UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

Commission File No. 0-19195

AMERICAN MEDICAL TECHNOLOGIES, INC.

(Exact name of small business issuer in its charter)

5655 Bear Lane, Corpus Christi, TX 78405

(Address of principal executive offices)(Zip Code)

(361) 289-1145

(Issuer’s telephone number)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.04 par value per share

(Title of Class)

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

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

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

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

State issuer’s revenues for its most recent fiscal year: $3,165,399

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $1,214,073 as of April 9, 2008 based upon the closing price of $0.12 reported on the OTC Bulletin Board on that date. For purposes of this calculation only, all directors, executive officers and owners of more than ten percent of the registrant’s Common Stock are assumed to be affiliates.

There were 10,117,274 shares of the issuer’s Common Stock issued and outstanding on April 9, 2008.

DOCUMENTS INCORPORATED BY REFERENCE - None

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

TABLE OF CONTENTS

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Special Note Regarding Forward Looking Statements

The Company makes forward-looking statements in this report and may make such statements in future filings with the Securities and Exchange Commission.  The Company may also make forward-looking statements in its press releases or other public shareholder communications.  The Company’s forward-looking statements are subject to risks and uncertainties and include information about its expectations and possible or assumed future results of operations.  When the Company uses any of the words “believes”, “expects”, “anticipates”, “estimates” or similar expressions, it is making forward-looking statements.

To the extent available, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of its forward-looking statements.  While the Company believes that its forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made.  Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Company’s control or are subject to change, actual results could be materially different.  Factors that might cause such a difference include, without limitation, the following:  the Company’s inability to generate sufficient cash flow to meet its current liabilities, the inability of the Company to find suitable new acquisitions or the expense or difficulty of integrating such acquisitions with current Company operations, adverse results in any of the Company’s material lawsuits, the possible failure of revenues to offset additional costs associated with its new business model, the potential lack of product acceptance, the Company’s potential inability to introduce new products to the market, the potential failure of customers to meet purchase commitments, the potential loss of customer relationships, the potential failure to receive or maintain necessary regulatory approvals, the extent to which competition may negatively affect prices and sales volumes or necessitate increased sales expenses, the failure of negotiations to establish original equipment manufacturer agreements or strategic alliances and the other risks and uncertainties set forth in this report.

Other factors not currently anticipated by management may also materially and adversely affect the Company’s results of operations.  Except as required by applicable law, the Company does not undertake any obligation to publicly release any revisions which may be made to any forward-looking statements to reflect events or circumstances occurring after the date of this report.

PART I

ITEM 1.               DESCRIPTION OF BUSINESS

Introduction

American Medical Technologies, Inc., (“AMT” or “Company”) “distributes”, “manufactures” and “brokers” high technology products designed primarily for the global general and cosmetic dental industries.  In the distributor function, AMT acts as the manufacturer licensee and global sales representative of a premium brand of professional tooth whitening.  As a manufacturer, AMT continues to design and produce air and water abrasive kinetic preparation systems in the Company’s Corpus Christi, Texas manufacturing facility.  As a broker, AMT acts as the sales and technical “detailer” of several premium and renowned dental product brands.  Outside of dental product sales AMT also develops, manufactures and markets precision air abrasive jet machining, (“AJM”) systems for industrial applications and operates a successful parts and maintenance business for past AMT dental and industrial products. AMT incorporated in Delaware in November 1989 and completed its initial public offering in June 1991.  AMT changed its name for American Dental Technologies, Inc. on July 13, 2000.

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Over the past few years AMT successfully implemented a restructuring and recovery program which protected the company’s assets from excessive claims and creating a solid foundation from which the company was to plan and execute its current, positive growth strategy.  In 2006, the Company added the Spectrum Dental product line and by doing, began a new era in the life of AMT which lead to the production of a business model for the sound and on-going development of shareholder value.  In 2007, AMT became the contractual broker of the BriteSmile, BreathRx, DirectCrown and SheerVision brands of reputable and high quality dental products.

Products

Described below are the Company’s current principal product lines.

Contrast Tooth Whitening

In April 2007, the Company entered into a 5 year licensing agreement with Discus Dental and its wholly owned subsidiary, Spectrum Dental, a leading provider of professional tooth whitening systems, under which AMT was granted the exclusive worldwide distribution rights of the Spectrum Dental product line.  The products purchased from Discus Dental and resold under the brand names: Contrast AM, Contrast PM, Contrast PM Plus, FastDam, FastTrack and other ancillary products, utilize hydrogen peroxide or carbamide peroxide in various concentrations to safely and effectively whiten discolored teeth.  Although the safety and efficacy of these technologies are well tested, due to the relative strength of the materials, Contrast tooth whitening products are only available as administered by dental professionals.

Spectrum Dental products accounted for 53% and 34% of AMT’s total revenues in 2007 and 2006, respectively

Details of the Discus Dental / Spectrum Dental License Agreement:

As previously initially reported in the Company’s Form 8-K, filed with the Securities and Exchange Commission (“SEC”) on April 17, 2006, the Company, on April 11, 2006, entered into an Exclusive License Agreement (the “License Agreement”) with Discus Dental Holdings, Inc., a California corporation (“Discus”), under which the Company became the exclusive, worldwide distributor of the proprietary dental products manufactured and sold by Discus’ wholly owned subsidiary, Spectrum Dental, Inc. (“Spectrum”). The License Agreement is for a term of five years, contains minimum requirements for sale of the products by the Company, and may be terminated (i) for cause upon 30 days notice, (ii) at certain times during the term of the License Agreement if the Company fails to maintain positive net income for a specified period, (iii) upon the Company’s failure to comply with applicable securities laws, (iv) if any judgment is rendered against the Company, or it defaults on any debt, in excess of $50,000, (v) upon any change in the Company’s results of operation or condition which in the sole opinion of Discus has or could have a material adverse effect on the Company’s condition, business, properties or prospects, and (vi) upon the occurrence of certain other customary events of default. As full consideration, the Company granted to Discus a ten year warrant (the “Warrant”) to purchase up to 2,500,000 shares of its common stock at $0.20 per share. The shares subject to the Warrant vest 500,000 after the first year and an additional 41,667 shares on each successive full one-month period thereafter until the fifth anniversary of the date of grant; however vesting ceases upon the sale of Spectrum to the Company as contemplated by the Option Agreement described below. The shares subject to the Warrant are adjusted upon the occurrence of certain events including a stock dividend, reclassification, merger and stock split, and upon the issuance of shares for a consideration per share less than the applicable conversion price of the Warrant, with certain exceptions for compensation paid in stock.

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Manufacturing Agreement

Also, on April 11, 2006, the Company entered into a Manufacturing Agreement with Westside Packaging, Inc., a wholly owned subsidiary of Discus and the current manufacturer, for the manufacture of the products and sale to the Company for distribution under the License Agreement. The products manufactured are sold under the marks Contrastpm®, Contrastam®, FastDam® and FastTrak®. The Manufacturing Agreement is for a term of three years with automatic one year renewal terms unless either party gives notice of non-renewal.

Standstill Agreement

As of January 16, 2007, Discus, Spectrum and Westside, on the one hand, and the Company, on the other hand, entered into a Standstill Agreement, in which each of the parties agreed that there are pending disputes among them concerning the existence and/or extent of any performance issues under the License Agreement and Manufacturing Agreement (collectively, the “Agreements”).  It is the Company’s position that the Agreements are in effect.  Discus has agreed not to dispute the Company’s position, but has reserved, together with the Company, all rights, claims and/or defenses relating to the Agreements.  The parties to the Standstill Agreement have agreed to discuss potential resolution of any disputes arising out of the Agreements.  Further, the parties have agreed that any party may terminate the Standstill Agreement by providing the other party with 10 days’ written notice.  The parties further agreed that no party to the Standstill Agreement may commence any legal action against the other party prior to termination of the Standstill Agreement.  The Standstill Agreement is dated February 1, 2007.

Option Agreement

On April 11, 2006, the Company and Discus also entered into a Put and Call Option Agreement (the “Option Agreement”) whereby Discus has a put option to compel the Company to purchase all the outstanding shares of capital stock of Spectrum, and the Company has a call option to compel Discus to sell such shares, at any time after April 11, 2007 and before the earlier to occur of the termination or expiration of the License Agreement or five years. Notwithstanding the foregoing, the Company may not exercise its call option if the price at which its shares of common stock are trading, or the average trading price of its shares during the preceding 30 day period, is less than $0.60 per share. The exercise price of the option will be between $2,300,000 and $2,662,537.50, depending on the date of exercise. The purchase price will be paid with a combination of cash and 3,000,000 shares of Company common stock (subject to adjustment); provided that if that aggregate value of the specified amount of cash and the value of the stock based on the average trading value of the Company’s stock for the 30 days preceding the closing of the Option Agreement is less than the applicable exercise price, then the Company must issue additional shares to equal the value of the exercise price. At the option of the parties, the exercise price can be paid in all cash; however, if the Company first elects to exercise its call option, the method of payment of the exercise price will be at the election of Discus. Upon the exercise of the option, the parties shall enter into a Stock Purchase Agreement substantially in the form agreed to in the Option Agreement for the purchase and sale of the Spectrum shares.

