September 2006, FASB issued SFAS 158 `Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and 132(R)' This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements. F-8 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 NOTE 3 - ACCRUED LIABILITIES Included in accrued liabilities are payments due in connection with certain loan fees. A total of 300,000 shares are payable to third parties. The total value of the stock on the date of the notes were $68,600. NOTE 4 - NOTES PAYABLE During the second quarter of 2006, certain investors exercised warrants to purchase 3,679,138 shares of common stock for an aggregate of $551,871. The proceeds were paid directly by the investors to satisfy $275,000 outstanding notes payable of the company and $276,871 in interest. During the second quarter of 2006, an investor purchased 1,669,851 shares of common stock as required under an investment agreement for the aggregate amount of $31,991. The proceeds were paid directly by the investor to satisfy $22,526 in notes payable of the company and $9,465 in interest. During the third quarter of 2006, an investor purchased 2,694,610 shares of common stock as required under an investment agreement for the aggregate amount of $45,000. The proceeds were paid directly by the investor to satisfy $45,000 in accrued interest. NOTE 5 - COMMITMENTS AND CONTINGENCIES a) A. Sean Rose, Claire F. Rose and Mark Rose v. Universal Detection Technology, fka Pollution Research and Control Corporation Superior Court of the State of California for the County of Los Angeles, North Central District, Case No. EC042040 F-9 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 On or about April 16, 2004, Plaintiffs commenced an action against the Company (Case No. EC 038824) for amounts allegedly due pursuant to four unpaid promissory notes. On August 2, 2004, the parties executed a Confidential Settlement Agreement and Mutual Releases (the "Agreement"). On December 30, 2005, Plaintiffs commenced the above-referenced action against the Company, alleging the Company breached the Agreement and seeking approximately $205,000 in damages. A judgment was entered on April 11, 2006. The Company has previously accrued for this settlement. b) Steven P. Sion and Sion Consulting, Inc. v. Universal Detection Technology Corporation, et. Al. Superior Court of the State of California for the County of Los Angeles, Case NO. BC350942 On April 19, 2006, Plaintiffs Steven P Sion and Sion Consulting, Inc., a Nevada corporation, instituted an action in the Los Angeles Superior Court (Central District Case No. BC350942) against Defendants Universal Detection Technology Corporation, Albert E. Gooselin, Jr., Roy Peterson, Greg Edwards, Bombay Consortium, Inc., Howard Sperling, Assisted Care, Inc. As to Universal Detection, Plaintiffs alleged claims for: (1) Breach of Contract; (2) Fraud, (3) Negligent Misrepresentation; and (4) Conspiracy in relation to the sale of Dasibi Environmental Corp. Plaintiffs seeks an unspecified amount of compensatory, general and punitive damages against all Defendants. On July 17, 2006, Universal Detection timely filed an Answer to the Complaint. Universal Detection strongly disputes and shall vigorously defend against the allegations of the Complaint. To date, no trial date has been set. While Universal Detection disputes these allegations, the Company cannot control the outcome of the case or what damages, if any, will result. c) During 2005, the Company entered into two lease agreements to lease testing equipment. The Company had violated the terms of the lease as the Company sold the equipment in March 2006. In April 2006, the leasing company agreed to remove the sale of equipment as a default of the lease and treat the two leases as one single purchase transaction. Under the forebearance agreement entered into by the two parties, the Company shall pay the outstanding balance plus interest at a rate of 18% in monthly payments of $1,816 until October 15, 2008. The outstanding balance on this note is $38,095 as of September 30, 2006. The Company has been named as the defendant in an action captioned Trilogy Capital Partners, Inc. v. Universal Detection Technology, case number SC089929. The case was filed on June 2, 2006 in the Superior Court for Los Angeles County. Trilogy Capital Partners, Inc. is a California corporation ("Trilogy"). Trilogy asserts that the Company is indebted to it in the approximate amount of $96,000 for services performed under contract and for damages related to the failure to register certain securities. Trilogy was engaged to provide investment relations services to the Company. The Company disputes and denies that the services were rendered and all other allegations set forth in the complaint, and the Company has filed an answer to such effect. The parties are engaged in discovery. The parties have agreed to submit to a voluntary mediation at the end of November, 2006. The Company plans to vigorously defend the action; however, the Company cannot determine what costs and damages, if any, will arise as a result of this litigation NOTE 6 - STOCKHOLDERS' EQUITY During the three months ended March 31, 2006, the Company issued an aggregate of 450,000 shares of common stock to employees for services rendered to the Company valued at $ 28,000. During the three months ended March 31, 2006, certain investors exercised warrants to purchase 1,609,999 shares of common stock for an aggregate amount of $221,500. F-10 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 During the three months ended March 31, 2006, the Company issued 2,124,771 shares of common stock as payment for consulting services for an aggregate amount of $193,167. During the three months ended June 30, 2006, the Company issued an aggregate of 1,497,949 shares of common stock to employees for services rendered to the Company value at $59,078. During the three months ended June 30, 2006, certain investors exercised warrants to purchase 4,512,471 shares of common stock for an aggregate amount of $676,871. The Company received $125,000 of the proceeds during the second quarter of 2006. The remaining $551,871 was used to pay off outstanding notes payable of $275,000 and accrued interest of $276,871. The notes were paid directly by the investors. During the three months ended June 30, 2006 the Company issued an aggregate of 5,509,351 shares of common stock as payment for consulting services for an aggregate amount of $344,685. During the three months ended June 30, 2006, an investor purchased 7,267,936 shares of common stock as required under an investment agreement for an aggregate amount of $165,991. The Company received $124,000 of the proceeds during the second quarter of 2006 and collected the stock subscription receivable of $10,000 during July 2006. The remaining $31,991 was used to pay off an outstanding note payable with interest. The note was paid directly by the investor. During the three months ended September 30, 2006 the Company issued an aggregate of 7,446,637 shares of common stock to employees for services rendered to the Company value at $88,510. During the three months ended September 30, 2006 the Company issued an aggregate of 4,502,168 shares of common stock as payment for consulting services for an aggregate amount of $66,910. During the three months ended September 30, 2006, an investor purchased 13,657,625 shares of common stock as required under an investment agreement for an aggregate amount of $135,000. The Company received $70,000 of the proceeds during the third quarter of 2006 and collected the stock subscription receivable of $20,000 during October 2006. The remaining $45,000 was used to pay off accrued interest on an outstanding note payable. The interest was paid directly by the investor. NOTE 7 - RELATED PARTY TRANSACTIONS During the three months ended March 31, 2006, the company repaid $430 in outstanding principal and $361 in interest under a promissory note agreement to Jacques Tizabi, its president and chief executive officer. F-11 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 During the three months ended March 31, 2006, the company repaid $53,882 of outstanding principal and $4,118 in interest under various promissory note agreements to Ali Moussavi, its vice president of global strategy. During the three months ended June 30, 2006 the company borrowed $8,319 and repaid $15,042 in outstanding principal and $1,158 in interest under various promissory note agreements to Jacques Tizabi, its president and chief executive officer. During the three months ended June 30, 2006, the company repaid $62,018 of outstanding principal and $5,896 in interest under various promissory note agreements to Ali Moussavi, its vice president of global strategy. During the three months ended September 30, 2006, the company borrowed $5,500 and repaid the $5,500 in outstanding principal and $110 in interest under various promissory note agreements to Jacques Tizabi, its president and chief executive officer. NOTE 8 - SUBSEQUENT EVENTS During October and November 2006, the Company issued an aggregate of 12,763,597 shares of common stock to three employees for services valued at approximately $59,450. During October and November 2006, the Company issued an