Nanotechnology, which focuses on manipulating materials at the atomic scale to create advanced materials with novel properties, is itself a broad field and many national governments have made a priority of supporting nanoscience research and development. Since the inception of the U.S. National Nanotechnology Initiative in 2001, the U.S. government has invested $4 billion to support nanotechnology research and development activities.

In general, advanced materials enable significant improvements in the performance, cost and functionality of existing products and allow the development of products not previously possible. Such materials have potential applications in many industries, including semiconductors, electronics, biotechnology, textiles, alternative energy and defense. Some advanced material products that are currently being developed include: very high density and cost efficient digital memories; smart sensors; pharmaceuticals; drug delivery systems; cost efficient fuel cells, solar cells and light sources; stain resistant textiles; lightweight, high strength composites for civil and military applications; and wear resistant and anti-corrosion coatings for industrial applications.

In 2004, the market sizes of the following advanced material subsectors—coatings, ceramics, flame retardants and composites—were estimated to be approximately $9.4 billion, $2.3 billion, $1.6 billion and $4.8 billion, respectively.

Technology innovation is a key engine for growth in an increasingly global and competitive marketplace. According to published research, over $300.0 billion was spent in research and development in the United States in 2004 as follows: $93.0 billion by federal agencies, $187.0 billion by the private sector, $12.0 billion by academic institutions and $9.0 billion by not-for-profit organizations.

The Company is developing a number of new devices that use high frequency sound waves, commonly known as ultrasound or ultrasonic waves, to evaluate the physical properties of materials. The Company’s devices can determine the physical condition of an object by analyzing numerical measurements taken from ultrasonic waves that interact with such object. The Company’s quantitative ultrasonic signal processing technology is designed to be extremely sensitive, detecting changes in the physical properties of the object studied.

Ultrasound is an important, non-invasive tool for diagnosing disease inside the body. Roughly 700,000 procedures utilizing ultrasound devices are performed each day worldwide. The Company’s quantitative ultrasound supplements other diagnostic tools, providing a numerical readout of certain physical properties of the body part being analyzed, such as pressure or strain, which helps physicians diagnose certain disease conditions. All three products, the QUS-1000CS, the QUS-1000BQ and the QUS-1000ICP, share common components, but also have customized interfaces specific to each application.

The Company is developing a multi-purpose diagnostic instrument for the United States Army’s initiative to improve field service for deployed vehicles. The Company’s multi-purpose diagnostic device measures the physical integrity of parts in the field based on their responses to an ultrasonic probe. Each part has its own distinct acoustic response to an ultrasonic probe which the Company’s device can read.

The Company is also developing homeland security products based on its ultrasonic platform technology, such as an ultrasonic wand to detect weapons concealed beneath clothing and a product that identifies vehicles on the highway system that might be transporting weapons of mass destruction.

The Company is developing innovative applications integrating fiber optic sensors, software and hardware components to provide remote and secure asset monitoring solutions and products.

Cost of revenues decreased 18.3% to $8.5 million for the nine months ended September 30, 2005 from $10.5 million for the nine months ended September 30, 2004.

Operating expense decreased 5.8% to $3.0 million for the nine months ended September 30, 2005 from $3.1 million for the nine months ended September 30, 2004.

Interest expense remained consistent between 2004 and 2005.