Registration Rights Agreement

Also, on April 11, 2006, the Company entered into a Registration Rights Agreement with Discus pursuant to which it agreed, at its own expense, to register the offer and resale of shares issuable upon exercise of the Warrant not later than April 11, 2007, and to register shares acquired by Discus under the Option Agreement within 120 days after the exercise of an option under the Option Agreement and to use its reasonable best efforts to cause the registration statement to be declared effective by the SEC as soon as practicable thereafter. The Company must, subject to certain specified circumstances, maintain the effectiveness of the registration statement for a

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specified period of time. The Company also granted to Discus piggyback rights for other registration statements filed by it with the SEC for the sale of its shares.  As of the date of this filing of this form 10-KSB, the Company has not filed such a registration statement.  The Registration Rights Agreement requires physical or net-share settlement by delivery of registered shares and does not specify any circumstances under which net-cash settlement will be permitted or required and the contract does not specify how the contract will be settled in the event that the Company is unable to deliver registered shares.  Therefore,  net-cash settlement is assumed if the Company is unable to deliver registered shares and the warrants are classified as a liability.

KCP Cavity Preparation Systems

AMT has patented the method whereby a dentist can remove tooth decay by means of a narrow, high velocity stream of minute particles delivered by compressed air to the tooth through a lightweight dental hand piece.  In many cases the KCP lessens the patient sensitivity and, as such, may be used to treat a patient without anesthesia.  .The KCP shapes restorations, removes old composite materials, and modifies the underlying hard tissue, often helping to increase bond strength in restorative procedures.  It is also used for sealant preparations; surface stain removal and intra-oral porcelain removal and repair.  The KCP can often be used in place of a traditional dental drill.

In 2003 and 2004, the Company introduced “Hydrobrasion” technology.  Hydrobrasion is the patented use of air, water and micro particles which are combined to form an effective cutting slurry that safely removes dental tooth structure and tooth decay in a minimally invasive manner..  In 2004, the Company introduced this technology in the KCP “Flexijet®”, an air abrasion unit with an integrated water system that dramatically diminishes overspray, minimizes patient sensitivity, and produces faster, more precise cutting.   In 2005, the Company developed and introduced the “Hydro Jet®” product which utilizes the Company’s patented “Hydrobrasion” technology.

KCP products accounted for 3% and 12% of AMT’s total revenues in 2007 and 2006, respectively

Industrial Products

AMT develops, manufactures and markets its precision AJM systems for industrial applications.  The AJM system has a wide range of applications, including drilling, cutting, abrading, deburring, dressing, beveling, etching, shaping and polishing.  Its principal advantage over conventional machining is that the AJM process, which accomplishes its work through kinetic particle displacement (an erosion process), produces no heat, shock or vibration.  This enables precise work to be done on fragile materials without deburring or further processing.  AJM systems are often used to remove the slag, burrs and flash resulting from conventional machining processes.  Some examples include deburring needles, beveling silicon wafers and cutting fiber optics.

Industrial products accounted for 18% and 20% of AMT’s total revenues in 2007 and 2006, respectively.

DirectCrown Temporary Crown and Bridge Materials:

In April 2007, AMT entered into a license agreement with CrownBeav LLC to represent the unique DirectCrown brand of temporary crown and bridge shell materials.  DirectCrown, a low-cost alternative to conventional temporary crown and bridge materials, is a pre-formed shell made of a high-impact, flexible, carbon polymer.  When filled with the system’s resin and molded over the prepared teeth, the result is a hard and wear-resistant restoration that is easier and less expensive for the dentist that

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traditional temporary materials and techniques. Because of the simplicity and low cost natures of the product, DirectCrown shells are ideal for patients of all ages.

License Agreement

On April 1, 2007, the Company entered into a License Agreement with CrownBeav LLC, an Oregon limited liability company, under which the Company became the nonexclusive distributor for the United States and Canada and the exclusive distributor for the rest of the world of it’s DirectCrown brand of temporary crown and bridge material.  The license agreement is for a term of ten years with automatic renewals for additional five year terms, contains minimum requirements for sale of the products by the Company, and may be terminated (i) for cause upon 60 days notice, (ii) upon the Company’s failure to comply with applicable securities laws, (iii) upon the occurrence of certain other customary events of default.  In full consideration, the Company granted to CrownBeav a five year option to purchase (the “Option”) 1,000,000 shares of common stock at $0.20 per share.  The shares subject to the Option will vest two years from the Effective Date of the agreement.  The option agreement includes a guaranteed trading price of $0.40 per share for the 30-day period prior to vesting.  Additional option shares will be granted for the difference if the market price of the shares is below $0.40 during the 30-day period.

The Black-Scholes option pricing model was used to determine the fair value of the options issued to CrownBeav with the following assumptions:  risk free interest rate of 4.54%; dividend yield of 0%; volatility factors of 139%, the expected market price of the Company’s common shares over the estimated life of the option of 3.5 years.  The resulting fair value of the call option was $341,726.  The option grant vests on April 1, 2009.  The option agreement includes a guaranteed trading price of $0.40 per share for the 30-day period prior to vesting.  Additional option shares will be granted for the difference if the market price is below $0.40 during the 30-day period.  The Black-Scholes option pricing model was used to determine the fair value of the option guarantee issued to CrownBeav with the following assumptions:  risk free interest rate of 4.60%; dividend yield of 0%; volatility factors of 100%, the expected market price of the Company’s common shares over the guarantee period of 2 years.  The resulting fair value of the put option was $185,000.  The $526,726 fair market value of the option (combination of call and put) was capitalized as an intangible asset and is being recognized as a licensing fee over the 10 year period of the license.

Commissions received by AMT for DirectCrown products accounted for 3% of AMT’s total revenues in 2007.  DirectCrown products were not sold by AMT in 2006.

BriteSmile Professional Tooth Whitening

In December 2007, AMT entered into a partnership with Discus Dental, Inc. to represent the highly acclaimed and world renowned BriteSmile professional tooth whitening systems in select international markets.  BriteSmile, one of the world’s most highly recognized tooth whitening brand names, is a tooth whitening procedure which is performed by a dental professional in a dentist office.  By applying light technology to a proprietary gel and activator system, the patient experiences dramatic whitening results in approximately one hour.  To supplement the procedure, the BriteSmile brand also includes professional take home whitening gels, a whitening toothpaste, a refreshing mouth rinse and a unique “Whitening to Go” paint on whitening stick.  AMT’s key role is to act as the sales and technical service detailer for the existing global BriteSmile business as well as to prospect for new distributors and new countries.

No revenue was recognized for the representation of BriteSmile products in 2007.

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BreathRx Professional Oral Care Products

In conjunction with the above mentioned BriteSmile agreement, in December 2007 AMT also entered into a partnership with Discus Dental, Inc. to represent the unique BreathRx line of professional oral care products in select international markets.  The BreathRx brand, sold primarily in the USA through major retail drug and supermarket outlets, is a comprehensive system used to eliminate oral malodor.  Through the three step process of rinsing, scraping and brushing, a patient will experience a clinically proven reduction in bad breath.  The proprietary active ingredients in the system help to kill odor causing bacteria while delivering a fresh minty flavor to the mouth.  Ancillary products such as whitening toothpaste, chewing gum, breath mints and breath spray help to fill out the product offering.  AMT’s role is to offer BreathRx to it’s established distribution network who then sell the product to dental professionals.

No revenue was recognized for the representation of BreathRx products in 2007.

SheerVision dental headlights and loupes

In December 2007, AMT entered into a partnership agreement with the company SheerVision, Inc. (“SheerVision”) (OTC: BB: SVSO:OB) to represent the highly acclaimed  family of advanced proprietary surgical loupes and LED head light systems for the dental, medical and veterinary markets.  Under the terms of the agreement, AMT acts as the sales and technical service representative, selling SheerVision products through its international federation of international distributors.  AMT is compensated on a commission basis for all products sold into the international territory.

At the time of the agreement, SheerVision announced they were making some engineering upgrades to their existing “Infinity” Firefly dental headlight.  The upgrade process has taken longer than SheerVision expected and, as such, commissionable sales will not be realized by AMT until at least the second quarter of 2008

Parts, Maintenance and Consumable Sales

In support of the 8,000+ Flexijet, Hydrojet and Plasma Arc Curing (“PAC”) lights that have been installed in the field, primarily in the USA and in Europe, AMT offers a “for fee” repair and part service for the units which have gone past their original manufacturer’s warranty period.  AMT generates revenue and profit by performing repairs and maintenance on past sold units.

Parts, Maintenance and Consumable Sales accounted for 19% and 31% of AMT’s total revenues in 2007 and 2006, respectively.

Marketing, Sales and Training

In the North American dental market, AMT uses a network of independent sales representatives and major dental dealers and distributors to sell its products.

For AMT’s international markets, AMT has set up an international distribution network with key distribution partners located in Latin America, Asia, Europe and the Middle East.  These third-party distributors are responsible for directing individual country sales, providing sales and technical support, and in some cases, holding and managing local inventory and logistics.

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AMT presently has several industrial product distributors for its AJM product.  Such distributors have been and are anticipated to be the primary source of sales for AMT’s industrial products in the future.  Industrial product distributors are supported by AMT primarily through advertising in the Thomas Register and trade journals, and by participation in trade shows.

Training and Service

Training and the dissemination of industry information is an important factor in the successful sale of AMT products.  The Company offers its dealers and distributors free training on all products and supports them on an “as needed” basis with dentist training, technical seminars and lectures.

AMT provides warranty and repair service for AMT’s products in the United States.  To service its dental equipment, AMT has a service department in Corpus Christi and has service arrangements with independent distributors for products in other markets.  To date, AMT has not experienced significant service problems.  AMT generally provides a one-year warranty on all of its products, except for Contrast tooth whitening and BreathRx oral care products, where no warranty or service is required.