aggregate of 3,500,000 shares of its common stock valued at approximately $39,400 in connection with services. During October and November 2006, an investor purchased 18,654,284 shares of common stock as required under an investment agreement for an aggregate amount of $129,000. F-12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. The following discussion should be read in conjunction with our consolidated financial statements, and the related notes included elsewhere in this Quarterly Report on Form 10-QSB and the Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein. The forward-looking information set forth in this Quarterly Report on Form 10-QSB is as of the date of our filing, and we undertake no duty to update this information. Shareholders and prospective investors can find information filed with the Securities and Exchange Commission, which we refer to as the SEC, after the date of the filing of this report at SEC's website at www.sec.gov. More information about potential factors that could affect our business and financial results is included in the section entitled "Cautionary Statements and Risk Factors." OVERVIEW We are engaged in the research and development of bio-terrorism detection devices. Our strategy is to identify qualified strategic partners with whom to collaborate in order to develop commercially viable bio terrorism detection devices. Consistent with this strategy, in August 2002, we entered into a Technology Affiliates Agreement with the NASA Jet Propulsion Laboratory, commonly referred to as JPL, to develop technology for our bio-terrorism detection equipment. Under the Technology Affiliates Agreement, JPL developed its proprietary bacterial spore detection technology and integrated it into our existing aerosol monitoring system, resulting in a product named BSM-2000. BSM-2000 is designed to provide continuous unattended monitoring of airborne bacterial spores in large public places, with real-time automated alert functionality. The device is designed to detect an increase in the concentration of bacterial spores, which is indicative of a potential presence of Anthrax. In May 2004, we unveiled the first functional prototype of BSM-2000. The prototype operated on external software. In July 2004, we commenced simulated tests with benign bacterial spores having anthrax-like properties in order to fine tune our product. The use of benign spores is as effective as testing with anthrax spores because our device is designed to detect an increase in bacterial spore concentration levels. Based on results we obtained, we were able to enhance the sensitivity of BSM-2000 by improving the sample collection efficiency of the device, and made certain other modifications to improve efficiency. Our device is a functional viable product, available for sale. In 2006, we have followed a diversification strategy pursuant to which we have added various other services to our BSM-2000, biological detection system. By combining our in-house experience and knowledge and outside expertise offered by various consultants and third parties, we have added threat evaluation and consulting services, training courses, and event security to our services. Such services are intended to diversify and expand our customer base. To date, we have provided event security for a fashion debut event. Our consulting services and training courses have not been sold to date and there is no guarantee that any of them will be demanded and sold in the market in the future. We plan to continue field testing of BSM-2000 in different environments and conditions in 2006 and to use the empirical data gained from the testing to further improve the design and functionality of our product. 2 We were engaged in discussions with Rutgers University to perform our field-testing. Some time has passed and CAIT has not given us any guidance on if or when such testing will take place and the Company is pursuing alternatives for testing. We plan to continue to market and make available for sale the current version of our BSM-2000 while we engage in field-testing. No Such locations or time or testing parameters have yet been set. In the second quarter of 2006, we updated our price list for BSM-2000. In evaluating the market demand for our product, BSM-2000, we retained the services of outside consultants, Joseph Breen Associates. Our new set price for BSM-2000 is $109,000. We also constructed two separate customer accounts called National and Key accounts. A Key account represents small to medium customers and resellers of BSM-2000 who purchase or intend to purchase a minimum of 3 to 5 units of BSM-2000 annually. This category of customers receives a 10% discount from list prices. A National account represents medium to large customers and resellers of BSM-2000 who purchase or intend to purchase more than 5 units of BSM-2000 annually. This category of customers receives a 20% discount from list prices. As such Key account and National account customers can purchase BSM-2000 for $98,000 and $87,000 per unit respectively. We have chosen Horiba Jobin Yvon, a company based in Edison, New Jersey as our manufacturer of choice for the production of the spectrometers that are used within our device. In addition, Met One Instruments, a company based in Tacoma, Washington has agreed to collaborate with us for manufacturing the mechanical component and the air sampler used in BSM-2000. Upon completion of our testing, Met One Instruments also has agreed to collaborate with Horiba Jobin Yvon and Horiba Jobin Yvon has agreed to obtain technical information from Met One Instruments in order for Horiba Jobin Yvon to manufacture the entire device including the spectrometer and the air sampler. We may decide to use services of other manufacturers in the future. In February 2006, we entered into a marketing and sales agreement with Security Solutions International (SSI), pursuant to which SSI will market BSM-2000 in the United States. SSI provides training for law enforcement and anti terrorism forces and has agreed to feature BSM-2000 in their seminars and conferences. We had previously entered into an agreement with SSI for marketing of the BSM-2000 in Central and South America. In February 2006, we co-hosted a training session with SSI regarding the protection of government and privately owned buildings; the event was attended by law-enforcement and building security personnel. To date, we have not realized any leads or sales as a result of SSI's efforts and cannot guarantee that we will realize any sales through SSI soon, or at all. In April 2006, in conjunction with SSI, we conducted a training session on "Intelligence Gathering and Terrorist Activities" at the Institute for Criminal Studies at the Broward Sheriff's office in Fort Lauderdale, Florida. Our speakers provided an overview on terrorism with weapons of mass destruction, their consequences and steps on how communities can be more alert and vigilant about possible biological, chemical, and nuclear attacks. While chemical and nuclear warfare are not our core competencies, the protocols used for pre and post event planning are very similar to those used in the event of a biological attack or any event that can cause mass casualties. We maintain close relationships with SSI and hope to collaborate on more training or marketing projects with them in the future. We cannot guarantee that our efforts and collaborations with SSI will lead to any sales of our products, our partners' products, our consulting services, or any other one of our services. To date we have not recognized any revenues as a result of our partnerships with SSI. In March 2006, we entered into an agreement with Michael Stapleton Associates (MSA). MSA is based in New York and provides technologies and solutions for explosive detection and real time monitoring of various facilities. Pursuant to the agreement, we were planning to conduct feasibility studies regarding the potential integration of BSM-2000 into MSA's monitoring and screening solutions and technologies. To date, we have not conducted any studies under this agreement and any collaboration with MSA in the future will be contingent upon us being able to raise the necessary funds and successfully design and implement the software and hardware needed for integration of BSM-2000 in MSA's solutions. Thus far, no feasibility studies have taken place and MSA has not given any assurances as to if or when such studies would take place. 