Competition

There is direct competition to AMT’s in-house manufactured products; however, it is the new and emerging technologies that represent the biggest commercial threat to the Company’s manufacturing business.  Hydrobrasion technology is being supplanted by high technology dental lasers which, although considerably higher in price, can perform certain additional functions.  On the lower end, this technology competes with conventional treatment methods that include standard drills and basic dental instruments.  Even so, a small market still exists which justifies the continuance of the product line for the foreseeable future.

For all in-house manufactured products, AMT has patents in the basic technologies which the Company believes provide a competitive advantage.  AMT believes there are approximately three companies that presently sell competing dental air abrasive products. AMT’s PAC and KCP products must also compete with conventional treatment methods using dental instruments or equipment that are generally less expensive and with which dentists are more familiar.

AMT faces several competitors in the tooth whitening industry.  AMT’s Contrast tooth whitening products face competition from a variety of companies utilizing similar hydrogen peroxide and carbamide peroxide technologies.  The BriteSmile products face competition from Discus Dental’s own ZOOM in-office tooth whitening system as well as from Chinese and European light manufacturers.  Even so, the global tooth whitening market continues to grow with patient demand at an all time high.

Many of the companies that compete against the total AMT product offering, particularly those that manufacture traditional dental equipment, have been in business longer, have greater resources and have a larger distribution network than AMT.  AMT’s competitive position is dependent upon its pricing and marketing practices, its ability to make ongoing improvements in its existing products, to develop new products, and to successfully promote the capabilities and treatment benefits of its products.  While AMT believes its products are competitive in terms of capabilities, quality and price, competition has adversely affected, and may in the future adversely affect, AMT’s business.

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Patents

AMT believes its patents provide some competitive advantage in those countries where they have been issued.  AMT believes its technology patents and other patent rights provide a proprietary means to utilize that technology in dentistry.  In the United States, AMT has patents related to dental air abrasive systems and methods for using an air abrasive stream for dentistry that do not begin expiring until 2011, technology patents for air abrasive cavity preparation systems which will begin expiring in 2012, and industrial air abrasive patents which have expiration dates ranging from 2011 to 2017.  AMT also holds several industrial air abrasive patents in various other countries.   As a result, in 2005, two companies signed license agreements with the Company to market air abrasion products and in 2006 a settlement agreement was reached with a third company.

CrownBeav LLC and Discus Dental both hold strategic technology patents for their respective products, providing AMT with some market protection and creating certain barriers to entry for new manufacturers.  The Contrast tooth whitening products are not protected by patent.

Manufacturing and Suppliers

To the extent that AMT continues to manufacture, the manufacturing operations are conducted at its ISO 9001:2000 and EN13485 certified facility in Corpus Christi, Texas.  AMT’s products are manufactured from parts, components and subassemblies obtained from a number of unaffiliated suppliers or fabricated internally at its manufacturing facility. AMT has modern machining capability allowing it to control the production of certain non-standard parts.  AMT uses numerous suppliers for standard parts and for fabrication of certain parts.  Although most of the parts and components used in its products are available from multiple sources, AMT presently obtains several parts and components from single sources.  Lack of availability of certain parts and components could result in production delays.  Management has identified alternate suppliers and believes any delays would be minimal and would not materially affect AMT’s business.

AMT has contractual relationships with the manufacturer of the Spectrum tooth whitening products, BreathRx oral care products, BriteSmile professional tooth whitening systems and DirectCrown temporary crown and bridge products. The manufacturers of all these products are stable and product is delivered per pre-established, mutually agreed order quantities and ship dates.  The Company believes that delivery delays would be highly unlikely and would have a minimal material effect on AMT’s business.

Research and Development

Historically, most research and development, prototype production and testing activities for the products manufactured by AMT have taken place at the Company’s Corpus Christi, Texas facility, although some research and development work was performed for AMT by consultants.  No further major new product development is anticipated by the Company.

AMT’s research and development expenditures for 2007 and 2006 were $17,596 and $67,783, respectively.

Governmental Regulation

The dental products manufactured by AMT are subject to significant governmental regulation in the United States and in certain other countries.  In order to conduct clinical tests and to market products

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for therapeutic use, AMT must comply with procedures and standards established by the FDA and comparable foreign regulatory agencies.  Changes in existing regulations or adoption of additional regulations may adversely affect AMT’s ability to market its existing products or to market enhanced or new dental products.

At this time, AMT’s Contrast and DirectCrown product lines are not subject to regulation inside the USA.  A change in this status could adversely affect AMT’s ability to market these products in the USA.

United States Regulatory Requirements

The Federal Food, Drug and Cosmetic Act (“FDC Act”) regulates medical devices in the United States by classifying them into one of three classes based on the extent of regulation believed necessary to ensure safety and effectiveness. Class I devices are those devices for which safety and effectiveness can reasonably be ensured through general controls, such as device listing, adequate labeling, pre-market notification and adherence to the Quality System Regulation (“QSR”) as well as medical device reporting (“MDR”), labeling and other regulatory requirements.  Some Class I medical devices are exempt from the requirement of pre-market approval or clearance.  Class II devices are those devices for which safety and effectiveness can reasonably be ensured through the use of special controls, such as performance standards, post-market surveillance and patient registries, as well as adherence to the general controls provisions applicable to Class I devices.  Class III devices are devices that generally must receive pre-market approval by the FDA pursuant to a pre-market approval (“PMA”) application to ensure their safety and effectiveness.  Generally, Class III devices are limited to life sustaining, life supporting or implantable devices; however, this classification can also apply to novel technology or new intended uses or applications for existing devices.

Before they can be marketed, most medical devices introduced to the United States market are required by the FDA to secure either clearance of a pre-market notification pursuant to Section 510(k) of the FDC Act (a “510(k) Clearance”) or approval of a PMA. Obtaining approval of a PMA application can take several years. In contrast, the process of obtaining 510(k) Clearance generally requires a submission of substantially less data and usually involves a shorter review period. Most Class I and Class II devices enter the market via the 510(k) Clearance procedure, while new Class III devices ordinarily enter the market via the more rigorous PMA procedure.  In general, approval of a 510(k) Clearance may be obtained if a manufacturer or seller of medical devices can establish that a new device is “substantially equivalent” to a predicate device other than one that has an approved PMA.  The claim for substantial equivalence may have to be supported by various types of information, including clinical data, indicating that the device is as safe and effective for its intended use as its legally marketed equivalent device.  The 510(k) Clearance is required to be filed and cleared by the FDA prior to introducing a device into commercial distribution. Market clearance for a 510(k) notification submission may take three to 12 months or longer.  If the FDA finds that the device is not substantially equivalent to a predicate device, the device is deemed a Class III device, and a manufacturer or seller is required to file a PMA application. Approval of a PMA application for a new medical device usually requires, among other things, extensive clinical data on the safety and effectiveness of the device.  PMA applications may take years to be approved after they are filed. In addition to requiring clearance or approval for new medical devices, FDA rules also require a new 510(k) filing and review period, prior to marketing a changed or modified version of an existing legally marketed device, if such changes or modifications could significantly affect the safety or effectiveness of that device.  FDA prohibits the advertisement or promotion of any approved or cleared device for uses other than those that are stated in the device’s approved or cleared application.

The FDA granted 510(k) Clearance to market the KCP for hard-tissue applications in late 1992.  510(k) Clearance to market the PAC was granted by the FDA in mid-1995.

Pursuant to FDC Act requirements, the Company has registered its manufacturing facility with the FDA as a medical device manufacturer, and listed the medical devices it manufactures.  The Company also is subject to inspection on a routine basis for compliance with FDA regulations.  These regulations include those covering the QSR, which, unless the device is a Class I exempt device, require that the Company

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manufacture its products and maintain its documents in a prescribed manner with respect to issues such as design controls, manufacturing, testing and validation activities.  Further, the Company is required to comply with other FDA requirements with respect to labeling, and the MDR regulations which require that the Company provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its products, as well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur.  The Company believes that it is currently in material compliance with all relevant QSR and MDR requirements.

In addition, our manufactured products are subject to regulatory requirements covering third-party reimbursement.   Our products are generally purchased by dental or medical professionals who then bill various third party payors, such as government programs or private insurance plans, for the procedures conducted using these products.  In the United States third party payors review and frequently challenge the prices charged for medical services. In many foreign countries, the prices are predetermined through government regulation.  Payors may deny coverage and reimbursement if they determine that the procedure was not medically necessary (for example, cosmetic) or that the device used in the procedure was investigational.  We believe that most of the procedures being performed with our current products generally have been reimbursed. The inability to obtain reimbursement for services using our products could deter dentists and physicians from purchasing or using our products.  We cannot predict the effect of future healthcare reforms or changes in financing for health and dental plans.  Any such changes could have an adverse effect on the ability of a dental or medical professional to generate a return on investment using our current or future products.  Such changes would act as disincentives for capital investments by dental and medical professionals and could have an adverse effect on our business, financial condition and results of operations.

Foreign Regulatory Requirements

International sales of medical devices are also subject to the regulatory requirements of each country.  Regulation of medical devices in foreign countries varies between countries.  The Company, in general, will rely upon its distributors and sales representatives in the foreign countries in which it markets its products to ensure that the Company complies with the regulatory laws of such countries.  In Europe, the regulations of the European Union require that a device have a CE mark before it can be sold in that market.  The KCP, PAC, tooth whitening, oral care and DirectCrown products have all been granted CE mark approvals and may be sold in European Union countries and markets.   Additional foreign authorizations to market its dental products are sought by the Company where needed.

Regulation of medical devices in other countries is subject to change and there can be no assurance AMT will continue to be able to comply with such requirements.  The Company believes that its international sales to date have been in compliance with the laws of the foreign countries in which it has made sales. Failure to comply with the laws of such country could have a material adverse effect on the Company’s operations and, at the very least, could prevent the Company from continuing to sell products in such countries.  Exports of most medical devices are also subject to certain limited FDA regulatory controls.

Product Liability Exposure

AMT’s business involves the inherent risk of product liability claims.  If such claims arise, they could have an adverse effect on AMT.  AMT currently maintains product liability insurance with coverage per occurrence and in the aggregate of $7 million.  There is no assurance that such coverage will be sufficient to protect AMT from all risks to which it may be subject or that product liability insurance will be available at a reasonable cost, if at all, in the future.

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Foreign Operations and Segment Information

For information regarding the Company’s foreign operations and business segments, see Note 8 of the Notes to Consolidated Financial Statements.  Such information is incorporated herein by reference.

Employees

On April 9, 2008, AMT had 14 full-time employees.  Of these employees, three were engaged in direct sales and marketing activities.  Five employees were engaged in manufacturing activities, and the remaining six employees were in finance, administration and customer service.  AMT has no collective bargaining agreements with any unions and believes that its overall relations with its employees are good.

STATUS OF PAST AND FUTURE BUSINESS STRATEGIES :

KCP Cavity Preparation Systems:

In the past AMT’s patented KCP tooth decay removal and restorative preparation systems represented significant sales and profit to the Company.  The brand names: “KCP”, “Flexijet”, and “Hydro Jet” were the market products in North America and Europe during the dental industry’s active use of hydrobrasion technology.  Now, with the advent of dental lasers and other non-invasive technologies, AMT now finds that product sales for this mature technology have softened.

In 2008 AMT will continue to include the Hydro Jet in its product offering, selling through its existing international network of dealers; however no significant investment is planned to upgrade the product technology or to market the products.

Equipment Service and Maintenance:

There are approximately 8,000 KCP, Flexijet and HydroJet systems installed in dentist offices primarily in North America and Europe, most of which have gone past their original manufacturer’s warranty period.  As an adjunct to the Company’s traditional sales activity, AMT also offers “for-fee” repair services, generating revenue and profit by performing repairs and maintenance on past sold equipment.  With more and more dentists retiring their older AMT equipment, the Company revenue from repairs and service has flattened out.  In 2008 AMT plans to continue the parts, equipment and maintenance functions.

Industrial Products:

In the past, sales of the Company’s AJM systems and their associated parts and consumable products have represented a significant portion of the Company’s revenues even though they were outside of the Company’s primary dental market.  Today, industrial product sales have leveled off and are forecasted to remain flat unless significant technology and marketing investment is made.  The Company is exploring ways to capitalize on this product line.

Discontinued Products:

Given the Company’s assessment of the current state of technology, and an influx of competition from foreign manufacturers offering similar products, AMT discontinued selling the Ultracam, Intra-oral Camera system in 2007.  Repairs for the existing units are referred to a qualified third party company.  AMT liquidated the stock and component inventories related to this discontinued product line.

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New Products:

The Company believes that the key to its on-going growth and profitability is in the acquisition and sale of new products.  Currently AMT is in discussions with reputable dental manufacturers to increase the number and range of products offered.  AMT believes that these discussions may lead to license or brokerage agreements in 2008, but can provide no assurances that any licensing or brokerage agreements will materialize or be profitable for the Company.

ITEM 2.               DESCRIPTION OF PROPERTY

As previously reported in the Company’s Form 8-K, filed with the SEC on April 17, 2006, the Company, on April 11, 2006, sold to and leased back from the Sepulveda Group, LLC, a California limited liability company affiliated with Discus, its former 45,000 square foot building and property located at 5655 Bear Lane, Corpus Christi, Texas. The gross sale proceeds were $1.9 million, and the Company’s monthly lease back rent for the facility is $20,385 for a five year term, commencing April 11, 2006, with a 3% yearly increase and an option to extend the lease term for an additional five years.

ITEM 3.               LEGAL PROCEEDINGS

In the normal course of business, we may become involved in various legal proceedings.  Except as stated below, we know of no pending or threatened legal proceeding to which we are or will be a party which, if successful, might result in material adverse change in our business properties or financial condition.  However, as with most businesses, we are occasionally parties to lawsuits incidental to our business, none of which are anticipated to have a material adverse impact on our financial position, results of operations, liquidity or cash flows.  We estimate the amount of potential exposure it may have with respect to litigation claims and assessments.

The Company was in arbitration for breach of employment contract claims filed by two former employees totaling $250,000.  In April 2006, the parties amended their claims to a total amount between $385,000 and $1,035,000.  In April 2006, the Company settled with both parties for an aggregate payment of $410,000.  The settlement was included in “other accrued liabilities” in the Company’s March 2006 balance sheet and was paid in April 2006.

On November 20, 2006, a demand for arbitration and statement of claim was filed against the Company, alleging that the Company had breached agreements to pay the claimant royalties and consulting fees.  The original demand sought damages of $47,800.  The demand for arbitration seeks an award of $125,000.  The original demand of $47,800 is included in “other accrued liabilities” in the Company’s December 2006 balance sheet.   In October 2007, a preliminary settlement was reached through arbitration in the amount of $32,500.  The settlement and release were finalized and the settlement paid in the first quarter of 2008.

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

None

PART II

ITEM 5.               MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock trades in the over-the-counter market under symbol ADLI.OB on the OTC Electronic Bulletin Board.  The following table shows the quarterly high and low bid prices for the last two fiscal years.  The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

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Holders

As of December 31, 2007 there were approximately 346 holders of record of AMT common stock based upon the records of the Company’s stock transfer agent and security position listings.

Dividends

The Board of Directors presently intends to retain all earnings to finance operations and does not expect to authorize cash dividends in the foreseeable future.  Any payment of cash dividends in the future will depend upon earnings, capital requirements, any restrictive covenants in future loan agreements and other factors considered relevant by the Board of Directors.

Equity Compensation Plans

The following table reflects the information described as of December 31, 2007 with respect to compensation plans under which the Company’s stock is authorized for issuance.

In July 2007, the Company adopted the 2007 Equity Incentive Plan (“Equity Plan”).  The Equity Plan provides for the granting of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights (or SARs), Restricted Stock, Performance Units and Performance Shares to employees, consultants and directors.  The purpose of the Equity Plan is to promote the success and to enhance the value of the Company by aligning the interest of Participants with those of the Company’s shareholders, to provide flexibility to the Company in its ability to motivate, attract, and retain the services of outstanding individuals, upon whose judgment, interest, and special effort the success of the Company is largely dependent.   When the Equity Plan was implemented there were 1,000,000 common shares available to be granted under the Equity Plan.  In the year ended December 31, 2007, a total of 100,000 performance shares and 627,968 performance unit shares had been granted under the Equity Plan to legal and outside consultants of the Company.  The $212,862 expense is included in other professional fees.

Recent Issuance of Unregistered Securities

                        The Company issued 200,000 restricted shares of common stock to Mr. Roger Dartt in August 2007 in consideration for work performed in the first quarter of 2008.

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ITEM 6.               MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report.  The discussion contains certain forward-looking statements relating to the Company’s anticipated future financial condition and operating results and its current business plans.  In the future, the Company’s financial condition and operating results could differ materially from those discussed herein and its current business plans could be altered in response to market conditions and other factors beyond its control.  Important factors that could cause or contribute to such differences or changes include those discussed elsewhere in this report.  See the disclosures under “Item 1-Description of Business.”

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect amounts reported in the accompanying consolidated financial statements and related footnotes.  These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information the Company believes to be reasonable under the circumstances.  There can be no assurance that actual results will conform to the Company’s estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time.  The following policies are those the Company believes to be the most sensitive to estimates and judgments.  The Company’s significant accounting policies are more fully described in Note 1 to our consolidated financial statements.

Revenue Recognition

The Company recognizes revenue net of sales tax when all of the following criteria are met:  1) a contract or sales arrangement exists, the buyer is obligated to pay and such obligation would not be changed in the event of theft or physical destruction or damage of the product; 2) products have been shipped, and if necessary installed, and title has been transferred or services have been rendered; 3) the price of the products or services is fixed or determinable; 4) no further obligation exists on the part of the Company (other than warranty obligations); and 5) collectibility is reasonably assured.  The Company grants a thirty day unconditional money-back guarantee on selected products and a warranty for one year on parts and labor on defective products. The Company accrues its estimated exposure to returns and warranty claims based on historical average returns and claims paid.  None of the Company’s current product lines requires installation. The Company’s policy is to include shipping and handling costs, net of related revenues, in costs of goods sold.

Receivables and Credit Policies

Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Payments on trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices. The carrying amount of trade receivables is reduced by a valuation allowance for any invoices over 90 days past due and 5% of the remaining balance. Additionally, management addresses significant individual accounts for collectibility and provides an additional allowance if necessary .

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Inventories—Slow Moving

The Company’s reserve for slow moving inventory is evaluated periodically based on its current and projected sales and usage.  The inventory reserve calculation assumes that any parts on hand exceeding three years of projected usage are subject to complete valuation allowance.  For purposes of computing the valuation allowance at December 31, 2007, part usage was projected at 50% of 2007 part usage.  The valuation allowance could change materially, either up or down, if actual part usage in future years is materially different than the usage projected at December 31, 2007; however, the new cost basis cannot subsequently be marked up based on changes in underlying facts and circumstances.