3 In March 2006, we received a firm order from the government of the United Kingdom for two units of UDTT's BSM-2000 Anthrax Detection Systems. We have shipped both units and payment for both has been received. Due to confidentiality of the purchase order, we are unable to release the specific use and the name of the branch of government that has made the purchase. In April 2006, we engaged Joseph Breen and Associates to prepare and submit an application for a contract under the US General Services Administration (GSA) schedule. The contract is aimed to enable US government agencies to purchase Universal Detection Technology's technology and services. The U.S. GSA is a federal management and procurement agency that provides products and services to the U.S. government. In the third quarter of 2006 GSA informed us that our application had some deficiencies that needed to be fixed. As a result, our offer was rejected. Joseph Breen & Associates has since prepared another application and submitted it to the GSA for review. To date we have not heard anything back regarding the status of our application and there is presently no guarantee that the Company will be awarded a contract under the GSA schedule. In May 2006, Joseph Breen & Associates informed the Company that it has started talks with the Pentagon regarding BSM-2000 and its potential for the US government. The Company has not presented its products and services to any representatives from the Pentagon and there is presently no guarantee that the Company will present or sell its solutions to Pentagon at any time in the future. To date, Joseph Breen & Associates has not informed the Company of any outcomes regarding the talks it has been held with the Pentagon. We initially planned to secure and lease a testing facility close to the JPL laboratories where we would be able to implement a quality assurance program and test our products against the required specifications before shipping them to customers. We believe that the proximity to JPL and in particular to Caltech will help us by utilizing the knowledge of graduate and PhD students familiar with the project in a consultant or employment capacity. While we are still considering the implementation of this plan, we also are considering sponsoring researchers at JPL to work with the inventor of our bacterial spore detection technology to perform the tasks of quality assurance and research and development. Implementation of either of these plans is dependent on our ability to secure adequate funds, and we cannot assure you we will be able to do so soon, or at all. In June 2006 the Company hired a part time mechanical engineer, with expertise in the field of instrument design, with the goal of gaining more control over the design and manufacturing of BSM-2000 as well as offering in-house advice on implementation of the Company's technology and services. During the time since he started his employment with Universal Detection, the engineer has traveled to Met One Instrument's facilities and has helped expedite the manufacturing of the second unit that was shipped to Europe pursuant to our purchase order. This new addition to the Company's team is also intended to increase our research capabilities and to reduce our dependence on third parties for future design changes. In May 2006 the Company posted a letter to shareholders from its Chief Executive Officer, Mr. Jacques Tizabi, outlining its business and marketing plans. Among other topics, the letter covered marketing of BSM-2000, threat of terrorism, international distribution, expansion into counterterrorism training, and expansion into non-terror related services in the future. The materials included in this shareholder letter were mostly forward-looking and were for informational purposes only. The Company makes no guarantees that any or all parts of such plans may materialize in the future. 4 In the second quarter of 2006 the Company initiated a plan to expand its services to include security related consulting, event security, and counterterrorism training. In order to provide these services, the Company has employed a collaborative strategy where capable partners in various fields have been chosen to complement services and technologies offered by Universal Detection's staff. The success of the Company's new services and its new strategy depends, among other factors, on productive and close relationships between the Company and its partners, the reputation of its partners, the availability of its partners, and the viability of technologies offered by its partners. We are not certain that all these conditions will be met in the future and hence, we cannot make any guarantees about the success of our business strategy. In April 2006 the Company employed services of the US Department of Commerce's Commercial Service with the goal of promoting its products and services overseas. Pursuant to the agreement BSM-2000 will be featured on the website of local Commercial Service websites in Australia, Singapore, Hong Kong, Indonesia, Belgium, Sweden, United Kingdom, South Africa, Qatar, Israel, Saudi Arabia, and Canada. In June 2006, after the launch of a new service, called Event Security aimed at providing counterterrorism security solutions for special events, the Company announced the first sale of Event Security solutions to a debut reception of a Los Angeles based fashion brand. On July 31, 2006 we announced a strategic agreement with UTEK Corporation, a specialty finance company focused on technology transfer. Following a 30-day advance written termination notice given to Universal Detection Technology by UTEK our alliance was terminated on September 19, 2006. We have no plans to renew our relationship with UTEK Corporation in the future. In February 2006, the Company expanded its relationship with Caltech by licensing additional technologies in the field of microbial monitoring and sterility verification. While the Company plans to commercialize the microbial monitoring technology for use in hospitals, it has not yet started any such activities and there is no guarantee that it will in the near future. The Company also commenced work on developing smart ticket assay for detection of anthrax spores. Smart ticket assays are rapid field tests that are similar to common home pregnancy tests. Further research and development is needed to fully commercialize these smart ticket assays and presently there is no guarantee that the Company will have necessary funding and resources to conduct such research and development. In September 2006, the Company conducted a research on the status of readiness of buildings in the US to deal with a potential bio-terrorist attack. The findings of this research were published in a paper that will soon be available for customers. We have not sold any copies of this research report to date and we may never be able to sell any. We have currently applied to the Copyright Office to obtain a copyright on this research. Once the copyright is obtained the Company plans to sell the paper on Company's website and in seminars and conferences. In October 2006, the Company entered into an agreement with Emergency Film Group to provide DVDs and Videos for training of emergency staff and law enforcement personnel. Pursuant to the agreement the Company shall utilize and distribute DVDs produced by Emergency Film Group to its customers and clients. The Company plans to add these DVDs, ranging from training videos on decontamination to incident command in the field and other emergency topics, to its services and to provide a one-stop shop for users of its various products and services. While the Company shall try its best to market these DVDs alongside its various other products and services there are no guarantees that it will be successful in selling any DVDs. 5 LIQUIDITY AND CAPITAL RESOURCES On April 29, 2004, we commenced a private offering of our securities. In this private placement, we sold $3.0 million of Units. The offering was made solely to accredited investors through Meyers Associates, L.P., a registered broker dealer firm. Each Unit consists of one share of common stock and a Class A Warrant and a Class B Warrant. The offering price per Unit was $0.50. Both the Class A and Class B Warrants are exercisable by the holder at any time up to the expiration date of the warrant, which is five years from the date of issuance. In the aggregate, the investors purchased 6,000,000 shares of common stock, Class A Warrants to purchase 3,000,000 shares of common stock at $0.50 per share and Class B Warrants to purchase 3,000,000 shares of common stock at $0.70 per share. Meyers received a sales commission equal to 10% of the gross proceeds and payment of 3% of the gross proceeds for a non-accountable expense allowance for an aggregate payment of $403,140. Meyers and its agents also received Class A Warrants to purchase an aggregate of 2,400,000 shares of common stock as consideration for their services as placement agent. In connection with the private placement, we also entered into a consulting agreement with Meyers for an 18 month term, whereby Meyers would provide us consulting services related to corporate finance and other financial service matters and will receive $7,500 per month, as well as Class A Warrants to purchase 1,200,000 shares of our common stock. During the first quarter of 2006, we entered into an agreement with 66 of our warrant holders, holding a total of 6,122,470 Company warrants, to exchange their warrants with new ones with an exercise price of $0.15. The exchanged warrants were subsequently issued to new investors. As of September 30, 2006, we have received exercise notices for all 6,122,470 outstanding warrants from the new investors. The net proceeds to us from the sale of the Units were approximately $2.5 million. We have used all of these funds for working capital purposes. In February 2006, we entered into an agreement with an investor whereby the investor shall invest up to ten million