Issuance of Options and Warrants

The Company periodically issues options and warrants to purchase stock at a price which may be higher or lower than the strike price of the stock on the grant date.  The fair value of the options and warrants issued is estimated at the date of the grant using the Black Scholes pricing model.  The Company recognizes the expense over the vesting period of the options and warrants.  The Company has a policy of issuing new shares for the exercise of options and warrants.

Results of Operations

Years Ended December 31, 2007 and December 31, 2006

For the year ended December 31, 2007 revenue was $3,165,399 compared to $2,712,335 for the year ended December 31, 2006, an increase of approximately 17%.   The increase in revenue resulted primarily from the addition of the Spectrum product line in April 2006.   The Spectrum product line added approximately $745,000 in revenue for the year ended December 31, 2007 compared to the year ended December 31, 2006.   Commissions earned from the DirectCrown product line added in April 2007 increased revenues by approximately $83,000.  The sale of inventory from discontinued product line resulted in approximately $133,000 in additional revenues for the year ended December 31, 2007.  These increases were partially offset by a $241,000 decrease in KCP product line sales and a decrease of $222,000 in the sales of parts and repairs.  The Company anticipates continued growth in the new product lines add, the addition of new product lines in the future and a continued decrease in KCP product line sales and the sales of parts and repairs.

Additionally, royalties decreased approximately $25,000 due to decreased sales by licensees, and the Company expects the decreases in royalties to continue.

Gross profit as a percentage of revenues was approximately 53% for the year ended December 31, 2007 compared to 50% for the year ended December 30, 2006.  The increase in gross profit is primarily attributable to the addition of the Spectrum product line in April 2006 which has a higher gross margin line than other product lines.  Additionally, a portion of the increase in gross profit is related to the addition of the DirectCrown product line revenues which is received as commissions.  The higher gross profit was partially offset by $228,000 of inventory added to the inventory valuation allowance in the year ended December 31, 2007 compared to $133,000 of inventory added to the inventory valuation allowance in the year ended December 31, 2006.

Selling, general and administrative expenses were $2,845,731 and $2,841,547 for the years ended December 31, 2007 and December 31, 2006 respectively, constituting an increase of less than 1%.  For the year ended December 31, 2007 compared to the year ended December 31, 2006; payroll increased approximately $118,000, primarily due to employee stock option expense; general office expense increased approximately $154,000, primarily due to the license fees related to the Spectrum and DirectCrown agreements and an increase of approximately $57,000 in expenses related to new business development; other professional fees increased approximately $201,000 primarily due to an increase in legal and

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accounting fees related to new product contract negotiations and accounting fees related to the cost of complying with the Sarbanes-Oxley Act.  These increases were partially offset by a decrease of approximately $130,000 in show expenses as a result of AMT’s master distributors representing the Company’s product lines on the Company’s behalf.  Additionally, the year ended December 31, 2006 included $410,000 for the settlement of breach of employment and other claims with former employees.

Other income (expense) was $242,918 and $67,231 for the years ended December 31, 2007 and December 31, 2006, respectively.  Of the amount in 2007, approximately $94,000 is related to compensation for consulting services, $46,000 is related to the write off of unused customer credits from prior years and $15,300 is for the adjustment to a legal settlement accrued in 2006.  Of the amount in 2006, $10,000 is related to the recovery of accounts receivable invoices that were previously reserved and $9,000 is related to compensation for consulting services.

Research and development expenses were $17,596 and $67,783 for the years ended December 31, 2007 and December 31, 2006, respectively.  The expenses in 2006, included work on the Company’s Hydrojet handpieces.  The expenses in 2007 were related to new product research for the Company’s tooth whitening product line.  The Company expects the decrease in research and development expenses to continue.

Liquidity and Capital Resources

The Company’s operating activities used $357,386 in cash resources in 2007.

The Company’s investing activities in 2007 provided $231,279.  The cash provided by investing activities in 2007 included $185,190 from the sales and maturities of government securities.

The Company’s financing activities in 2007 provided $74,037.  The cash provided by financing activities in 2007 included $100,000 borrowed against the Company’s line of credit.

On February 9, 2005 the Company entered into a secured loan agreement with Texas State Bank in the amount of $682,000. The loan was secured by a primary lien on the Company’s building and other real property. Interest on the loan was set at the prime rate plus 1%.  The principal on the loan was payable in 35 monthly installments of $3,789 plus interest with the final principal payment due in full in February 2008.  The funds received from this loan were used to retire the note held by Aimee Maroney which matured on December 31, 2004.  In April 2006, the Company invested $632,744 in a Certificate of Deposit with a term of one year as collateral for the outstanding principal remaining on the loan. The original terms of the loan remained the same.  In December 2006, the Company redeemed the Certificate of Deposit and used the proceeds to pay the balance on the note.

On December 21, 2006, the Company entered into a secured line of credit agreement with Texas State Bank.  The funds available under the line of credit were $600,000.  The Company invested $300,000 with funds drawn against the line of credit in a Certificate of Deposit with a term of one year as collateral for the loan.  Interest on the line of credit is set at the prime rate plus 1%.  The interest rate on the line of credit was 9.25% as of December 31, 2006.  The principal on the loan is payable in one payment on December 20, 2007, with interest on the outstanding amount payable monthly.  The Company borrowed an additional $100,000 against the line of credit in December 2006.  In February 2007, Texas State Bank increased the line of credit to $800,000 using the Company’s accounts receivable and inventory as collateral.  In January 2008, the Company renewed  the secured line of credit agreement. The terms of the original line of credit remained the same with the exception of the payment date which was extended to January 2009.

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On April 11, 2006 the Company sold its 45,000 square foot Corpus Christi facility for $1.9 million to the Sepulveda Group, a California limited liability company. The Company entered into a five year lease back of the facility with a monthly rent of $20,385. The lease provides for a 3% yearly rent increase and an option to extend the lease for an additional five years. The Company invested $632,744 of the sale proceeds in a Certificate of Deposit with Texas State Bank which will be used as replacement collateral for the loan entered into in February 2005. Of the proceeds, $54,858 was used for a security deposit and rent for the facility, $88,671 was used to pay the 2005 property taxes and $14,088 was used as real estate and closing fees. The remaining $1.1 million in net proceeds were used to reduce liabilities and for operational expenses as needed.

On April 11, 2006, the Company entered into a licensing agreement with Discus Dental Holdings, Inc. (“Discus”) and its wholly owned subsidiary, Spectrum Dental, Inc. (“Spectrum Dental”), a leading provider of professional tooth whitening products under the brand names of “Contrastpm”, “Contrastpmplus” and “Contrastam”, under which AMT became the exclusive distributor of the Spectrum Dental product line, which provided  approximately $933,000 in additional revenue in 2006. The Sepulveda Group, LLC is affiliated with Discus. In full payment for the license, the Company issued Discus a warrant to purchase 2,500,000 shares of common stock at $0.20 per share.

The fair value of the warrants issued to Discus is estimated at the end of each period using the Black-Scholes option pricing model with the following assumptions used on December 31, 2007:  risk free interest rate of 3.52%; dividend yield of 0%; volatility factors of the expected market price of the Company’s common shares over the estimated life of the warrant of 6.42 years.  The calculated fair value of the warrant as of December 31, 2007 was $449,412.  The calculated fair value of the warrant on the grant date was $549,530 which the Company capitalized as an intangible asset and is recognizing as a licensing fee over the vesting period of five years.

In 2006, the Company entered into a new phase of its corporate development.  The first step in the transition was to infuse the existing executive and sales management teams with fresh talent.  The second step in the transition was to review the status of AMT’s existing core products and as a result of this review, the Company is exploring the discontinuation of some of its mature product lines in order to reduce spending and to outsource some of the Company’s equipment service and maintenance in order to take advantage of lower overhead costs.

In 2007, the Company continued to include the Hydro Jet in its product offering, selling through its existing international network of dealers; however, no significant investment was made  to upgrade the product technology or to market the products.

In 2008, the Company continued the alteration of its basic business model from that of traditional manufacturing to one of a product-brokering organization, directing the sales of products from contractually bound manufacturers to the international dental market.  Under the new business model, AMT is in the process of  positioning itself as the premier “outsourced sales organization” for companies seeking the international sale and distribution of their unique dental products.  In 2007, the Company added DirectCrown , temporary crown and bridge materials; SheerVision headlamps and loupes; BriteSmile professional tooth whitening and BreathRx professional oral care products to the list of products being distributed or represented by the Company.   The Company believes it can continually grow contractually protected revenue by increasing the sales of existing products and by the sales of new product lines, while minimizing overhead costs and inventory liabilities with the addition of brokered product lines.

The Company has suffered recurring losses from operations, and its total liabilities exceeds its total assets. This raises substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to generate positive operational cash flow is dependent upon increasing revenues through the sales of existing product lines and the expansion related to the representation of additional lines of dental products.  While the Company has identified additional product lines and has ongoing dialogs with dental product manufacturers, there can be no assurance that the Company will be successful in finalizing the contract for representation of these products or that the Company will be successful in generating a positive operational cash flow.

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The following table summarizes AMT’s contractual obligations as of December 31, 2007:

* Variable interest rate on note. Interest rate used was as of December 31, 2007.

New Accounting Standards and Disclosures

In June 2006, FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes”, an interpretation of FASB Statement 109 Accounting for Income Taxes, was issued.  FIN No. 48 describes accounting for uncertainty in income taxes, and includes a recognition threshold and measurement attribute for recognizing the effect of a tax position taken or expected to be taken in a tax return.  FIN No. 48 is effective for fiscal years beginning after December 15, 2006.  The Company’s adoption of  FIN No. 48 on January 1, 2007, had no material effect on the Company’s financial condition, results of operations, or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” which defers the effective date of Statement 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. As of January 1, 2008, the Company does not have any recurring fair value measurements and has opted for the deferral. Accordingly, the Company has not implemented and is currently evaluating the impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a material impact on its results from operations or financial position.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to measure eligible assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. As of January 1, 2008, the Company did not elect the fair value option on any financial instruments or certain other items as permitted by SFAS 159.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) (SFAS 141R), “Business Combinations,” which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years

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beginning after December 15, 2008. The adoption of SFAS 141R is not expected to have a material impact on the Company’s results from operations or financial position.

In December 2007, the FASB also issued Statement of Financial Accounting Standards No. 160 (SFAS 160), “Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS 160 requires that accounting and reporting for minority interests be re-characterized as non-controlling interests and classified as a component of equity. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 is not expected to have a material impact on our results from operations or financial position.

Off Balance Sheet Arrangements

As of December 31, 2007, The Company has no off balance sheet arrangements.

ITEM 7.               FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  To The Stockholders and Board of Directors

American Medical Technologies, Inc.

We have audited the accompanying consolidated balance sheets of American Medical Technologies, Inc. as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.   An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Medical Technologies, Inc. as of December 31, 2007 and 2006 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with United States generally accepted accounting principles.

We were not engaged to examine management’s assertion about the effectiveness of American Medical Technologies, Inc.’s internal control over financial reporting as of December 31, 2007 included in the accompanying Management Evaluation of Internal Controls and, accordingly, we do not express an opinion thereon.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the annual financial statements for the year ended December 31, 2007, the Company has suffered recurring losses from operations, and its total liabilities exceeds its total assets. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial

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statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Also as discussed in note 1 to the accompanying consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment .

Hein & Associates LLP

Houston, Texas

April 9, 2008

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AMERICAN MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

See accompanying notes to consolidated financial statements.

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AMERICAN MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2007 AND 2006

See accompanying notes to consolidated financial statements.

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AMERICAN MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

YEARS ENDED DECEMBER 31, 2007 AND 2006

See accompanying notes to consolidated financial statements.

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AMERICAN MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND 2006

See accompanying notes to consolidated financial statements.

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American Medical Technologies, Inc.

Notes to Financial Statements

1.    ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Operations and Principles of Consolidation — American Medical Technologies, Inc. (“AMT” or the “Company”) develops, manufactures, markets and sells high technology products primarily for dentistry; and distributes tooth whitening products.  The consolidated financial statements include the accounts and operations of the Company and American Medical Technologies GmbH, its German subsidiary.  All intercompany transactions and balances have been eliminated.

Going Concern — The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company incurred a net loss attributable to common shareholders of $952,856 and $1,421,992 for the years ended December 31, 2007 and December 31, 2006, respectively.  The Company’s recurring losses from operations and the Company’s total liabilities exceeding its total assets raise substantial doubt as to the Company’s ability to continue as a going concern.  The Company believes that the increases in revenue and gross margin due to the addition of new product line representations and additional funds available from the line of credit will alleviate the doubt about the Company’s ability to continue as a going concern; however, no assurances can be made.

Inventories — Inventories are stated at the lower of cost, determined by the first-in first-out method, or market.  At December 31, 2007 and 2006, inventories consisted of the following:

Inventories at December 31, 2007 and 2006 are net of valuation allowances of approximately $1,000,000 and $1,700,000, respectively.  During the year ended December 31, 2007, the Company liquidated or disposed of approximately $850,000 of inventory that was previously included in the Company’s inventory valuation allowance.

The Company’s reserve for slow moving inventory is evaluated periodically based on its current and projected sales and usage. The inventory reserve calculation assumes that any parts on hand exceeding three years of projected usage are subject to complete valuation allowance. For purposes of computing the valuation allowance at December 31, 2007, part usage was projected at 50% of 2007 part usage. The valuation allowance could change materially, either up or down, if actual part usage in future years is materially different than the usage projected at December 31, 2007; however, the new cost basis cannot subsequently be marked up based on changes in underlying facts and circumstances.

Property and Equipment — Property and equipment are stated at cost less accumulated depreciation.  Depreciation is computed by the straight-line method over the estimated useful lives of the related assets, which range from three to ten years.  Depreciation is not included in cost of sales.  At December 31, 2007 and 2006 property and equipment consisted of the following:

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Investments — During 2005, the Company borrowed $1.35 million in margin loans from its investment brokerage house. Interest received and matured securities were used as payments on these loans, with additional borrowing as needed for cash requirements. The balance on the margin loans as of December 31, 2005 was $822,290.  The margin loans were set up with a variable interest rate. The interest rate as of December 31, 2005 was 8.375%.  During 2006, the Company borrowed an additional $206,000 in margin loans from its investment brokerage house.  Interest received and matured securities were used to pay the balance on the margin loans in the third quarter of 2006.

In April 2006, the Company sold to and leased back from the Sepulveda Group, LLC, a building and property located in Corpus Christi, Texas.  The gross sale proceeds were $1.9 million.  A gain of $778,447 was recognized, $503,202 of which was deferred at December 31, 2007 and is being amortized over the term of the lease.

In April 2006, the Company invested $632,744 in a Certificate of Deposit with Texas State Bank which was used as replacement collateral for a loan entered into in February 2005.  This Certificate of Deposit was redeemed in December 2006.

In December 2006 the Company invested $300,000 in a Certificate of Deposit with Texas State Bank which was used as collateral for a line of credit extended to the Company by Texas State Bank.

Revenue Recognition —  The Company recognizes revenue when all of the following criteria are met:  1) a contract or sales arrangement exists, the buyer is obligated to pay and such obligation would not be changed in the event of theft or physical destruction or damage of the product; 2) products have been shipped, and if necessary installed, and title has been transferred or services have been rendered; 3) the price of the products or services is fixed or determinable; 4) no further obligation exists on the part of the Company (other than warranty obligations); and 5) collectibility is reasonably assured.  The Company grants a thirty day unconditional money-back guarantee on selected products and a warranty for one year on parts and labor on defective parts and equipment. The Company accrues its estimated exposure to returns and warranty claims based on historical average returns and claims paid.  None of the Company’s current product lines require installation. The Company’s policy is to include shipping and handling costs, net of related revenues, in costs of goods sold.

Receivables and Credit Policies -Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Payments on trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices. The carrying amount of trade receivables is reduced by a valuation allowance for any invoices over 90 days past due and 5% of the remaining balance. Additionally, management addresses significant individual accounts for collectibility and provides an additional allowance if necessary.

Intangible Assets — Intangible assets consist of patents, and are stated at cost less accumulated amortization.

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Goodwill and intangible assets that have indefinite useful lives are tested at least annually for impairment.  Intangible assets with finite useful lives will continue to be amortized over their useful lives.

The Company has amortizable intangible assets as of December 31, 2007 and 2006 as follows:

Amortization expense related to finite lived intangibles was $150,861 and $80,806 for the years ending December 31, 2007 and December 31, 2006, respectively.  The following table shows the estimated amortization expense in total for all finite lived intangible assets to be incurred over the next five years.

Earnings Per Share — The following table sets forth the computation for basic and diluted earnings per share:

Potentially dilutive securities include options and warrants.  As of December 31, 2007 and December 31, 2006 there were approximately 825,000 and 159,000 shares issuable, respectively, in connection with these potentially dilutive securities.  These potentially dilutive securities were excluded from the computations of diluted net loss per share for both years because their effect would have been antidilutive.

Comprehensive Loss — The Financial Accounting Standards Board’s Statement No. 130, Reporting Comprehensive Income requires foreign currency translation adjustments and unrealized income (loss) on available for sale securities to be included, along with net loss, in comprehensive loss.

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Stock Based Compensation — Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised), “Share-Based Payment.”  Under the fair value recognition provisions of SFAS No. 123(R), stock based compensation is measured at the grant date based on the value of the awards and is recognized as expense over the requisite service period (usually the vesting period). The Company selected the modified prospective method of adoption described in SFAS No. 123(R); as such, no prior periods have been restated. The Company has a policy of issuing new shares for stock option exercises.

Advertising — The Company expenses advertising costs as incurred.  Advertising expense approximated $27,000 and $19,000 in 2007 and 2006, respectively.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from these estimates.  The determination of the Company’s valuation allowance for inventory is a significant estimate that could change materially over the next year should circumstances affecting the Company’s current sales volumes change.  The calculated fair value of the warrants issued to Discus is a significant estimate that could change materially over the next year should there be a significant change in the market value of the Company’s common stock.

Fair Value of Financial Instruments — The fair value of the Company’s cash, accounts receivable, line of credit and accounts payable approximates their carrying value due to their short-term nature.  The fair value of the Company’s preferred stock which was outstanding at December 31, 2006 approximates fair value as its terms and yield approximates current market conditions.

Reclassifications - Certain amounts in the prior year have been reclassified to conform to the current year presentation. Such reclassifications had no effect on previously reported net loss.

Issuance of Options and Warrants -   The Company periodically issues options and warrants to purchase stock at a price which may be higher or lower than the strike price of the stock on the grant date.  The fair value of the options and warrants issued is estimated at the date of the grant using the Black Scholes pricing model.  The Company recognizes the expense over the vesting period of the options and warrants.  The Company has a policy of issuing new shares for the exercise of options and warrants.