dollars to purchase the Company's stock until January 2009. Under the agreement, the Company may order the investor to purchase a limited number of shares based on recent trading price and volume. As of September 30, 2006, 20,925,561 shares have been issued for an aggregate price of $300,991. The Company received $204,000 of the proceeds during the second and third quarters of 2006 and $20,000 in October 2006. The remaining $76,991 was used to pay off outstanding notes payable and accrued interest during 2006. The note was paid directly by the investor. During the second quarter of 2006, certain investors exercised warrants to purchase 4,512,471 shares of common stock for an aggregate of $676,871. The Company received $125,000 of the proceeds during the second quarter of 2006. The remaining $551,871 was paid directly by the investors to satisfy $275,000 outstanding notes payable of the company and $276,871 in interest. In June 2006, the Company registered 25,000,000 shares of its common stock for future issuances in an S-8. As of September 30, 2006, 9,270,869 of these shares had been issued. During the nine months ended September 30, 2006 we spent an aggregate of $1,839,020 on selling, general and administrative expenses and marketing expenses. This amount represents a 25% decrease over the comparable year-ago period. The decrease is principally attributable to a decrease in operating costs. 6 We require approximately $3.9 million in the next 12 months to repay debt obligations and execute our business plan. We do not anticipate that our cash on hand is adequate to meet our operating expenses over the next 12 months. Also, we do not believe we have adequate capital to repay all of our debt currently due and becoming due in the next 12 months. We anticipate that our uses of capital during the next 12 months principally will be for: o administrative expenses, including salaries of officers and other employees we plan to hire; o repayment of debt; o sales and marketing; o product testing and manufacturing; and o expenses of professionals, including accountants and attorneys. Our working capital deficit at September 30, 2006, was $ 2,992,732. Our independent auditors' report, dated March 29, 2006, includes an explanatory paragraph relating to substantial doubt as to our ability to continue as a going concern, due to our working capital deficit at December 31, 2005. We require approximately $1.4 million to repay indebtedness in the next 12 months. The following provides the principal terms of our outstanding debt as of September 30, 2006: o One loan from three family members, each of whom is an unaffiliated party, evidenced by four promissory notes in the aggregate principal amounts of $100,000, $50,000, $50,000, and $100,000, each due June 24, 2001 with interest rates ranging from 11% to 12%. We entered into a settlement agreement in the third quarter of 2004 with each of these parties. Pursuant to this agreement, at June 30, 2005, we were required to pay an additional $80,000 as full payment of our obligations. We did not make scheduled payments and are in default of these notes. o One loan from an unaffiliated party in the aggregate principal amount of $195,000 with interest at a rate of 9% per annum. Pursuant to a letter agreement dated as of August 10, 2004, we entered into a settlement with this party and agreed to pay a total of $261,000 pursuant to a scheduled payment plan through July 2005. Additionally, the Company, in September 2004, issued 206,250 shares of common stock upon the conversion of unpaid interest in the aggregate amount of $33,000. At September 30, 2006, there was $161,000 principal amount remaining on this note. We did not make our scheduled payment under this note and are in default. As of September 30, 2006 we owed $30,801 in interest on this note. o One loan from an unaffiliated party in the aggregate principal amount of $98,500, due July 31, 2005, with interest at the rate of 9% per annum. Pursuant to a letter agreement dated August 10, 2004, between us and this third party, we agreed to pay a total of $130,800 pursuant to a scheduled payment plan through July 2005. At September 30, 2006 there was $ 74,500 principal amount remaining on this note. We did not make our scheduled payments under this note and are in default. As of September 30, 2006 we owed $18,864 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $35,000, due September 10, 2002, and verbally extended to a date to be mutually agreed upon by the parties, with interest at the rate of 10% per annum. As of September 30, 2006, we owed $15,069 in interest on these notes. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $75,000, due on May 10, 2003, and verbally extended to a date to be mutually agreed upon by the parties, with interest at the rate of 18% per annum. As of September 30, 2006 we owed $1,446 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $50,000 due on November 10, 2005, and further verbally extended to a date to be mutually agreed upon by the parties, with an interest rate of 12% per annum. As of September 30,.2006, we owed $ 8,500 in interest on this note. 7 o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $50,000 due on July 31, 2005, and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12% per annum. As of September 30, 2006, we owed $8,500 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on August 31, 2005, and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 15% per annum. As of September 30, 2006, we owed $ 6,000 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on July 31, 2005, and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12% per annum. As of September 30, 2006, we owed $ 5,250 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on October 30, 2005, and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12% per annum. We agreed to issue 100,000 shares of common stock to the note holder as additional consideration for extending credit to us. The shares have not been issued. As of September 30, 2006 we owed $3,900 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $60,000 due on November 15, 2005, and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12% per annum. We agreed to issue 50,000 shares of common stock to the note holder as additional consideration for extending credit to us. The shares have not been issued. As of September 30, 2006 we owed $8,100 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $40,000 due on December 31, 2005, and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12% per annum. We agreed to issue 50,000 shares of common stock to the note holder as additional consideration for extending credit to us. The shares have not yet been issued. As of September 30, 2006, there was $2,400 in principal amount remaining on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $90,000 due on November 13, 2005, and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12% per annum. We agreed to issue 200,000 shares of common stock to the note holder as additional consideration for extending credit to us. The shares have not yet been issued. As of September 30, 2006, we owed $9,450 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $15,000 due on December 28, 2005, and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12.5% per annum. We agreed to issue 20,000 shares of common stock to the note holder as additional consideration for extending credit to us. The shares have not yet been issued. As of September 30, 2006, we owed $1,500 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $100,000 due on March 31, 2006 and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12% per annum. As of September 30, 2006, we owed $7,500 in interest on this note. 8 o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $20,000 due on May 17, 2006 and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12.5% per annum. As of September 30, 2006, we owed $1,029 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on May 26, 2006 and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12.5% per annum. As of September 30, 2006, we owed $1,406 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $14,975 due on August 31, 2006 and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12.5% per annum. As of September 30, 2006, we owed $156 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $25,000 due on August 31, 2006 and further verbally extended to a date to be mutually agreed upon by the parties with an interest rate of 12.5% per annum. As of September 30, 2006, we owed $260 in interest on this note. Management continues to take steps to address the Company's liquidity needs. In the past, management has entered into agreements with some of our note holders to amend the terms of our notes to provide for extended scheduled payment arrangements. Management is engaged in discussions with each holder of debt that is in default and continues to seek extensions with respect to our debt that is past due. Management also may seek extensions with respect to our other debt as it becomes due. In addition, management may endeavor to convert some portion of the principal amount and interest on our debt into shares of common stock. Historically, we have financed operations through private debt and equity financings. In recent years, financial institutions have been unwilling to lend to us and the cost of obtaining working capital from investors has been expensive. We principally expect to raise funds through the sale of equity or debt securities. During 2005, management spent the substantial majority of its time negotiating contracts for the installation of the BSM-2000 in target markets and developing its marketing and sales plan. These activities diverted management from the time it otherwise would spend negotiating sales of securities to raise capital. In addition, the more recent price and volume volatility in the common stock has made it more difficult for management to negotiate sales of its securities at a price it believes to be fair to the Company. The Company actively continues to pursue additional equity or debt financings, but cannot provide any assurance that it will be successful. If we are unable to pay our debt as it becomes due and are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. RELATED PARTY TRANSACTIONS On September 20, 2005, the Company executed a promissory note in the aggregate principal amount of $2,153 payable to Jacques Tizabi, our President and Chief Executive Officer. The promissory note bears interest at 12% per annum and is due and payable on November 20, 2005. The maturity date of the note was verbally extended to a date to be mutually agreed upon by the parties. The note was repaid with interest in full. 9 On October 7, 2005, the Company executed a promissory note in the aggregate principal amount of $80,000 payable to Ali Moussavi, our Vice President of Global Strategy. The promissory note bears interest of 12% per annum and is due on October 31, 2005. The maturity date of the note was verbally extended to a date to be mutually agreed upon by the parties. The note was repaid with interest in full. On October 17, 2005, the Company executed a promissory note in the aggregate principal amount of $5,000 payable to Jacques Tizabi, our President and Chief Executive Officer. The promissory note bears interest at 28.8% per annum and is due in 60 monthly installments of $158 or is due in full when the Company has an aggregate cash balance of $100,000 or more. The note was repaid with interest in full. On October 21, 2005, the Company executed a promissory note in the aggregate principal amount of $16,000 payable to Ali Moussavi, our Vice President of Global Strategy. The promissory note bears interest of 12.5% per annum and is due on December 21, 2005. The maturity date of the note was verbally extended to a date to be mutually agreed upon by the parties. The note was repaid with interest in full. On November 14, 2005, the Company executed a promissory note in the aggregate principal amount of $9,000 payable to Ali Moussavi, our Vice President of Global Strategy. The promissory note bears interest of 12.5% per annum and is due on December 4, 2005. The maturity date of the note was verbally extended to a date to be mutually agreed upon by the parties. The note was repaid with interest in full. On December 1, 2005, the Company executed a promissory note in the aggregate principal amount of $900 payable to Ali Moussavi, our Vice President of Global Strategy. The promissory note bears interest of 12% per annum and is due on March 10, 2006. The note was repaid with interest in full. On March 9, 2006, the Company executed a promissory note in the aggregate principal amount of $7,000 payable to Nima Montazeri, our Vice President of Strategic Development. The promissory note does not bear interest. The note was repaid in full. On April 13, 2006, the Company executed a promissory note in the aggregate principal amount of $1,970 payable to Jacques Tizabi, our President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and is due on April 27. 2006. The note was repaid with interest in full. On April 13, 2006, the Company executed a promissory note in the aggregate principal amount of $2,266 payable to Jacques Tizabi, our President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and is due on April 27, 2006. The note was repaid with interest in full. On April 19, 2006, the Company executed a promissory note in the aggregate principal amount of $1,783 payable to Jacques Tizabi, our President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and is due on May 3. 2006. The note was repaid with interest in full. On May 4, 2006, the Company executed a promissory note in the aggregate principal amount of $2,300 payable to Jacques Tizabi, our President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and is due on May 18. 2006. The note was repaid with interest in full. On July 7, 2006, the Company executed a promissory note in the aggregate principal amount of $3,100 payable to Jacques Tizabi, our President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and is due on July 27, 2006. The note was repaid with interest in full. 10 On August 15, 2006, the Company executed a promissory note in the aggregate principal amount of $400 payable to Jacques Tizabi, our President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and is due on August 31, 2006. The note was repaid with interest in full. On September 7, 2006, the Company executed a promissory note in the aggregate principal amount of $2,000 payable to Jacques Tizabi, our President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and is due on September 17, 2006. The note was repaid with interest in full. On August 23, 2004, we entered into an amendment to the Employment Agreement with Jacques Tizabi, our President and Chief Executive Officer. Among other matters, the Amendment amends the term of the employment agreement to terminate on December 31, 2010, provides that $100,000 of our CEO's compensation shall be deferred until we have the financial resources to pay any or all of that amount, and, commencing on January 1, 2006, increases our CEO's base salary by 5% per annum. The Amendment also reduces our CEO's reimbursable automobile cost and provides for reimbursement of a portion of his health and insurance premiums. CAUTIONARY STATEMENTS AND RISK FACTORS The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. In that event, the trading price of our common stock could decline, and our shareholders may lose all or part of their investment in our common stock. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. OUR INDEPENDENT AUDITORS' REPORT EXPRESSES DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. Our independent auditors' report, dated March 29, 2006 includes an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern, due to our working capital deficit at December 31, 2005. We have experienced operating losses since the date of the auditors' report and in prior years. Our auditor's opinion may impede our ability to raise additional capital on terms acceptable to us. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. If we are unable to continue as a going concern, your entire investment in us could be lost. WE ARE IN DEFAULT ON A PORTION OF OUR DEBT AND DO NOT HAVE ADEQUATE CASH TO FUND OUR WORKING CAPITAL NEEDS. OUR FAILURE TO TIMELY PAY OUR INDEBTEDNESS MAY REQUIRE US TO CONSIDER STEPS THAT WOULD PROTECT OUR ASSETS AGAINST OUR CREDITORS. If we cannot raise additional capital, we will not be able to repay our debt or pursue our business strategies as scheduled, or at all, and we may cease operations. We have been unable to pay all of our creditors and certain other obligations in accordance with their terms, and as a result, at September 30, 2006 we are in default on a portion of our debt totaling approximately $331,000, excluding accumulated interest of approximately $ 295,000. In the aggregate, as of September 30, 2006, we have approximately $1.4 million in debt obligations, including interest, owing within the next 12 months. We currently have verbal extensions with respect to approximately $ 657,375 of the aggregate debt obligations to a date to be mutually agreed upon by us and each of the respective noteholders. We cannot assure you that any of these noteholders will continue to extend payment of these debt obligations or ultimately agree to revise the terms of this debt to allow us to make scheduled payments over an extended period of time. 11 We have nominal cash on hand and short-term investments and we do not expect to generate material cash from operations within the next 12 months. We have attempted to raise additional capital through debt or equity financings and to date have had limited success. The down-trend in the financial markets has made it extremely difficult for us to raise additional capital. In addition, our common stock trades on The Over the Counter Bulletin Board which makes it more difficult to raise capital than if we were trading on The NASDAQ Stock Market. Also, our default in repaying our debt restricts our ability to file registration statements, including those relating to capital-raising transactions, on Form S-3, which may make it more difficult for us to raise additional capital. In July 2004, we completed a private placement resulting in net proceeds to us of approximately $2.5 million, all of which have been used. In February 2006, we entered into an agreement with an investor whereby the investor shall invest up to ten million dollars to purchase the Company's stock until January 2009. Under the agreement, we may order the investor to purchase a limited number of shares based on recent trading price and volume. As of September 30, 2006, we have ordered $300,991 of stock to be purchased. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. WE HAVE A HISTORY OF LOSSES AND WE DO NOT ANTICIPATE THAT WE WILL BE PROFITABLE IN FISCAL 2006. We do not anticipate material sales of the BSM-2000 until after we complete all testing and modifications, which is contingent principally upon receipt of adequate funding and our ability to continue to form collaborative arrangements with qualified third parties to engage in that testing at nominal cost to us. We have not been profitable in the past years and had an accumulated deficit of approximately $32 million at September 30, 2006. During the nine months ended September 30, 2006, and the fiscal years ended December 31, 2005 and 2004, we have experienced losses of $ 2.0 million, $3.5 million and $5.8 million, respectively. Achieving profitability depends upon numerous factors, including our ability to develop, market and sell commercially accepted products timely and cost-efficiently. We do not anticipate that we will be profitable in fiscal 2006. IF WE OBTAIN FINANCING, EXISTING SHAREHOLDER INTERESTS MAY BE DILUTED. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our shareholders will be diluted. In addition, any convertible securities issued may not contain a minimum conversion price, which may make it more difficult for us to raise financing and may cause the market price of our common stock to decline because of the indeterminable overhang that is created by the discount to market conversion feature. In addition, any new securities could have rights, preferences and privileges senior to those of our common stock. Furthermore, we cannot assure you that additional financing will be available when and to the extent we require or that, if available, it will be on acceptable terms. IF WE CANNOT PARTNER WITH THIRD PARTIES TO ENGAGE IN RESEARCH AND DEVELOPMENT AND TESTING OF OUR DEVICE AT MINIMAL COST TO US, OUR PRODUCT DEVELOPMENT WILL BE DELAYED. We contract with third parties at minimal cost to us to conduct research and development activities and we expect to continue to do so in the future. Under our agreement with JPL, it will engage in limited testing of our device. Because we are unable to pay third parties to test our product and instead must rely on a qualified third party's willingness to partner with us to test our product, our research and development activities and the testing of our product may be delayed. In addition, since we contract with third parties for these services, we have less direct control over those activities and cannot assure you that the research or testing will be done properly or in a timely manner. 12 IF WE CANNOT PARTNER WITH THIRD PARTIES TO COMPLEMENT OUR SERVICES, OUR SERVICE MAY NOT MEET CUSTOMER EXPECTATION AND MAY NOT GAIN ANY MARKET SHARE Our consulting and training service depend on combining our in-house expertise with those of our third party consultants or partners. We may not be able to retain qualified individuals at rates acceptable to us. Additionally, our partners may be unable to accomplish the tasks they have claimed they can or may offer counterterrorism technologies that will fail to meet market expectations. All these risk factors may reduce or eliminate our ability to successfully market our services and our technologies. MANAGEMENT HAS NO EXPERIENCE IN PRODUCT MANUFACTURING, MARKETING, SALES, OR DISTRIBUTION. WE MAY NOT BE ABLE TO MANUFACTURE OUR BACTERIAL SPORE DETECTOR IN SUFFICIENT QUANTITIES AT AN ACCEPTABLE COST, OR IN A TIMELY FASHION, AND MAY NOT BE ABLE TO MARKET AND DISTRIBUTE IT EFFECTIVELY, EACH OF WHICH COULD HARM OUR FUTURE PROSPECTS. If we are unable to establish an efficient manufacturing process for the BSM-2000, our costs of production will increase, our projected margins may decrease, and we may not be able to timely deliver our product to customers. When and if we complete all design and testing of our product, we will need to establish the capability to manufacture it. Management has no experience in establishing, supervising, or conducting commercial manufacturing. We plan to rely on third party contractors to manufacture our product, although to date we have not entered into any manufacturing arrangements with any third party. Relying on third parties may expose us to the risk of not being able to directly oversee the manufacturing process, which may adversely affect the production and quality of our BSM-2000. In addition, these third party contractors may experience regulatory compliance difficulty, mechanical shutdowns, employee strikes, or other unforeseeable acts that may increase the cost of production or delay or prevent production. In addition, if we are unable to establish a successful sales, marketing, and distribution operation, we will not be able to generate sufficient revenue in order to maintain operations. We have no experience in marketing or distributing new products. We have not yet established marketing, sales, or distribution capabilities for our BSM-2000 or for any other one of our services including consulting, event security, or counterterrorism training. We also plan on entering into distribution agreements with third parties to sell our BSM-2000. If we are unable to enter into relationships with third parties to market, sell, and distribute our products, we will need to develop our own capabilities. We have no experience in developing, training, or managing a sales force. If we choose to establish a direct sales force, we will incur substantial additional expense. We may not be able to build a sales force on a cost effective basis or at all. Any direct marketing and sales efforts may prove to be unsuccessful. In addition, our marketing and sales efforts may be unable to compete with the extensive and well-funded marketing and sales operations of some of our competitors. We also may be unable to engage qualified distributors. Even if engaged, they may fail to satisfy financial or contractual obligations to us, or adequately market our products. 13 WE CANNOT GUARANTEE THAT OUR BIO-TERRORISM DETECTION DEVICE WILL WORK OR BE COMMERCIALLY VIABLE. Our product in development requires testing, third party verification, potentially additional modifications and demonstration of commercial scale manufacturing before it can be proven to be commercially viable. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. These reasons include the possibilities that the product may be ineffective, unsafe, difficult or uneconomical to manufacture on a large scale, or precluded from commercialization by proprietary rights of third parties. We cannot predict with any degree of certainty when, or if, the testing, modification and validation process will be completed. If our product development efforts are unsuccessful or if we are unable to develop a commercially viable product timely, we would need to consider steps to protect our assets against our creditors. OUR PRODUCTS AND SERVICES MAY NOT BE COMMERCIALLY ACCEPTED WHICH WILL ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY. Our ability to enter into the bio-terrorism detection device market and counterterrorism consulting and training, establish brand recognition and compete effectively depends upon many factors, including broad commercial acceptance of our products and services. If our products and services are not commercially accepted, we will not recognize meaningful revenue and may not continue to operate. The success of our products and services will depend in large part on the breadth of information these products and services capture and the timeliness of delivery of that information. The commercial success of our products and services also depends upon the quality and acceptance of other competing products, general economic and political conditions and other factors, all of which can change and cannot be predicted with certainty. We cannot assure you that our new products and services will achieve market acceptance or will generate significant revenue. EXISTING AND DEVELOPING TECHNOLOGIES MAY AFFECT THE DEMAND FOR OUR BSM-2000. Our industry is subject to rapid and substantial technological change. Developments by others may render our technology and planned product noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Competition from other biotechnology companies, universities, governmental research organizations and others diversifying into our field is intense and is expected to increase. According to the public filings of Cepheid, one of our competitors, it has begun shipping its detection technology product, including for use by the U.S. Postal Service. Cepheid's entry into the market before us may make it more difficult for us to penetrate the market. In addition, our competitors offer technologies different than ours which potential customers may find more suitable to their needs. For example, Cepheid's technology specifically detects for Anthrax whereas our technology detects for an increase in the level of bacterial spores. Many of our competitors also have significantly greater research and development capabilities than we do, as well as substantially greater marketing, manufacturing, financial and managerial resources. SHARES ISSUED UPON THE EXERCISE OF OUR OUTSTANDING OPTIONS AND WARRANTS MAY DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE. If exercised, our outstanding options and warrants will cause immediate and substantial dilution to our stockholders. We have issued options and warrants to acquire our common stock to our employees, consultants, and investors at various prices, some of which are or may in the future be below the market price of our stock. As of September 30, 2006, we had outstanding options and warrants to purchase a total of 17,662,449 shares of common stock. Of these options and warrants, 17,662,449 are at or above the recent market price of $0.01 per share and none have exercise prices at or below this price. The weighted average exercise price for these outstanding options and warrants is $0.33. 14 WE USE A SIGNIFICANT PORTION OF OUR CASH ON HAND AND STOCK TO PAY CONSULTING FEES. WE MAY NOT RECEIVE THE BENEFIT WE EXPECT FROM THESE CONSULTANTS. The consultants that we hire may not provide us with the level of services, and consequently, the operating results, we anticipate. We spent approximately $ 0.6 million and $1.0 million in consulting fees during the nine months ended September 30, 2006, and the year ended December 31, 2005, respectively, and utilized approximately 10 consultants during this period. The consultants we engage provide us with a variety of services. THE LOSS OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER WOULD DISRUPT OUR BUSINESS. Our success depends in substantial part upon the services of Jacques Tizabi, our President, Chief Executive Officer and Chairman of the Board of Directors. The loss of or the failure to retain the services of Mr. Tizabi would adversely affect the development of our business and our ability to realize profitable operations. We do not maintain key-man life insurance on Mr. Tizabi and have no present plans to obtain this insurance. IF A U.S. PATENT FOR THE BACTERIAL SPORE DETECTION TECHNOLOGY IS NOT ISSUED, COMPETITORS MAY BE ABLE TO COPY AND SELL PRODUCTS SIMILAR TO OURS WITHOUT PAYING A ROYALTY, WHICH WOULD HAVE A MATERIAL ADVERSE IMPACT ON OUR ABILITY TO COMPETE. If BSM-2000 is commercialized, the lack of U.S. or foreign patent protection could allow competitors to copy and sell products similar to ours without paying a royalty. The bacterial spore detection technology that is integrated into BSM-2000 is owned by Caltech. On January 31, 2003, Caltech filed a U.S. patent application covering the technology, which currently is being reviewed by the U.S. Patent and Trademark Office. Caltech also filed a patent application with the European Patent Office. We paid and filed on behalf of Caltech a patent application in Japan as well. No patents have been issued and we cannot assure you that any patents will be issued. If a U.S. patent is not issued, or not issued timely, we may face substantially increased competition in our primary geographic market. WE MAY BE SUED BY THIRD PARTIES WHO CLAIM OUR PRODUCT INFRINGES ON THEIR INTELLECTUAL PROPERTY RIGHTS. DEFENDING AN INFRINGEMENT LAWSUIT IS COSTLY AND WE MAY NOT HAVE ADEQUATE RESOURCES TO DEFEND OURSELVES. We may be exposed to future litigation by third parties based on claims that our technology, product, or activity infringes on the intellectual property rights of others or that we have misappropriated the trade secrets of others. This risk is compounded by the fact that the validity and breadth of claims covered in technology patents in general and the breadth and scope of trade secret protection involves complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us, whether or not valid, could result in substantial costs, could place a significant strain on our financial and managerial resources, and could harm our reputation. Our license agreement with Caltech requires that we pay the costs associated with initiating an infringement claim and defending claims by third parties for infringement, subject to certain offsets that may be allowed against amounts we may owe to Caltech under the licensing agreement. In addition, intellectual property litigation or claims could force us to do one or more of the following: o cease selling, incorporating, or using any of our technology and/or products that incorporate the challenged intellectual property, which could adversely affect our potential revenue; o obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, if at all; or o redesign our products, which would be costly and time consuming. 15 THE U.S. GOVERNMENT HAS RIGHTS TO THE TECHNOLOGY WE LICENSE FROM CALTECH. Under the license rights provided to the U.S. government in our license agreement with Caltech, a U.S. government agency or the U.S. armed forces may, either produce the proprietary products or use the proprietary processes or contract with third parties to provide the proprietary products, processes, and services to one or more Federal agencies or the armed forces of the U.S. government, for use in activities carried out by the U.S. government, its agencies, and the armed forces, including, for instance, the war on terrorism or the national defense. Further, the Federal agency that provided funding to Caltech for the research that produced the inventions covered by the patent rights referenced in the Technology Affiliates Agreement and the related technology may require us to grant, or if we refuse, itself may grant a nonexclusive, partially exclusive, or exclusive license to these intellectual property rights to a third party if the agency determines that action is necessary: o because we have not taken, or are not expected to take within a reasonable time, effective steps to achieve practical application of the invention in the detection of pathogens, spores, and biological warfare agents; o to alleviate health or safety needs which are not reasonably satisfied by us or our sublicenses; o to meet requirements for public use specified by Federal regulations and those regulations are not reasonably satisfied by us; or o because we have not satisfied, or obtained a waiver of, our obligation to have the licensed products manufactured substantially in the United States. THE BACTERIAL SPORE DETECTION TECHNOLOGY IS LICENSED TO US BY CALTECH. IF OUR LICENSE TERMINATES, OUR FUTURE PROSPECTS WOULD BE HARMED. The loss of our technology license would require us to cease operations until we identify, license and integrate into our product another technology, if available. If we fail to fulfill any payment obligation under the terms of the license agreement or materially breach the agreement, Caltech may terminate the license. To maintain our license with Caltech, a minimum annual royalty of $10,000 was due to Caltech on August 1, 2005, and is due on each anniversary thereof, regardless of any product sales. Any royalties paid from product sales for the 12-month period preceding the date of payment of the minimum annual royalty will be credited against the annual minimum. A minimum annual royalty of $10,000 was due and paid to CalTech on August 1, 2005. The next annual royalty of $10,000 was due on August 1, 2006 which we have not yet paid. OUR STOCK PRICE IS VOLATILE. The trading price of our common stock fluctuates widely and in the future may be subject to similar fluctuations in response to quarter-to-quarter variations in our operating results, announcements of technological innovations or new products by us or our competitors, general conditions in the bio-terrorism detection device industry in which we compete and other events or factors. In addition, in recent years, broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. These broad market fluctuations also may adversely affect the future trading price of our common stock. 16 OUR STOCK HISTORICALLY HAS BEEN THINLY TRADED. THEREFORE, SHAREHOLDERS MAY NOT BE ABLE TO SELL THEIR SHARES FREELY. The volume of trading in our common stock historically has been low and a limited market presently exists for the shares. We have no analyst coverage of our securities. The lack of analyst reports about our stock may make it difficult for potential investors to make decisions about whether to purchase our stock and may make it less likely that investors will purchase our stock. We cannot assure you that our trading volume will increase, or that our historically light trading volume or any trading volume whatsoever will be sustained in the future. Therefore, we cannot assure you that our shareholders will be able to sell their shares of our common stock at the time or at the price that they desire, or at all. POTENTIAL ANTI-TAKEOVER TACTICS THROUGH ISSUANCE OF PREFERRED STOCK RIGHTS MAY BE DETRIMENTAL TO COMMON SHAREHOLDERS. We are authorized to issue up to 20,000,000 shares of preferred stock, of which none currently are issued and outstanding. The issuance of preferred stock does not require approval by the shareholders of our common stock. Our Board of Directors, in its sole discretion, has the power to issue preferred stock in one or more series and establish the dividend rates and preferences, liquidation preferences, voting rights, redemption and conversion terms and conditions and any other relative rights and preferences with respect to any series of preferred stock. Holders of preferred stock may have the right to receive dividends, certain preferences in liquidation and conversion and other rights, any of which rights and preferences may operate to the detriment of the shareholders of our common stock. Further, the issuance of any preferred stock having rights superior to those of our common stock may result in a decrease in the market price of the common stock and, additionally, could be used by our Board of Directors as an anti-takeover measure or device to prevent a change in our control. ITEM 3. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting him to material information required to be included in our periodic reports with the Securities and Exchange Commission. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. 17 (b) Changes in Internal Controls over financial reporting There have been no changes in our internal controls over financial reporting during our last fiscal quarter, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. (c) Limitations on Effectiveness of Controls. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. A. Sean Rose, Claire F. Rose and Mark Rose v. Universal Detection Technology, fka Pollution Research and Control Corporation Superior Court of the State of California for the County of Los Angeles, North Central District, Case No. EC042040 On or about April 16, 2004, Plaintiffs commenced an action against the Company (Case No. EC 038824) for amounts allegedly due pursuant to four unpaid promissory notes. On August 2, 2004, the parties executed a Confidential Settlement Agreement and Mutual Releases (the "Agreement"). On December 30, 2005, Plaintiffs commenced the above-referenced action against the Company, alleging the Company breached the Agreement and seeking approximately $205,000 in damages. A judgment was entered on April 11, 2006. B. Steven P. Sion and Sion Consulting, Inc. v. Universal Detection Technology Corporation, et. Al. Superior Court of the State of California for the County of Los Angeles, Case NO. BC350942 On April 19, 2006, Plaintiffs Steven P Sion and Sion Consulting, Inc., a Nevada corporation, instituted an action in the Los Angeles Superior Court (Central District Case No. BC350942) against Defendants Universal Detection Technology Corporation, Albert E. Gooselin, Jr., Roy Peterson, Greg Edwards, Bombay Consortium, Inc., Howard Sperling, Assisted Care, Inc. As to Universal Detection, Plaintiffs alleged claims for: (1) Breach of Contract; (2) Fraud, (3) Negligent Misrepresentation; and (4) Conspiracy in relation to the sale of Dasibi Environmental Corp. Plaintiffs seeks an unspecified amount of compensatory, general and punitive damages against all Defendants. On July 17, 2006, Universal Detection timely filed an Answer to the Complaint. Universal Detection strongly disputes and shall vigorously defend against the allegations of the Complaint. To date, no trial date has been set. While Universal Detection disputes these allegations, the Company cannot control the outcome of the case or what damages, if any, will result. The Company has been named as the defendant in an action captioned Trilogy Capital Partners, Inc. v. Universal Detection Technology, case number SC089929. The case was filed on June 2, 2006 in the Superior Court for Los Angeles County. Trilogy Capital Partners, Inc. is a California corporation ("Trilogy"). Trilogy asserts that the Company is indebted to it in the approximate amount of $96,000 for services performed under contract and for damages related to the failure to register certain securities. Trilogy was engaged to provide investment relations services to the Company. The Company disputes and denies that the services were rendered and all other allegations set forth in the complaint, and the Company has filed an answer to such effect. The parties are engaged in discovery. The parties have agreed to submit to a voluntary mediation at the end of November, 2006. The Company plans to vigorously defend the action; however, the Company cannot determine what costs and damages, if any, will arise as a result of this litigation. 18 The Company is not a party to any other pending legal proceedings, other than routine litigation deemed incidental to our business. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. During the first three quarters of fiscal 2006, we issued the following securities, which were not registered under the Securities Act of 1933, as amended. We did not employ any form of general solicitation or advertising in connection with the offer and sale of the securities described below. In addition, we believe the purchasers of the securities are "accredited investors" for the purpose of Rule 501 of the Securities Act. For these reasons, among others, the offer and sale of the following securities were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act or Regulation D promulgated by the SEC under the Securities Act: o During the three months ended March 31, 2006, we issued an aggregate of 450,000 shares of common stock to employees for services rendered to the Company valued at $ 28,0002. o During the three months ended March 31, 2006, certain investors exercised warrants to purchase 1,609,999 shares of common stock for an aggregate amount of $221,500. o During the three months ended March 31, 2006, we issued 2,124,771 shares of common stock as payment for consulting services for an aggregate amount of $193,167, which have subsequently been returned. o During the three months ended June 30, 2006, we issued an aggregate of 1,497,949 shares of common stock to employees for services rendered to the Company value at $59,078. o During the three months ended June 30, 2006, certain investors exercised warrants to purchase 4,512,471 shares of common stock for an aggregate amount of $676,871. o During the three months ended June 30, 2006 we issued an aggregate of 5,509,351 shares of common stock as payment for consulting services for an aggregate amount of $344,872. o During the three months ended June 30, 2006, we issued 7,267,936 shares of common stock as required under an investment agreement for an aggregate amount of $165,991. o During the three months ended September 30, 2006, we issued an aggregate of 7,446,637 shares of common stock to employees for services rendered to the Company value at $88,510. o During the three months ended September 30, 2006, we issued an aggregate of 4,502,168 shares of common stock as payment for consulting services for an aggregate amount of $64,710. o During the three months ended September 30, 2006, we issued 13,657,544 shares of common stock as required under an investment agreement for an aggregate amount of $135,000. 19 ITEM 3. DEFAULTS UPON SENIOR SECURITIES o One loan from three family members, each of whom is an unaffiliated party, evidenced by four promissory notes in the aggregate principal amounts of $100,000, $50,000, $50,000, and $100,000, each due June 24, 2001 with interest rates ranging from 11% to 12%. We entered into a settlement agreement in the third quarter of 2004 with each of these parties. Pursuant to this agreement, at June 30, 2005, we were required to pay an additional $80,000 as full payment of our obligations. We did not make scheduled payments and are in default of these notes. o One loan from an unaffiliated party in the aggregate principal amount of $195,000 with interest at a rate of 9% per annum. Pursuant to a letter agreement dated as of August 10, 2004, we entered into a settlement with this party and agreed to pay a total of $261,000 pursuant to a scheduled payment plan through July 2005. Additionally, the Company, in September 2004, issued 206,250 shares of common stock upon the conversion of unpaid interest in the aggregate amount of $33,000. At September 30, 2006, there was $161,000 principal amount remaining on this note. We did not make our scheduled payment under this note and are in default. As of September 30, 2006 we owed $30,801 in interest on this note. o One loan from an unaffiliated party in the aggregate principal amount of $98,500, due July 31, 2005, with interest at the rate of 9% per annum. Pursuant to a letter agreement dated August 10, 2004, between us and this third party, we agreed to pay a total of $130,800 pursuant to a scheduled payment plan through July 2005. At September 30, 2006 there was $ 74,500 principal amount remaining on this note. We did not make our scheduled payments under this note and are in default. As of September 30, 2006 we owed $18,864 in interest on this note. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. 20 ITEM 6. EXHIBITS. (a) Exhibits. 31.1 Certification of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer and Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIVERSAL DETECTION TECHNOLOGY Date: __________, 2006 /s/Jacques Tizabi ---------------------------------------- By: Jacques Tizabi Its: President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer and Principal Financial and Accounting Officer) 22