2.    AGREEMENTS WITH RELATED PARTIES

Roger Dartt —The Company renewed its employment agreement with Mr. Dartt effective June 1, 2004 and extended the term to end December 31, 2006.  Under the renewed employment agreement, Mr. Dartt’s base salary was $250,000 per year, and he received a signing bonus of $166,000, which he used to purchase 250,000 shares of Company common stock at $0.33 per share pursuant to options previously granted.  Mr. Dartt agreed not to compete with the Company for one year after termination.  The employment agreement was not renewed on December 31, 2006. Mr. Dartt continued as Chairman of the Board for the Company until his resignation on October 31, 2007.  In consideration for his continued work during the three month period ended March 31, 2007, the Company agreed to issue 200,000 shares of common stock to Mr. Dartt.  The Company issued 200,000 restricted shares of common stock to Mr. Dartt in August 2007 and recorded an expense of $60,000.

Judd D. Hoffman - The Company entered into an employment agreement with Mr. Hoffman effective January 1, 2007, naming him as the Company’s President and Chief Executive Officer for a term ending December 31, 2009.  The employment agreement provides for an annual base salary of $210,000, an increase of not less than 5% on each anniversary date, an incentive bonus in 2007 based on profit and the option grant to purchase 850,000 shares of stock at a price of $.20 per share.  The options vest as follows:  100,000 immediately and 250,000 vesting on the last day of the first, second and third years of the employment term.  Additionally, in June 2006 Mr. Hoffman was granted the

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option to purchase 100,000 shares of stock at a price of $0.27 per share.  This option grant vested on September 16, 2006.  The employment agreement can be terminated for cause if Mr. Hoffman fails to perform his duties with the Company, engages in gross misconduct in connection with his work for the Company, commits a breach of this agreement or commits a felonious or fraudulent act against the Company.  If his employment is terminated without cause, Mr. Hoffman is entitled to 12 month’s salary and any portion of stock options will immediately vest and be exercisable for a period of 90 days.

3.    OTHER EVENTS

License Agreement CrownBeav LLC – DirectCrown product line   On April 1, 2007, the Company entered into a License Agreement with CrownBeav LLC, an Oregon limited liability company, under which the Company became the nonexclusive distributor for the United States and Canada and the exclusive distributor for the rest of the world of it’s DirectCrown brand of temporary crown and bridge material.  The license agreement is for a term of ten years with automatic renewals for additional five year terms, contains minimum requirements for sale of the products by the Company, and may be terminated (i) for cause upon 60 days notice, (ii) upon the Company’s failure to comply with applicable securities laws, (iii) upon the occurrence of certain other customary events of default.  In full consideration, the Company granted to CrownBeav a five year option to purchase (the “Option”) 1,000,000 shares of common stock at $0.20 per share.  The shares subject to the Option will vest two years from the Effective Date of the agreement.  The option agreement includes a guaranteed trading price of $0.40 per share for the 30-day period prior to vesting.  Additional option shares will be granted for the difference if the market price of the shares is below $0.40 during the 30-day period.

The Black-Scholes option pricing model was used to determine the fair value of the options issued to CrownBeav with the following assumptions:  risk free interest rate of 4.54%; dividend yield of 0%; volatility factors of 139%, the expected market price of the Company’s common shares over the estimated life of the option of 3.5 years.  The resulting fair value of the call option was $341,726.  The option grant vests on April 1, 2009.  The option agreement includes a guaranteed trading price of $0.40 per share for the 30-day period prior to vesting.  Additional option shares will be granted for the difference if the market price is below $0.40 during the 30-day period.  The Black-Scholes option pricing model was used to determine the fair value of the option guarantee issued to CrownBeav with the following assumptions:  risk free interest rate of 4.60%; dividend yield of 0%; volatility factors of 100%, the expected market price of the Company’s common shares over the guarantee period of 2 years.  The resulting fair value of the put option was $185,000.  The $526,726 fair market value of the option (combination of call and put) was capitalized as an intangible asset and is being recognized as a licensing fee over the 10 year period of the license.

License Agreement – Spectrum product line . On April 11, 2006, the Company entered into an Exclusive License Agreement (the “License Agreement”) with Discus Dental Holdings, Inc., under which the Company became the exclusive, worldwide distributor of the proprietary dental products manufactured and sold by Discus’ wholly owned subsidiary, Spectrum Dental, Inc. (“Spectrum”). The License Agreement is for a term of five years, contains minimum requirements for sale of the products by the Company, and may be terminated (i) for cause upon 30 days notice, (ii) at certain times during the term of the License Agreement if the Company fails to maintain positive net income for a specified period, (iii) upon the Company’s failure to comply with applicable securities laws, (iv) if any judgment is rendered against the Company, or it defaults on any debt, in excess of $50,000, (v) upon any change in the Company’s results of operation or condition which in the sole opinion of Discus has or could have a material adverse effect on the Company’s condition, business, properties or prospects, and (vi) upon the occurrence of certain other customary events of default. As full consideration, the Company granted to Discus a ten year warrant (the “Warrant”) to purchase up to 2,500,000 shares of its common stock at $0.20 per share. The shares subject to the Warrant vest 500,000 after the first year and an additional 41,667 shares on each successive full one-month period thereafter until the fifth anniversary of the date of grant; however vesting ceases upon the sale of Spectrum Dental to the Company as contemplated by the Option Agreement described below. The shares subject to the Warrant are adjusted upon the occurrence of certain events including a stock dividend, reclassification,

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merger and stock split, and upon the issuance of shares for a consideration per share less than the applicable conversion price of the Warrant, with certain exceptions for compensation paid in stock.

The fair value of the warrants issued to Discus is estimated at the end of each period using the Black-Scholes option pricing model with the following assumptions used on December 31, 2006:  risk free interest rate of 4.59%; dividend yield of 0%; volatility factors of the expected market price of the Company’s common shares over the estimated life of the warrant of 6.42 years.  The calculated fair value of the warrant was $549,530 which the Company capitalized as an intangible asset and is recognizing as a licensing fee over the vesting period of five years.

Registration Rights Agreement . Also on April 11, 2006, the Company entered into a Registration Rights Agreement with Discus pursuant to which it agreed, at its own expense, to register the shares acquired by Discus under the Warrant or the Option Agreement with the SEC not later than April 11, 2007, and to use its reasonable best efforts to cause the registration statement to be declared effective by the SEC as soon as practicable thereafter. The Company must, subject to certain specified circumstances, maintain the effectiveness of the registration statement for a specified period of time. The Company also granted to Discus piggyback rights for other registration statements filed by it with the SEC for the sale of its shares.

The Registration Rights Agreement between the Company and Discus provides that the Company shall file a shelf registration relating to the offer and resale of shares issuable upon exercise of the warrant not later than an unspecified date in April 2007.  As of the date of the filing of this Form 10-KSB, the Company has not filed such registration statement.   The Registration Rights Agreement requires physical or net-share settlement by delivery of registered shares and does not specify any circumstances under which net-cash settlement will be permitted or required and the contract does not specify how the contract will be settled in the event that the Company is unable to deliver registered shares.  Therefore,  net-cash settlement is assumed if the Company is unable to deliver registered shares and the warrants are classified as a liability.

Option Agreement – Spectrum product line . On the same date as the Company entered into the Licensing Agreement, the Company and Discus entered into a Put and Call Option Agreement (the “Option Agreement”) whereby Discus has a put option to compel the Company to purchase all the outstanding shares of capital stock of Spectrum , and the Company has a call option to compel Discus to sell such shares, at any time after April 11, 2007 and before the earlier to occur of the termination or expiration of the License Agreement or five years. Notwithstanding the foregoing, the Company may not exercise its call option if the price at which its shares of common stock are trading, or the average trading price of its shares during the preceding 30 day period, is less than $0.60 per share. The exercise price of the option will be between $2,300,000 and $2,662,537, depending on the date of exercise. The purchase price will be paid with a combination of cash and 3,000,000 shares of Company common stock (subject to adjustment); provided that if that aggregate value of the specified amount of cash and the value of the stock based on the average trading value of the Company’s stock for the 30 days preceding the closing of the Option Agreement is less than the applicable exercise price, then the Company must issue additional shares to equal the value of the exercise price. At the option of the parties, the exercise price can be paid in all cash; however, if the Company first elects to exercise its call option, the method of payment of the exercise price will be at the election of Discus. Upon the exercise of the option, the parties are required to enter into a Stock Purchase Agreement substantially in the form agreed to in the Option Agreement for the purchase and sale of the Spectrum shares.

Manufacturing Agreement – Spectrum product line  The Company also entered into a Manufacturing Agreement with Westside Packaging, Inc. (“Westside”) a wholly owned subsidiary of Discus and the current manufacturer, for the manufacture of the products and sale to the Company for distribution under the License Agreement. The products manufactured are sold under the trademarks Contrastpm, Contrastam, FastDam and FastTrak. The Manufacturing Agreement is for a term of three years with automatic one year renewal terms unless either party gives notice of non-renewal.

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Standstill Agreement   Effective January 16, 2007, Discus, Spectrum and Westside, on the one hand, and the Company, on the other hand, entered into a Standstill Agreement, in which each of the parties agreed that there are pending disputes among them concerning the existence and/or extent of any performance issues under agreements among them, including, without limitation, the License Agreement and Manufacturing Agreement (collectively, the “Agreements”).  It is the Company’s position that the Agreements are in effect.  Discus has agreed not to dispute the Company’s position, but has reserved, together with the Company, all rights, claims and/or defenses relating to the Agreements.  The parties to the Standstill Agreement have agreed to discuss potential resolution of any disputes arising out of the Agreements.  Further, the parties have agreed that any party may terminate the Standstill Agreement by providing the other party with 10 days written notice.  The parties further agreed that no party to the Standstill Agreement may commence any legal action against the other party prior to termination of the Standstill Agreement.  The Standstill Agreement is dated February 1, 2007.

Sale and Leaseback Arrangement. On April 11, 2006, the Company sold to and leased back from the Sepulveda Group, LLC, a California company affiliated with Discus (“Sepulveda”), the 45,000 square foot building and property located in Corpus Christi, Texas. The gross sale proceeds were $1.9 million, and the monthly rent for the facility is $20,385 for the five year term, with a 3% yearly increase and an option to extend the lease term for an additional five years.

The Company invested $632,744 of the sale proceeds in a Certificate of Deposit with Texas State Bank which will be used as replacement collateral for the loan entered into in February 2005. Of the proceeds, $54,858 was used for a security deposit and rent for the facility, $88,671 was used to pay the 2005 property taxes and $14,088 was used as real estate and closing fees. The remaining $1.1 million in net proceeds were used to reduce liabilities and for operational expenses as needed.   The gain of $778,447 on the sale of the building was recorded on the Company’s balance sheet as deferred gain on sale of building and is being recognized over the term of the lease as a credit to rental expense.  The Company recorded a credit of $152,873 and  $122,372 in rental expense during the years ended December 31, 2007 and December 31, 2006, respectively.

Amendment to Loan Agreement . As a result of the sale and leaseback arrangement described above, the Company, under its loan agreement with Texas State Bank dated February 9, 2005 in the original principal amount of $682,000, executed a change of collateral agreement. The loan was originally secured by a primary lien on the Company’s building and other real property, and the final principal payment was due in full in February 2008. The Company invested $632,744 in a Certificate of Deposit with a term of one year as collateral for the outstanding principal remaining on the loan. The original terms of the loan remained the same.  In December 2006, the Company redeemed the Certificate of Deposit and used proceeds as full payment of loan.

4.    NOTE PAYABLE & LINE OF CREDIT

On February 9, 2005 the Company entered into a secured loan agreement with Texas State Bank in the amount of $682,000. The loan was secured by a primary lien on the Company’s building and other real property.  Interest on the loan was at the prime rate plus 1%.  The principal on the loan was payable in 35 monthly installments of $3,789 plus interest with the final principal payment due in full in February 2008.  The funds received from this loan were used to retire the note held by Aimee Maroney which matured on December 31, 2004.  In April 2006, the Company invested $632,744 in a Certificate of Deposit with a term of one year as collateral for the outstanding principal remaining on the loan. The original terms of the loan remained the same.  In December 2006, the Company redeemed the Certificate of Deposit and used the proceeds to pay the balance on the note.

On December 21, 2006, the Company entered into a secured line of credit agreement with Texas State Bank.  The funds available under the line of credit were $600,000.  The Company invested $300,000 with funds drawn against the line of credit in a Certificate of Deposit with a term of one year as collateral for the loan.  Interest on the line of credit is set at the prime rate plus 1%.  The interest rate on the line of credit was 9.25% as of December 31, 2006.  The principal on the loan was payable in

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one payment on December 20, 2007, with interest on the outstanding amount payable monthly.  The Company borrowed an additional $100,000 against the line of credit in December 2006.  In February 2007, Texas State Bank increased the line of credit to $800,000 using the Company’s accounts receivable and inventory as additional collateral.  The terms of the original line of credit remained the same with the exception of the payment date of the line being extended to February 2008.  The balance outstanding was $500,000 at December 31, 2007.  In January 2008, the Company renewed  the secured line of credit agreement. The terms of the original line of credit remained the same with the exception of the payment date which was extended to January 2009.

The Company paid interest of approximately $52,600 and $107,200 in 2007 and 2006, respectively.

5.    PREFERRED STOCK, STOCKHOLDERS’ EQUITY, STOCK OPTIONS AND WARRANTS

Preferred Stock

The Company has authorized up to 575,000 shares of Series B Preferred Stock at a per share price of $1 per share.  The holders of the Series B Preferred Stock are entitled to (i) receive an annual cumulative dividend at the rate of 10%, payable prior to dividends of any shares of common stock, (ii) two and one-half times the number of votes to which a holder of the same number of common shares is entitled, (iii) receive two and one-half shares of common stock for each share of Series B Preferred Stock tendered for conversion after September 30, 2005, (iv) require the Company to redeem shares of Series B Preferred Stock at the original sales price, plus accrued cumulative dividends, upon prior notice after September 30, 2005, or in the event of a merger, sale of a majority of the stock or sale of substantially all of the assets of the Company, and (v) receive a liquidation preference equal to the original sales price plus accrued cumulative dividends, prior to the rights of holders of the Series A Preferred Stock and common stock.  On September 30, 2007, all outstanding shares of Series B Preferred Stock were automatically redeemable at the original sales price plus accrued cumulative dividends and shares were recorded as a liability at December 31, 2006.  However, in September 2007, the holders of the Series B Preferred Stock tendered the 400,000 shares outstanding for conversion and the Company issued to the holders 1,000,000 shares of common stock.  The Company declared and paid $25,963 of Series B Preferred dividends in the period ended September 30, 2007.  Additionally, in the period ended September 2007, the Company paid $80,000 of Series B Preferred dividends declared and accrued in 2005 and 2006.

Employee Stock Option Plan

The Company currently sponsors a stock based compensation plan as described below. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised), “Share-Based Payment.”  Under the fair recognition provisions of SFAS No. 123(R), stock based compensation is measured at the grant date based on the value of the awards and is recognized as expense over the requisite service period (usually the vesting period). The Company selected the modified prospective method of adoption described in SFAS No. 123(R); as such, no prior periods have been restated. The fair values of the stock awards recognized under SFAS No. 123(R) are determined based on each separately vesting portion of the awards, however, the total compensation expense is recognized on a straight-line basis over the vesting period. The Company has a policy of issuing new shares for stock option exercises.

In accordance with the provisions of SFAS No. 123(R), there was $89,383 in stock based compensation expense recorded in the twelve month period ended December 31, 2007.

Prior to 2006, the Company accounted for stock based compensation using the intrinsic value method prescribed in Accounting Principals Board (“APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under APB Opinion No. 25, no compensation expense was recognized for stock options issued to employees because the grant price equaled or was above the market price on the date of grant for options issued by the Company.

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The Company had three stock option plans for employees, officers, directors, consultants and other key personnel which expired prior to December 31, 2004.    As of December 31, 2007, the Nonqualified Stock Option Plan has no options outstanding; the Long-Term Incentive Plan had options outstanding to acquire 4,680 shares; and the Stock Option Plan for Employees has no remaining options outstanding.

In May 2005, the Company adopted the 2005 Stock Option Plan (the “Plan”) for employees, officers, directors, consultants and other key personnel.  When the Plan was implemented there were options to purchase 1,000,000 shares common stock available to be granted under the Plan.  In the first quarter of 2007, the Company increased the number of options to purchase to 2,000,000 shares of common stock.

The Company granted 400,000 share options in June 2006 under the Plan.  The share options became exercisable at a rate of 100,000 per year beginning in September 2006.  The fair value of the options issued was estimated at the date of the grant using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 5.14%; dividend yield of 0%, volatility factors of 238%, the expected market price over the estimated life of the option of 6.25 years.  In January 2007, the unvested portion of this grant was cancelled.  The calculated fair value of the portion of the option grant that remained was $26,813.  The Company recognized the full expense in 2006.

The Company granted 100,000 share options in January 2007 under the Plan.  The share options became exercisable upon the grant date.  The fair value of the options issued was estimated at the date of the grant using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 4.68%; dividend yield of 0%, volatility factors of 241%, the expected market price over the estimated life of the option of 5.5 years.    The calculated fair value of the option grant was $19,916.  The Company recognized the expense in the first quarter 2007.

Additionally, the Company granted 870,000 share options in January 2007 under the Plan.  The share options will become exercisable at a rate of 250,000 per year beginning in December 2007.  The fair value of the options issued was estimated at the date of the grant using the Black-Scholes pricing model with the following assumptions:  risk free interest rate of 4.68%, dividend yield of 0%, volatility factors of 243%, the expected market price over the estimated life of the option of 6 years.  The calculated fair value of the option grants was $173,567.  The Company is recognizing the expense of over the three year vesting period of the options.

The Company granted 11,000 share options in February 2007 under the Plan.  The share options will become exercisable in February 2008.  The fair value of the options issued was estimated at the date of the grant using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate 4.77%, dividend yield of 0%, volatility factors of 234% the expected market price over the estimated life of the option of 5.5 years.  The calculated fair value of the option grants was $2,188.  The Company is recognizing the expense over the vesting period of the options.

The Company granted 60,000 share options in March 2007 under the Plan.  The share options will become exercisable at a rate of 30,000 per year beginning in March 2008.  The fair value of the options issued was estimated at the date of the grant using the Black-Scholes pricing model with the following assumptions:  risk free interest rate of 4.5%, dividend yield 0%, volatility factors of 247%, the expected market price over the estimated life of the options of 5.75 years.  The calculated fair value of the option grants was $25,132.  The Company is recognizing the expense over the two year vesting period of the options.

As of December 31, 2007, there was $131,416 in unrecognized compensation cost related to nonvested share based compensation arrangements granted under the Plan.

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The Company’s nonvested shares as of December 31, 2007 and changes during the period ended December 31, 2007, is summarized as follows:

Employee stock option activity is summarized as follows: