Edgar Filing: SPONGETECH DELIVERY SYSTEMS INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB

(Mark One)

|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED MAY 31, 2006

|_| TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER ________________________________

SPONGETECH DELIVERY SYSTEMS, INC.
---------------------------------
(Name of small business issuer in its charter)

Delaware 54-2077231
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)

The Empire State Building
350 Fifth Avenue, Suite 2204
New York, New York 10118
(Address of principal executive offices) (Zip Code)
Issuer's telephone Number: (212) 594-4175

Copies to:
Richard A. Friedman, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone: (212) 930-9700
Fax: (212) 930-9725

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

Securities registered under Section 12(g) of the Exchange Act: None

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

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. |X|

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

State issuer's revenues for its most recent fiscal year. $12,859.

State the aggregate market value of the voting and non-voting common
equity held by non-affiliates, computed by reference to the average bid and
asked price of such common equity, as of a specified date within the past 60
days. There is currently no public trading market for the issuer's common
equity.

As of August 28, 2006, the issuer had 34,072,636 outstanding shares of
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

Transitional Small Business Disclosure Format (check one): Yes |_| No |X|

TABLE OF CONTENTS

Page
----

PART I
Item 1. Description of Business.................................................................... 1
Item 2. Description of Property.................................................................... 4
Item 3. Legal Proceedings.......................................................................... 4
Item 4. Submission of Matters to a Vote of Security Holders........................................ 4

PART II

Item 5. Market for Common Equity and Related Stockholder Matters................................... 5
Item 6. Management's Discussion and Analysis or Plan of Operation.................................. 6
Item 7. Financial Statements....................................................................... 15
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure....... 15
Item 8A. Controls and Procedures.................................................................... 15
Item 8B. Other Information.......................................................................... 15

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.......................................... 15
Item 10. Executive Compensation..................................................................... 16
Item 11. Security Ownership of Certain Beneficial Owners and Management............................. 17
Item 12. Certain Relationship and Related Transactions.............................................. 18
Item 13. Exhibits................................................................................... 20
Item 14. Principal Accountant Fees and Services..................................................... 21

SIGNATURES................................................................................. 22

PART I

Item 1. Description of Business.

We design, produce, market and distribute cleaning products for vehicular use
utilizing patented technology relating to sponges containing hydrophilic, which
are liquid absorbing, foam polyurethane matrices. Our products can be pre-loaded
with detergents and waxes which are absorbed in the core of the sponge then
gradually released during use. We license the rights to manufacture and sell our
products from H.H. Brown Shoe Technologies, Inc. (d/b/a Dicon Technologies), the
holder of the relevant patents relating to the hydrophilic sponges. We have
designed and Dicon Technologies is conducting research and development for
products using the same hydrophilic technology for bath and home use which we
intend to market and sell as part of our product offering. There is no assurance
that we will successfully be able to market and sell products for bath and home
use.

Since our inception, we have had sales of $342,019, $1,858 and $1,051 for the
fiscal years ended May 31, 2003, 2004 and 2005 respectively. For the year ended
May 31, 2006, we had sales of $12,859. We have incurred losses since inception
and we expect to incur losses for the foreseeable future. For the fiscal years
ended May 31, 2006, 2005 and, 2004, we incurred net losses of $101,764, $58,699,
and $2,056,526, respectively. As a result of the foregoing, our independent
auditors, in their report covering our financial statements for the year ended
May 31, 2006, stated that our financial statements were prepared assuming that
we would continue as a going concern.

Corporate Background

We were formed on June 18, 1999, under the name Romantic Scents, Inc. On June
12, 2001, Romantic Scents, Inc. changed its name to RSI Enterprises, Inc., and,
on October 2, 2002, changed its name to Spongetech International Ltd. On July
15, 2002, we entered into a stock purchase agreement with Nexgen Acquisitions
VIII, Inc., a blank check company, pursuant to which our sole stockholder, RM
Enterprises International, Inc. received 12,000,000 shares of Nexgen
Acquisitions VIII, Inc. and thereby became its majority stockholder. The
transaction was accounted for as a reverse acquisition using the purchase method
of accounting, whereby RM Enterprises International, Inc., our sole shareholder,
retained approximately 63% of the outstanding common stock. Thereafter, on
October 9, 2002, Nexgen Acquisitions VIII, Inc. changed its name to Spongetech
Delivery Systems, Inc. On December 16, 2002, we changed our domicile to
Delaware. Spongetech Delivery Systems, Inc. (formerly Nexgen Acquisitions VIII,
Inc.) merged with and into us so that we became the surviving company.
Immediately subsequent to the merger, we changed our name to Spongetech Delivery
Systems, Inc.

On March 1, 2004, our Certificate of Incorporation was voided by the State of
Delaware for non-payment of franchise taxes in the amount of $114.40, including
interest, fees and penalties for 2002 and $164.49, including taxes, fees and
penalties for 2003, which outstanding amounts were paid on June 27, 2005.On June
27, 2005, a Certificate for Renewal and Revival of our Certificate of
Incorporation (the "Certificate") was filed with the State of Delaware, which
restored, renewed and revived our Certificate of Incorporation commencing
February 29, 2004. In accordance with Delaware Corporation law, upon the filing
of the Certificate, our Certificate of Incorporation was renewed and revived
with the same force and effect as if it had not been voided. Such reinstatement
validated all contracts, acts, and matters, done and performed by our officers
and agents within the scope of our Certificate of Incorporation during the time
the Certificate of Incorporation was voided.

The Technology

We entered into a license agreement on July 1, 2001 for patented technology
relating to hydrophilic polyurethane matrices on an exclusive basis. The
technology is owned by and licensed from H.H. Brown Shoe Technologies, Inc.,
Greenwich, Connecticut (d/b/a Dicon Technologies), a majority-owned subsidiary
of Berkshire Hathaway, Inc. which owns the patent rights. Our license applies to
the cleaning and polishing of land, sea and air transportation vehicles. We have
an oral understanding but no written agreements with Dicon that would permit us
to develop products using the same sponge technology in other areas, including
household cleaning and personal care.

Our license is a continuing one for the full life of the design patent, which
was jointly developed by one of our former employees, and which covers the
design, manufacture and use of a liquid-absorbent layer in a "molded sponge
design." The patent expires in 2017.

The license agreement mandates that we purchase our hydrophilic sponge products
from Dicon unless Dicon ceases its business operations, either totally or with
respect to the manufacture of the molded sponge design within the scope of the
design invention as set forth in the agreement. If such event occurs, we are
permitted to use other manufacturers.

Pursuant to the license agreement, Dicon retains title to the technology. Thus,
when the license expires, we have to give up any and all design rights to
products that we have developed using the licensed technology. Dicon pays all
expenses in connection with filing and maintaining the patent. Certain minimum
quantities, as set forth in the requirements agreement with Dicon as discussed
below, are required to be purchased by us in order for us to continue our
exclusive use of the license. Dicon has the right, without restriction, to
license its technology in areas other than sponges for use in cleaning and
polishing transportation vehicles.

The technology has also been used to draw fluids out of a human body, such as
body odors, and store them in the polyurethane matrix. The technology was
originally contemplated for use in shoe liners, incontinence pads and nursing
pads. Currently, companies such as Payless Shoes and H.H. Brown Shoe Company
(the licensor) use the technology for inner soles to absorb sweat and odors.
Revlon is a licensee of the technology which it uses in a cosmetic make-up
removal product.

Our license is based on the discovery that if a sponge incorporating the
hydrophilic matrix is filled with detergents and waxes, the matrix would retain
these cleaning and polishing agents and could only be released when the sponge
is squeezed. Thus, soap or wax could be retained for many uses and the sponge
could be rinsed after use without losing the cleaning agent or wax.

On January 31, 2006, our license agreement was amended. Pursuant to the terms of
the amendment, we have the right to (i) enter into arrangements or agreements
with third parties to use third parties' logos, name, slogans and/or marks on
our products for advertising, promotion, manufacture, distribution and sale and
(ii) sublicense our rights pursuant to the license agreement, subject to and
consistent with the terms of the license agreement. In addition, we agreed to
grant to Dicon the exclusive right to manufacture any products ordered as a
result of any agreements with third parties to use third parties' logos, name,
slogans and/or marks on our products for advertising, promotion, manufacture,
distribution and sale.

Supply and Requirements Agreement

On July 1, 2001, we entered into an exclusive worldwide supply and requirements
agreement with Dicon under which we must purchase from Dicon certain minimum
quantities of our sponges containing the Dicon hydrophilic matrix as follows:

Annual Period Number of Sponge Products
------------- -------------------------
1st annual period 250,000
2nd annual period 500,000
and each succeeding
annual period 1,000,000

at the following prices:

Aggregate Purchases Price per sponge product
------------------- ----------------------
50,000 to 100,000 $.817 sponge only
100,000 to 250,000 $.795 sponge only
Over 250,000 $.778 sponge only

Each annual period begins on July 1 of the current year and ends on June 30 of
the following year. In the event the minimum quantities are not ordered in each
one-year period, we must pay Dicon liquidated damages of $.20 per sponge for the
deficiency. If we fail to pay the damages within 30 days of the end of the
annual period, Dicon may terminate the license agreement or render our license
non-exclusive for all subsequent periods. Dicon may, after the first annual
period, raise the prices it charges for the sponges only if such increase is
based on bona fide increases in material and labor costs plus an appropriate
markup for overhead. The agreement was renewed until June 30, 2006. We may use
other manufacturers in the event of a breach by Dicon or in the event of force
majeure which prevents production for 90 days. We ordered in 75,000 sponges in
the first year. In the second and third years of the contract we ordered 229,000
and 0 sponges, respectively. We therefore did not order the minimum quantity for
the term of the agreement and in December 2003, we paid $1,894.51 to Dicon for
any and all missed requirements. We have not paid any additional fees to Dicon
for any missed requirements. Since July 1, 2004 we have purchased 908 sponges.
On February 15, 2005, we entered into a letter agreement with Dicon, pursuant to
which Dicon confirmed that all required payments under the Supply and
Requirements Agreement had been made by us and agreed to extend our license
December 31, 2006.

Dicon has designed and installed specialized equipment for producing molded foam
products containing this superabsorbent polymer infused with detergents, soaps
and waxes used as an absorbing and cleaning sponge product. The agreement sets
forth minimum purchase requirements and pricing for the basic sponge product.
Using its patented processes, Dicon manufactures products derived from
"Hydrophilic Urethane Chemistry." The hydrophilic system has two parts, a
hydrophilic pre-polymer phase and a water phase. During the water phase, various
water soluble active ingredients are introduced into the products.

Products

We have designed specially configured sponges containing an outer contact layer
and an inner matrix. Dicon, our licensor and manufacturer, loads the inner
matrix of the sponge with specially formulated soaps and, in our licensed
automotive cleaning and polishing product, soap and wax. When the sponge is
applied to a surface with minimal pressure, the soap or soap and wax are
simultaneously applied to the surface. When the sponge is not in use, the
hydrophilic matrix holds the soap so that it does not leech out of the sponge.

We believe that our use of the patent has great marketing potential. We can
choose any variety of cleansers, including anti-bacterial and abrasive soaps.
Thus, we may fine-tune our products for use on different kinds of vehicles. New
vehicles or those prepared for classic car shows require a gentle cleaner,
whereas older cars which have developed a film over the paint or where the paint
has faded may require a cleanser containing a compounding substance, a gentle
abrasive. Depending on the use of our vehicular sponge, we may include wax, or
may only include the cleanser.

We have developed a children's bath foam sponge, with a "safe mesh" coating
which prevents tearing, in the shape of animals in various colors. The sponges,
which float, are infused with a gentle no-tear, non-irritating anti-bacterial
soap. The bath foam sponge does not lose its soap while it is floating in the
bath tub as the inner hydrophilic matrix retains the soap until the child
squeezes the sponge in use. We are exploring retail outlets to sell this
product, ranging from pharmacies to department stores. We also intend to market
this product directly. Dicon has orally agreed to manufacture this product for
us. We have not yet made sales and cannot offer any assurances that sales will
result from our proposed marketing campaign.

We have developed prototypes of household cleaning sponges infused with
anti-bacterial bath and kitchen soaps. The products are being testing by a
national detergent manufacturer for possible use under its logo and brand. We
cannot predict whether or not the manufacturer will purchase our sponges and, if
it does, whether the product will succeed in the marketplace.

Sales and Marketing

We have historically depended on one customer for almost all of our sales.
Specifically, in 2003, our most recent year of active operations, we sold an
aggregate of 183,000 sponges to TurtleWax, which represented approximately 75%
of our orders. These sales to TurtleWax resulted in net sales of approximately
$291,000 during the year ended May 31, 2003. Our last sale to TurtleWax was in
May 2003. TurtleWax has not placed any orders with us since that time. While we
remain in contact with TurtleWax and continue to have discussions with them, we
have not pursued sales to TurtleWax due to our lack of proper funding. This is
due to that fact that TurtleWax orders require us to have product on an in-stock
basis so that we can immediately ship to them upon receiving orders.

In February 2004, we inaugurated a website, www.spongetech.com, to sell our
vehicular cleaning kit directly to the public. Since inception, we have sold
approximately 509 kits for aggregate sales price of approximately $4,835. We pay
the website hosting company, Harbor Enterprises, a 20% royalty from the sales
price on all Internet sales. We have not entered into a contract with Harbor
Enterprises. Either party may terminate the relationship at any time. We ship
directly to customers.

On July 18, 2005, we entered into an oral agreement with Lidel Fitzmaurice,
Inc., a sales group that targets sales from Virginia to Vermont with eleven
sales representatives. The sales representatives will receive seven (7%) of net
sales which they generate and will be paid on the tenth day of the month
following the month in which the sales are made. To date, we have received
orders in the approximate amount of $14,625 from the efforts of Lidel
Fitzmaurice, Inc., which orders were filled in June and July 2006. Lidel
Fitzmaurice, Inc. has advised us that it intends to attend the following trade
shows in the next twelve months: the Los Angeles Auto Show, the North American
International Auto Show, the South Carolina International Auto Show, the West
Virginia Auto Show, the Pennsylvania Auto and Boat Show, the Northeast Auto
Show, the Motor Trend International Auto Show, the Chicago Auto Show, the
Virginia International Auto Show, the New York International Auto Show, the
Tampa Bay International Auto Show, the Charlotte International Auto Show and the
National Hardware Show. We do not anticipate that we will incur any costs in
connection with retaining the various sales groups as the sales groups will be
paid a percentage the net sales they generate only.

On January 27, 2006 we entered into an oral agreement with Bill Perry &
Associates, a sales group with 9 sales representatives that will target their
sales efforts to Georgia, Tennessee, Alabama, Mississippi, Florida, North
Carolina, South Carolina and Virginia. The sales representatives will receive
commissions in the range of six (6%) percent to eight (8%) percent of net sales
which they generate and will be paid on the tenth day of the month following the
month in which the sales are made.

On February 22, 2006, we entered into an oral agreement with Creative Marketing,
a sales group with 5 sales representatives who will target their sales efforts
to Arizona, California and Nevada. The sales representatives will receive
commissions in the range of five (5%) percent to seven (7%) percent of net sales
which they generate and will be paid on the tenth day of the month following the
month in which the sales are made.

New Product Development

Our new product development program consists principally of devising or testing
new products, improving the efficiency of existing ones, evaluating the
environmental compatibility of products and market testing. We estimate that our
management devotes 2,000 hours to developing a product, its packaging and its
marketing campaign. We have never paid nor do we expect to ever have to pay cash
compensation for any product development activities. We are considering the
expansion of our product lines to include household cleaning products and
personal hygiene products. Dicon produced samples for us of our children's bath
foam sponge and household cleaning sponge. We have not yet signed an agreement
with Dicon in connection with the children's bath or household cleaning sponges,
these sponges are still in the research and development stage.

New Marketing

The Company will focus on its efforts on increasing its sales through the hiring
of various sales groups and its attendance at various trade shows. The Company
also intends to continue to promote its products through its website.

Competition

The market for consumer products is highly competitive. We compete with
international, national and local manufacturers and distributors of soaps,
detergents, waxes, sponges, cloths and other automotive, household and bath
products. Indirectly, in the automotive product area, we compete with
drive-through car washes. Our competition, for the most part, has brand
recognition and large marketing and advertising budgets. We face major
multinational competition in our proposed household and children's bath sponges.
Although our product is unique and patented, we cannot predict its acceptance in
any of the marketplaces for which it is designed.

We compete on the basis of the uniqueness of our sponge, which combines
efficiency and effectiveness compared to other vehicular cleaning products. Our
product avoids the preparation and clean-up of using sponges, liquid soaps and
pails of water. It also avoids the mess and limited storage life of traditional
liquid and paste waxes. In addition, our cleaning and wax product is much easier
to apply and does not have to be buffed. Our sponge which combines soap and wax
is considerable cheaper than the purchase of the individual cleaning and
application products, and our cleaning product is less expensive than the cost
of a sponge and liquid detergent.

We have in the past sold and intend to again explore retail markets, to sell and
provide greater public exposure to our vehicular sponge product.

Government Regulations

Employees

We currently employ five people on a part-time basis of whom three are members
of the business and sales management team and two are staff.

Item 2. Description of Property.

Since December 8, 2004, we have been occupying our principal offices, which
consist of 800 square feet of office space located at The Empire State Building,
350 Fifth Avenue, Suite 2204, New York, New York 10118. The premises are leased
by members of the family of Steven Moskowitz, our Secretary and Chief Financial
Officer. Pursuant to a sublease agreement, we paid 60,000 shares of our common
stock as consideration for the term of sublease. The sublease which covers 800
square feet of the subleased property expires on January 31, 2008. We pay
directly for telephone, utilities and other expenses.

Item 3. Legal Proceedings.

Except as described below, we are not currently a party to, nor is any of our
property currently the subject of, any pending legal proceeding. None of our
directors, officers or affiliates is involved in a proceeding adverse to our
business or has a material interest adverse to our business.

We are aware of a lawsuit commenced by Westgate Financial Corporation
("Westgate") in the Superior Court of New Jersey, Law Division, Hudson County on
December 23, 2004 against Spongetech International, Ltd, Romantic Scents, Inc,
Steven Moskowitz (our Secretary), RM Enterprises International, Ltd, and Flo
Weinberg, Inc., a wholly-owned subsidiary of RM Enterprises International. On
January 6, 2003, the Company and Westgate entered into a factoring agreement
wherein the Company assigned to Westgate its accounts receivable arising out of
its sale of goods or rendition of services to customers (the "Contract").
Westgate asserted a breach of that contract against the Company and sought
damages of $11,049.82 with interest accrued thereon, costs and reasonable
attorney's fees. The Company counterclaimed alleging breach of contract and
sought damages in an amount not less than $13,006.0. On July 25, 2006 the
parties entered into a Consent Order pursuant to which the Plaintiffs agreed to
pay the sum of $20,000 to Westgate in full satisfaction of all claims against
the Defendants.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Market Information

There is currently no public trading market for our common stock.

As of August 28, 2006 approximately 30,326,667 shares of our common stock were
eligible to be sold pursuant to Rule 144 under the Securities Act of 1933, as
amended and 3,625,969, shares of our common stock have been registered and may
be freely sold, subject to any prospectus delivery requirements.

Holders

As of August 28, 2006, there were 34,072,636 shares of our common stock issued
and outstanding and approximately 58 stockholders of record of our common stock.

Dividends

Historically, we have not declared or paid any cash dividends on our
common stock. Any future determination to pay dividends on our common stock will
depend upon our results of operations, financial condition and capital
requirements, applicable restrictions under any contractual arrangements and
such other factors deemed relevant by the our Board of Directors. There are no
restrictions in our articles of incorporation or bylaws that restrict us from
declaring dividends. The Nevada Revised Statutes, however, do prohibit us from
declaring dividends where, after giving effect to the distribution of the
dividend:

(1) we would not be able to pay our debts as they become due in the usual
course of business; or
(2) our total assets would be less that the sum of our total liabilities.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table shows information with respect to each equity
compensation plan under which the Company's common stock is authorized for
issuance as of the fiscal year ended May 31, 2006.

EQUITY COMPENSATION PLAN INFORMATION

-----------------------------------------------------------------------------------------------------------------
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation plans
warrants and rights (excluding securities
reflected in column (a)
-----------------------------------------------------------------------------------------------------------------
(a) (b) (c)
-----------------------------------------------------------------------------------------------------------------

Equity compensation plans approved
by security holders -0- -0- -0-
-----------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders -0- -0- -0-
-----------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------
Total -0- -0- -0-
-----------------------------------------------------------------------------------------------------------------

Recent Sales of Unregistered Securities

We filed a Registration Statement on Form SB-2, (file no. 333-123015) which was
declared effective by the Securities and Exchange Commission on April 13, 2006,
pursuant to which we were offering units, on a "best-efforts, minimum 2,000,000
Units, maximum 8,000,000 Units" basis, at an offering price of $.25 per unit.
Effective August 24, 2006, the Company determined that it would be in its best
interest to terminate the Offering and focus its efforts on the sales of its
products. On August 25, 2006, the Company filed a Post Effective Amendment No.1
to deregister the Units.

Pursuant to the Registration Statement, 3,625,569 shares are being offered by
the selling stockholders. We will not receive any proceeds from the sale of the
shares of common stock by the selling shareholders. Offering expenses were paid
prior to the commencement of the Offering. These expenses were paid out of funds
advanced to us by our officers, directors and affiliates. There are no formal or
written agreements with respect to the advance of funds to us by our officers,
directors and affiliates for payment of said costs.

In addition, pursuant to the Registration Statement, we offered rescission to
our shareholders who purchased shares of the Company in March 2002 through May
2002. The rescission offer expired on May 15, 2006. None of the shareholders
accepted the rescission offer.

In April 2006, we issued 120,000 shares of our common stock to our counsel for
legal services rendered valued at $.28 per share or an aggregate of $33,737
pursuant to an exemption from Registration under Section 4(2) of The Securities
Act of 1933, as amended.

Item 6. Management's Discussion and Analysis or Plan of Operation.

Forward-Looking Statements

The information in this report contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this report are forward looking. In particular, the statements herein
regarding industry prospects and future results of operations or financial
position are forward-looking statements. Forward-looking statements reflect
management's current expectations and are inherently uncertain. Our actual
results may differ significantly from management's expectations.

The statements contained in this prospectus are not purely historical
statements, but rather include what we believe are forward-looking statements.
The forward-looking statements are based on factors set forth in the following
discussion and in the discussions under "Risk Factors" and "Business." Our
actual results could differ materially from results anticipated in these
forward-looking statements. All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements.

Overview

We design, produce, market and distribute cleaning products for vehicular use
utilizing patented technology relating to hydrophilic sponges, which are liquid
absorbing, foam polyurethane matrices. Our products can be pre-loaded with
detergents and waxes, which are absorbed in the core of the sponge then released
gradually during use. We have also designed and have started to test market, but
have not yet produced or sold, products using the same hydrophilic technology
for bath and home cleaning use. We license the rights to manufacture and sell
our products for vehicular use from H.H. Brown Shoe Technologies, Inc., d/b/a
Dicon Technologies, the holder of the relevant patents relating to the
hydrophilic sponges.

Corporate Background

On March 1, 2004, our Certificate of Incorporation was voided by the State of
Delaware for non-payment of franchise taxes in the amount of $114.40, including
interest, fees and penalties, for 2002 and $164.49, including taxes, fees and
penalties, for 2003, which outstanding amounts were paid on June 27, 2005. On
June 27, 2005, a Certificate for Renewal and Revival of our Certificate of
Incorporation (the "Certificate") was filed with the State of Delaware, which
restored, renewed and revived our Certificate of Incorporation commencing
February 29, 2004. In accordance with Delaware Corporation law, upon the filing
of the Certificate, our Certificate of Incorporation was renewed and revived
with the same force and effect as if it had not been voided. Such reinstatement
validated all contracts, acts, and matters, done and performed by our officers
and agents within the scope of our Certificate of Incorporation during the time
the Certificate of Incorporation was voided. We were not assessed any franchise
taxes for the year 2004 because our Certificate of Incorporation was revoked and
voided in 2004. On March 6, 2006, we paid our franchise taxes for 2005 in the
amount of $162.03.

Events and Uncertainties that are critical to our business

We have had limited operations and like all new businesses face certain
uncertainties, including expenses, difficulties, complications and delays
frequently encountered in connection with conducting operations, including
capital requirements and management's potential underestimation of initial and
ongoing costs. We have had little or no revenues since fiscal year 2003, our
most recent year of active operations.

In 2003, we sold an aggregate of 183,000 sponges to TurtleWax, which represented
approximately 75% of our orders. These sales to TurtleWax resulted in net sales
of approximately $291,000 during the year ended May 31, 2003. Our last sale to
TurtleWax was in May 2003. While we remain in contact with TurtleWax and
continue to have discussions with them, we have not pursued sales to TurtleWax
due to our lack of proper funding. There is no guarantee that if we were to have
sufficient funds that TurtleWax will place orders with us. Also, there is no
guarantee that we may be able to generate any interest in our product that will
result in any sales in the future. While we have been able to generate sales of
$12,858 in our most recent fiscal year, there is no guarantee that we will be
able to generate sufficient sales to make our operations profitable. We may
continue to have little or no sales and continue to sustain losses in the
future. If we continue to sustain losses we will be forced to curtail our
operations and go out of business.

We license the right to use our technology from H.H. Brown Shoe Technologies,
Inc., Greenwich, Connecticut (d/b/a Dicon Technologies), a majority-owned
subsidiary of Berkshire Hathaway, Inc. which owns the patent rights. The License
Agreement expires in December 2006. Although we have been able to negotiate
extensions of the term with Dicon, there is no guarantee that we will be able to
negotiate an extension beyond December 31, 2006. If we lose the exclusive right
to use the technology, we may be forced to compete with other companies, who may
have greater resources. This will affect our ability to successfully penetrate
the market and achieve profitability. As a result, we may be forced to cease
operations. In addition, there is no guarantee that Dicon will continue to
manufacture our products since its core business is the use of the hydrophilic
technology in the manufacture of inner soles for shoes for its parent company,
HH Brown Shoe Technologies, Inc. If Dicon can no longer manufacture our products
there is no guarantee that we will be able to contract with another manufacturer
for our products or that we will be able to use the technology in our products.
In addition, there is no guarantee that upon our receipt of adequate funding to
become fully operational, that Dicon will be able to meet our manufacturing
needs. In addition, we depend on Product Development to manufacture the inserts
and packaging for our sponges. Dicon only commences the manufacture of the
sponge upon receipt of this packaging material. A delay in getting the packaging
to Dicon can cause further delays in the delivery of our products to customers.
A failure to have products delivered timely to our customers will cause delays
for our customer and may prompt them to look for alternate products. Production
delays will affect our profitability and may cause us to go out of business.

In addition, there is no guarantee that Dicon has adequate funds or will be able
to successfully defend the patents on our licensed technology against
infringement. If Dicon is unable to successfully defend any infringement claims
and other products are developed similar to ours using the licensed technology,
we may be forced out of business. Although we are currently exploring the use of
the hydrophilic technology in products for home use there is no guarantee that
the technology can be successfully used for such other uses. If we fail to find
other uses for the technology, our company will have only one product. There are
many risks and uncertainties associated with companies with only one product.
Any failure or dips in the market may significantly affect our profitability and
cause us to go out of business.

Our success depends in a large part on our ability to implement a successful
marketing and sales plan. While we are currently seeking to hire sales groups to
market our products, there is no guarantee that these efforts will result in any
substantial sales. These sales groups are independent contractors who not only
market and sell our products but also the products of other companies.
Therefore, there is no assurance that they will devote substantial time to the
sale of our product. Because of lack of funding, we are unable to hire a
dedicated sales team who will devote their efforts to promoting and selling our
products and fostering relationships with distributors who can assist us with
getting our products on the shelves of large retailers such as Wal-Mart and
Costco. However, there is no guarantee that with a dedicated sales team, our
business will become profitable.

If we are able to obtain funding to become fully operational, there is no
guarantee that we will be able to find personnel who will be able to work
closely with the warehouse to ship orders, including special orders, made via
the internet. In addition, there is no guarantee that we will be able to find
technology personnel who can accept the EDI transmissions from the larger
retailers and coordinate with our logistics and warehouse contacts to ensure
timely delivery of orders.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The critical accounting policies that affect our more significant
estimates and assumptions used in the preparation of our financial statements
are reviewed and any required adjustments are recorded on a monthly basis.

Results of Operations

Fiscal Years Ended May 31, 2006 and 2005

Net sales were $12,859 for the fiscal year ended May 31, 2006 as compared to
$1,051 for the fiscal year ended May 31, 2005, an increase of $11,808.
Management attributes this increase to the efforts of the various sales groups
which the Company has retained since July 2005.

We have an open purchase orders in the amount of $5,500 which will be shipped in
November 2006. We have historically depended on one customer for almost all of
our sales. Specifically, in 2003, our most recent year of active operations, we
sold an aggregate of 183,000 sponges to TurtleWax, which represented
approximately 75% of our orders. These sales to TurtleWax resulted in net sales
of approximately $291,000 during the year ended May 31, 2003. Our last sale to
TurtleWax was in May 2003. While we remain in contact with TurtleWax and
continue to have discussions with them, we have not pursued sales to TurtleWax
due to our lack of proper funding. Without sufficient funds, we are unable to
satisfy TurtleWax's requirement to have product on an in-stock basis so that we
can immediately ship to them upon receiving orders.

Cost of sales was $4,320 or 34% of net sales for the fiscal year ended May 31,
2006 as compared to $1,012 or 96 % of net sales for the fiscal year ended May
31, 2005.

Operating expenses for the fiscal year ended May 31, 2006 increased to $110,303
from $58,738 for the fiscal year ended May 31, 2005. This increase of $51,565
was a result of a increase in general and administrative expenses. Selling
expenses for the fiscal year ended May 31, 2006 was $0. General and
administrative expenses for the year ended May 31, 2006 included accounting
$29,925, legal, $63,737, office $5,350 and, SEC fees of $7,007.

Net loss for the fiscal year ended May 31, 2006 was $(101,764) or $(.00) as
compared to net loss of $(58,699) or $(.00) per share for the fiscal year ended
May 31, 2005.

Plan of Operations

We had sales of $342,019 during the year ended May 31, 2003. Since that time, we
have had minimal or no sales. Specifically, during the year ended May 31, 2006
and 2005, we had sales of $12,859 and $1,051 respectively. The main reason for
the increase is the efforts of the various sales groups which the Company has
retained since July 2005. We have recently been setting up the groundwork for
new sales with advance marketing but we require additional funding.

During the next year we expect to increase our marketing and sales efforts.
According to Cleanlink(1), a trade association for the cleaning industry, the
wholesale market for chemical cleaning products was in excess of $7.6 billion in
2002 and 2004. Accordingly, we believe there is a substantial market for easy to
use, multi-use cleaning products. In the next twelve months, management intends
to take a number of actions that it believes will enable our business to
successfully participate in this growing segment of the cleaning market.

Management intends to attend trade shows to promote our products. Management
intends to attend the Auto Show in Las Vegas Nevada, on October 31, 2006 through
November 2, 2006. Management estimates that it will cost us approximately
$14,000 to attend upcoming trade shows, all of which has been, and if necessary
will continue to be, funded by our officers, directors and affiliates until such
time as we are able to generate sales to fund our operations or obtain outside
funding. In addition, our Secretary, Steven Moskowitz, will utilize his accrued
air miles to cover all travel and hotel costs. There are no formal or written
agreements with respect to the advance of funds to us by our officers, directors
and affiliates. Our officers, directors and affiliates are not legally bound to
provide funding to us. If they do not pay for our expenses, we will be forced to
obtain funding. We currently do not have any arrangements to obtain additional
financing. In view of our limited operating history, our ability to obtain
additional funds is limited. Additional financing may only be available, if at
all, upon terms which may not be commercially advantageous to us. If we are not
able to obtain funding from other sources, we will not be able to obtain funding
to increase our sales and marketing efforts. As a result we may be forced to go
out of business.

On July 18, 2005, we entered into an oral agreement with Lidel Fitzmaurice,
Inc., a sales group that targets sales from Virginia to Vermont. Lidel
Fitzmaurice has eleven sales representatives. The sales representatives will
receive seven (7%) percent of net sales which they generate and will be paid on
the tenth day of the month following the month in which the sales are made. To
date, we have received orders in the approximate amount of $14,625 from the
efforts of Lidel Fitzmaurice, Inc., which orders were filled in June and July
2006. The products will be manufactured by Dicon and shipped directly to our
customers by Dicon, with payment remitted to Dicon upon receipt of payment from
the customers. Lidel Fitzmaurice, Inc. has advised us that it intends to attend
the following trade shows in the next twelve months: the Los Angeles Auto Show,
the North American International Auto Show, the South Carolina International
Auto Show, the West Virginia Auto Show, the Pennsylvania Auto and Boat Show, the
Northeast Auto Show, the Motor Trend International Auto Show, the Chicago Auto
Show, the Virginia International Auto Show, the New York International Auto
Show, the Tampa Bay International Auto Show, the Charlotte International Auto
Show and the National Hardware Show.

On January 27, 2006 we entered into an oral agreement with Bill Perry &
Associates, a sales group with 9 sales representatives who will target their
sales efforts to Georgia, Tennessee, Alabama, Mississippi, Florida, North
Carolina, South Carolina and Virginia. The sales representatives will receive
commissions in the range of six (6%) percent to eight (8%) percent of net sales
which they generate and will be paid on the tenth day of the month following the
month in which the sales are made. To date we have received orders in the
approximate amount of $3,150 from the efforts of Bill Perry & Associates. The
products will be manufactured by Dicon and shipped directly to our customers by
Dicon, with payment remitted to Dicon upon receipt of payment from the
customers. We anticipate that these orders will be filled late spring.

----------
(1) Obtained from Cleanlink.com based upon a study prepared and conducted by the
Research Department of Trade Press Publishing Corporation, publisher of Sanitary
Maintenance Magazine in conjunction with International Sanitary Supply
Association. The report can be accesses by following this link:
http://www.cleanlink.com/industrystatistics/2004sanitaryreport.asp

Typically, sales groups attend trade shows to meet with sellers of various
products which the sales persons believe they can market and sell to their
customers. We are in the process of reviewing the indications of interest we
received from various sales groups at the Auto show which management attended in
November 2005. There is no guarantee that we will be able to retain the various
sales groups or that their efforts will result in significant sales. We do not
anticipate that we will incur any costs in connection with retaining the various
sales groups as the sales groups will be paid a percentage the net sales they
generate only. The sales persons will be independent contractors retained by us
on a non-exclusive basis and may not devote their efforts solely to selling our
products. We do not intend to hire sales persons on an exclusive basis.

We currently have an understanding with Dicon, whereby Dicon has agreed to
manufacture and ship small orders directly to our customers. Following the
receipt of payment to us, we remit payment to Dicon within 60 days of the
shipment date. We have not entered into a written agreement with Dicon for the
manufacture and shipment of products directly to our customers. Dicon does not
charge us a fee for facilitating the shipment of small orders directly to our
customers or for the current payment arrangement. There can be no assurance that
Dicon will continue to manufacture and ship orders directly to our customers or
that they will not charge us a fee in the future for shipment of small orders
directly to our customers. If we are not able to have our products manufactured
and shipped directly to our customers then we will not be able to fill orders
and may be forced to cease and curtail our business.

Management intends to seek a production finance company to fund our purchase
orders. Typically the way this arrangement works is all orders received by us
will be forwarded to the production finance company which will assess the credit
worthiness of the entity or the individual placing the order. Upon approval, the
production finance company will fund the cost of the product at a cost to us,
representing a percentage of the order placed. Management intends to seek an
arrangement where the cost to the Company will not exceed 5% of each order. If
we are not successful in finding a production finance company to fund our
purchase orders, we will seek to have customers finance the production of their
orders. There is no guarantee that our customers will be able to finance the
production of their orders. If our customers are not able to finance their
orders, we will be forced to seek alternate financing, such as debt and/or
equity financing. We currently do not have any arrangements to obtain additional
financing. In view of our limited operating history, our ability to obtain
additional funds is limited. Additional financing may only be available, if at
all, upon terms which may not be commercially advantageous to us. If our
customers are unable to fund the production of their orders or we are not able
to fund the production of our products, we will be unable to make any sales of
products and may be forced to cease and curtail our business.

Management intends to locate a public warehouse facility located in New Jersey
or New York which is in close proximity to Dicon's facilities and which will
upon receipt of invoices from us and products from Dicon, will pack and ship the
completed orders to our customers at a cost to us which will not exceed 4% of
the orders for such services. Management anticipates that this facility will
also handle small internet orders. Management has not taken any action to locate
a public warehouse facility. If we are not successful in finding a public
warehousing facility, we will be unable to warehouse our products. This may
result is us being unable to process large orders. If we are unable to process
large orders, this will hinder our ability to become profitable and we may be
forced to cease and curtail our business.

Further, there is no assurance that management will be able to consummate any
agreements with a production finance company or warehouse on terms that are
acceptable to us or which will not significantly cut into our profit margin.

We have begun to review all indications of interest which we have received from
various infomercial companies as a way to promote our products. The success of
an infomercial featuring our products is dependent on, among other things,
having a compatible script director who understands our products and is able to
highlight the benefits of our products in a short running time and the ability
to get air time placement on channels such as ESPN and the Speed Channel to
reach our target market. In addition, in view of our lack of adequate funding,
we may be forced to give up a bigger profit margin to ensure that the
Infomercial is available for airing. We intend to enter into an agreement for
the production of an infomercial which we anticipate will be aired commencing in
January through March 2007. There is no guarantee that we will be able to find
an infomercial company who can successfully produce an infomercial on our behalf
or that we will generate any sales from the infomercial. Management anticipates
that it will cost a minimum of $50,000 and up to $300,000 to successfully
produce an infomercial.

We are currently exploring the attractiveness of certain distribution and
marketing arrangements with third parties to enhance distribution of our
products, including licensing arrangement for products that we believe are
complementary to sponges which could enhance our marketability. These efforts
have involved meeting with strategic licensing partners, and having discussions
regarding our products and market opportunities. We intend to pursue
arrangements with other companies to use their logos and marks on our product as
way to promote their products and target customers. To do so, we would be
required to enter into license agreements with these companies relating to the
use of their logos and marks. We anticipate that the cost for entering into such
arrangements will entail our attorney's fees for the negotiation of such
agreements and the cost of the mold to manufacture the sponges. Typically, the
cost of the mold is approximately $250, from which approximately 5,000 pieces
can be manufactured. To mass produce up to approximately 5,000,000 pieces, the
cost of the mold is approximately $5,500. The cost of the mold is typically paid
by the other party. To date, we have not entered into any agreements with any
parties for use of their logos and marks on our products and do not have any
immediate plans to enter into any such arrangement in the near future. Our
license agreement with Dicon permits us the right to enter into arrangements or
agreements with third parties to use third parties' logos, names, slogans and/or
marks on our products for advertising, promotion, manufacture distribution and
sale. In addition, our license agreement allows us to enter into sublicense
agreements consistent with the terms of our license agreement with Dicon. There
is no guarantee that we will be able to complete any agreements with third
parties that will have a positive effect on our sales, or that we will achieve
successful and profitable results from our distribution and marketing efforts.

We are also currently exploring distribution and marketing opportunities for our
cleaning products for use as a household cleaning sponge. We have developed a
prototype and are currently testing household cleaning sponges infused with
anti-bacterial bath and kitchen soaps with a national detergent manufacturer for
possible use under its logo and brand. There is no assurance that the
manufacturer will purchase our sponges or that we will be successful in gaining
distribution in this channel.

We have also developed a children's bath foam sponge, with a "safe mesh" coating
which prevents tearing, in the shape of animals in various colors. The sponges,
which float, are infused with a gentle no-tear, non-irritating anti-bacterial
soap. The bath foam sponge does not lose its soap while it is floating in the
bathtub as the inner hydrophilic matrix retains the soap until the child
squeezes the sponge in use. We are exploring multiple retail outlets to sell
this product and to market it directly to consumers. We have discussed with our
licensor, our plan to have this product manufactured and sold by us. However, we
have not yet entered into a formal agreement. This product is still in its
research and development stage. Upon the completion of research and development,
we intend to negotiate with Dicon the terms and conditions of the manufacture of
this product. We have not made any sales and cannot offer any assurances that
sales will result from our proposed marketing campaign, nor is there any
assurance that we will be able to enter into an agreement with Dicon for the
manufacture of this product. We are focused on expanding our marketing potential
and intend to explore the possibility of entering into marketing and
distribution arrangements for our products throughout the world. There is no
assurance that we will be successful in gaining distribution in these markets.

Based upon our current cash reserves and forecasted operations, we believe that
we will need to obtain at least $500,000 in outside funding to implement our
plan of operation over the next twelve months. Our need for additional capital
to finance our business strategy, operations, and growth will be greater should,
among other things, revenue or expense estimates prove to be incorrect. If we
fail to arrange for sufficient capital in the future, we may be required to
reduce the scope of our business activities in the areas of marketing and
research and development until we can obtain adequate financing. We may not be
able to obtain additional financing in sufficient amounts or on acceptable terms
when needed, which could adversely affect our operating results and prospects
and force us to curtail our business operations. Debt financing must be repaid
regardless of whether or not we generate profits or cash flows from our business
activities. Equity financing may result in dilution to existing stockholders and
may involve securities that have rights, preferences, or privileges that are
senior to our common stock. If we do not receive funding at lower prices, this
will have a dilutive effect on the value of our securities issued at higher
prices.

Liquidity and Capital Resources

As of May 31, 2006, we had cash of $2,805 as compared to $1,477at May 31, 2005.
Our current cash balance as of August 28, 2006 is $2,489. As of May 31, 2006,
net cash used by operating activities aggregated $(1,328). Based upon our
current cash reserves and forecasted operations, we believe that we will need to
obtain at least $500,000 in outside funding to implement our plan of operation
over the next twelve months. Based on our current cash balance, management
believes that we can satisfy our cash requirements for the next three months.
Our officers, directors and affiliates have indicated their preparedness to fund
our business until we are able to generate sufficient sales to fund our
operations. However, there are no formal or written agreements with respect to
the advance of funds to the Company by our officers, directors and affiliates
for payment of said costs. Accordingly, our officers, directors and other
affiliates are not legally bound to provide funding to us. Because of our
limited operations, if our officers and directors do not pay for our expenses,
we will be forced to obtain funding. We currently do not have any arrangements
to obtain additional financing from other sources. In view of our limited
operating history, our ability to obtain additional funds is limited. Additional
financing may only be available, if at all, upon terms which may not be
commercially advantageous to us.

The working capital (deficiency) at May 31, 2006 was $153,707 as compared to a
working capital (deficiency) of $112,037 at May 31, 2005. These factors create
substantial doubt about our ability to continue as a going concern. The recovery
of assets and the continuation of future operations are dependent upon our
ability to obtain additional debt or equity financing and our ability to
generate revenues sufficient to continue pursuing our business purpose.

In February 2005, we settled a breach of contract suit brought against us in the
Supreme Court of the State of New York by Paradigm Solutions, Inc. relating to
an agreement dated December 31, 2001. In this suit, Paradigm claimed
compensatory damages of $33,962. Although we denied that we had any liability to
Paradigm, in connection with the settlement we issued Paradigm 75,000 of our
common stock valued at $28,500 or $.38 per shares and paid $7,500 in cash.

In July 2006, we settled a suit brought against Spongetech International, Ltd,
Romantic Scents, Inc, Steven Moskowitz (our Secretary), RM Enterprises
International, Ltd, and Flo Weinberg, Inc., a wholly-owned subsidiary of RM
Enterprises International by Westgate Financial Corporation in which Westgate
asserted a breach of contract claim against us. Westgate alleged that the
Company defaulted on a factoring agreement and sought damages of $11,049.82 with
interest accrued thereon, costs and reasonable attorney's fees. We
counterclaimed alleging breach of contract and sough damages in an amount of not
less than $13,006.01. On July 25, 2006 the parties entered into a Consent Order
pursuant to which the Plaintiffs agreed to pay the sum of $20,000 to Westgate in
full satisfaction of all claims against the Defendants..

We maintain a supply and requirements agreement with Dicon, a manufacturing
company that has the technological know-how and patented and proprietary
information relating to hydrophilic foam sponges and their applications. The
agreement, which grants us exclusive worldwide rights to distribute the products
was extended until July 2006 and requires us to purchase all of our requirements

from Dicon. Pursuant to the agreement, we must purchase minimum annual required
amounts from Dicon. We did not satisfy last year's requirements and paid
$1,894.51 to Dicon in December 2003 in connection with the missed quantity
requirements. We did not make any payments to Dicon in 2004. On February 15,
2005, we entered into a letter agreement with Dicon, pursuant to which Dicon
confirmed that all required payments under the Supply and Requirements Agreement
had been made by us and agreed to extend our license until June 30, 2006.

It is extremely difficult to itemize the price of each sponge purchased from
Dicon because the price charged includes the sponge or sponge kit, packaging,
storage and shipping. The price for each sponge or sponge kit, including these
ancillary items, ranged from $.85 to $1.42. The average price per sponge or
sponge kit was $1.12. Our operations to date have been primarily financed by
sales of our equity securities to and loans from our officers and directors. As
of May 31, 2005, we had a working capital deficit of $112,037. We do not expect
positive cash flow from operations in the near term. Our operations presently
are generating negative cash flow, and we do not expect positive cash flow from
operations in the near term. In order to sustain our operations we will need to
secure additional working capital from other sources. Any inability to obtain
sufficient capital to sustain our existing operations to meet commitments may
require us to delay delivery of products, if and when ordered, to default on one
or more agreements, or to significantly reduce or eliminate then existing sales
and marketing, research and development or administrative functions. The
occurrence of any of these, or our inability to raise adequate capital, may have
a material adverse effect on our business, financial condition and results of
operations.

Due to the operating losses that we have suffered from then date of our
organization, in their report on the annual consolidated financial statements
for fiscal year ended May 31, 2006, our independent auditors included an
explanatory paragraph regarding concerns about our ability to continue as a
going concern. Our consolidated financial statements contain additional note
disclosures describing the circumstances that lead to this disclosure by our
independent auditors.

The issuance of additional equity securities by us could result in a significant
dilution in the equity interests of our current stockholders.

We have purchased the following sponge kits and sponges as of the date of the
prospectus: 25,000 kits, each consisting of a vehicular sponge, detail sponge
and chamois cloths 168,600 vehicular sponges 4,500 detail sponges 2,200 chamois
cloths.

RISK FACTORS

Our business involves a high degree of risk. Any of the following risks could
materially and adversely affect our business, financial condition, and results
of operations. This could cause the trading price of our common stock to
decline, with the loss of part or all of an investment in our common stock.

Risks relating to our Business

WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION WHICH MAY CONTINUE. IF WE
CONTINUE TO EXPERIENCE LOSSES, WE WILL BE UNABLE TO FUND ANY OF OUR SALES AND
MARKETING AND RESEARCH AND DEVELOPMENT ACTIVITIES. AS A RESULT WE MAY BE FORCED
TO CEASE OUR OPERATIONS WHICH WOULD CAUSE INVESTORS TO LOSE THEIR ENTIRE
INVESTMENT.

We incurred net losses of $58,699 and $2,056,526 for the years ended May 31,
2005 and 2004, respectively. As of November 30, 2005 we have a working capital
deficit of $137,325. Because of these conditions, we will require additional
working capital to develop our business operations. We have not achieved
profitability and we can give no assurances that we will achieve profitability
within the foreseeable future, as we fund operating and capital expenditures, in
such areas as sales and marketing and research and development. We cannot assure
investors that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future. If we continue to incur
losses, we will not be able to fund any of our sales and marketing and research
and development activities, and we may be forced to cease our operations. If we
are forced to cease operations, investors will lose the entire amount of their
investment.

WE HAVE A LIMITED OPERATING HISTORY AND MAY NOT GENERATE ENOUGH REVENUES TO STAY
IN BUSINESS.

We were organized in July 1999 and have had limited operations since our
inception from which to evaluate our business and prospects. There can be no
assurance that our future proposed operations will be implemented successfully
or that we will ever have profits. Our limited financial resources are
significantly less than those of other companies, which can develop alternatives
to our current and pending product lines in the U.S. If we are unable to sustain
our operations, you may lose your entire investment. We face all the risks
inherent in a new business, including the expenses, difficulties, complications
and delays frequently encountered in connection with conducting operations,
including capital requirements and management's potential underestimation of
initial and ongoing costs. In evaluating our business and prospects, these
difficulties should be considered. If we are unable to achieve profitability we
will be forced to curtail our operations and go out of business.

WE NEED SIGNIFICANT INFUSIONS OF ADDITIONAL CAPITAL, WHICH MAY RESULT IN
DILUTION TO YOUR OWNERSHIP AND VOTING RIGHTS IN US.

able to obtain additional financing in sufficient amounts or on acceptable terms
when needed, which could adversely affect our operating results and prospects
and force us to curtail our business operations. Debt financing must be repaid
regardless of whether or not we generate profits or cash flows from our business
activities. Equity financing may result in dilution to existing stockholders and
may involve securities that have rights, preferences, or privileges that are
senior to our common stock. If we do not receive funding at lower prices, this
will have a dilutive effect on the value of our securities issued at higher
prices. Further, the sale, or potential sale of large amounts of our securities
will, in all likelihood, have a depressive effect on the price of our securities
which will affect the value of your investment.

OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING AND WHICH MAY FORCE US TO CEASE OPERATIONS.

In their report dated August 15, 2006, our independent auditors stated that our
financial statements for the year ended May 31, 2006 were prepared assuming that
we would continue as a going concern. Our ability to continue as a going concern
is an issue raised as a result of recurring losses from operations and cash flow
deficiencies since our inception. We continue to experience net losses. Our
ability to continue as a going concern is subject to our ability to generate
revenues sufficient to continue pursuing our business purposes and obtain
additional debt or equity financing from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
If we are unable to continue as a going concern, you may lose your entire
investment.

WE HAVE DEFAULTED ON OUR LICENSE IN THE PAST AND IF WE DEFAULT AGAIN, OUR
LICENSOR COULD TERMINATE OUR LICENSE WHICH COULD CAUSE OUR BUSINESS TO FAIL.

We rely on our license agreement with Dicon for the development of our products.
Our principal product and our products that are under development utilize the
hydrophilic sponge technology that we license from Dicon. In addition, we rely
on Dicon to protect and enforce key patents held by Dicon, relating to the
hydrophilic technology. Dicon's patent expires in 2017. In the past, we have
defaulted on the license by not meeting our minimum supply requirements. If we
default again, Dicon may terminate the agreement or make the license
non-exclusive. If we lose our license, we may not be able to make alternative
arrangements on terms acceptable to us, or at all. We do not currently have any
alternative plans for which to purchase hydrophilic sponges. Any loss of our
license could materially adversely affect our business, financial condition and
results of operations. The loss of our license and the inability to obtain
alternative arrangements for our currently contemplated products or a different
product line will cause our business to fail. Our exclusive license is limited
to one function. If we are unable to expand this license to other areas, our
growth will be significantly limited.

Our license agreement with Dicon is limited to hydrophilic sponges used to clean
and polish land, sea and air transportation vehicles. Our business plan calls
for us to expand our product line using hydrophilic sponges into the areas of
personal hygiene and household cleaning. Although Dicon has orally indicated
that it will agree to expand our license to cover personal hygiene and household
cleaning products and has produced samples of both products for us, we have no
written assurances that Dicon will expand our exclusive license to include
additional product lines. If Dicon refuses to expand our license, we will be
unable to expand into new areas and our growth will be limited.

WE DEPEND ON PRODUCTS MADE USING ONE TECHNOLOGY; AND PRODUCTS USING DIFFERENT
TECHNOLOGIES MAY ATTRACT CUSTOMERS JEOPARDIZING OUR BUSINESS PROSPECTS.

Our cleaning products depend on the use of licensed technology relating to
sponges incorporating a hydrophilic (liquid absorbing) polyurethane matrix. A
number of factors could limit our sales of these products, or the profitability
of such sales, including competitive efforts by other manufacturers of similar
products, shifts in consumer preferences or the introduction and acceptance of
alternative product offerings. We have not developed products using other
technologies; and, thus, if our existing products or others based on the same
technology fail in the marketplace, we may be forced to cease all operations.

OUR LICENSOR MAY NOT BE SUCCESSFUL IN DEFENDING THE PATENTS ON OUR LICENSED
TECHNOLOGY AGAINST INFRINGEMENT; AND, AS A RESULT, WE MAY BE UNABLE TO COMPETE
AGAINST COMPANIES SELLING PRODUCTS USING THE SAME TECHNOLOGY AS WE DO.

In the event a competitor infringes upon our licensed technology, our licensor
may be unable to successfully assert patent infringement claims. In that event,
we may encounter direct competition using the same technology on which our
products are based and we may be unable to compete. If we cannot compete with
competitive products, our business will fail. In addition, if any third party
claims that our licensed products are infringing their intellectual property
rights, any resulting litigation could be costly and time consuming and would
divert the attention of management and key personnel from other business issues.
We also may be subject to significant damages or injunctions preventing us from
selling or using some aspect of our products in the event of a successful patent
or other intellectual property infringement claim. We may not have sufficient
capital to pay damages or if we do have sufficient capital, utilizing this
capital to pay damages will divert capital away from our business which is
critically needed to develop our business and products. Any of these events
could have a material adverse effect on our business and profitability and cause
us to curtail operations and cease our business. If we are enjoined from using
our licensed technology we will be forced to cease operations and go out of
business, as a result, investors will lose their entire investment.

THROUGHOUT OUR SALES HISTORY, WE HAVE DEPENDED ON ONE CUSTOMER FOR ALMOST ALL OF
OUR SALES. IF THAT CUSTOMER DOES NOT GIVE US REPEAT ORDERS, WE WILL NOT BE ABLE
TO CONTINUE IN BUSINESS.

We have historically depended on one customer for almost all of our sales.
Specifically, in 2003, our most recent year of active operations, we sold an
aggregate of approximately 153,000 sponges to TurtleWax, which represented
approximately 75% of our orders. These sales to TurtleWax resulted in net sales
of approximately $291,000 during the year ended May 31, 2003. Our last sale to
TurtleWax was in May 2003. TurtleWax has not placed any orders with us since
that time. While we remain in contact with TurtleWax and continue to have
discussions with them, we have not pursued sales to TurtleWax due to our lack of
proper funding. This is due to that fact that TurtleWax orders require us to
have product on an in-stock basis so that we can immediately ship to them upon
receiving orders. We are currently exploring ways to market our automobile
cleanser and wax product, children's bath and home cleaning products through
various marketing channels. If we are unable to expand our client and sales
base, we may have no existing business or prospects for new business and our
business could fail.

WE DEPEND ON THE EFFORTS OF INDEPENDENT SALES PERSONS TO GENERATE SALES OF OUR
PRODUCTS.

We do not have a sales staff devoted to generating sales of our products.
Instead, we rely on the efforts of independent sales groups, who are retained on
a non-exclusive basis. These independent sales persons may not devote a
significant amount of time to promoting our products or may focus their efforts
on other products which may result in them receiving a bigger sales commission.
We have no control over these sales persons. If these sales persons are not able
to generate significant sales for our products, we will be forced to curtail our
operations and go out of business.

WE DEPEND ON ONE MANUFACTURER FOR ALL OUR PRODUCTS; AND IF THAT MANUFACTURER IS
UNWILLING OR UNABLE TO PRODUCE OUR ORDERS IN THE QUANTITIES REQUIRED AND AT THE
PRICE AND QUALITY WE REQUIRE FOR SALES, WE WILL BE UNABLE TO CONTINUE IN
BUSINESS.

Our licensor is also our manufacturer. Our reliance on a sole supplier involves
several risks, including our potential inability to obtain adequate supplies and
reduced control over pricing and timely delivery. Although the timeliness,
quality and pricing of deliveries from our licensor has been acceptable to date
there can be no assurance that supplies will be available on an acceptable basis
or that delays in obtaining new suppliers will not have an adverse effect on us.
If we lose this manufacturer there is no guarantee that we will be able to make
alternate arrangements that will be acceptable to us. The success of our
business will depend on our ability to obtain adequate supplies of hydrophilic
sponges, chemicals, packaging materials, or finished products. Since we are
dependent on Dicon for our all of our products, a failure by Dicon to deliver
products when ordered will prevent us from fulfilling orders and would result in
us being unable to timely fill purchase orders. If we are not able to timely
deliver on purchase orders, we may experience a reduction in the number of
orders, which will negatively affect our business. If delays are persistent,
some of our purchasers may determine not to place future orders with us which
will result in a reduction in our profits and will cause us to cease operations
and go out of business.

THE MARKETPLACE MAY BE INDIFFERENT TO OUR PRODUCTS; IN WHICH CASE OUR BUSINESS
WILL FAIL.

Our hydrophilic sponges, and products based on them, feature an internal
structure which holds detergents and waxes which are released only when
squeezed. However, potential users may be satisfied with the cleaners, waxes and
applicators they are presently using. Thus, we may expend our financial and
personnel resources on design, marketing and advertising without generating
concomitant revenues. If we cannot generate sufficient revenues to cover our
overhead, manufacturing and operating costs, our business will fail.

COMPLIANCE WITH GOVERNMENTAL REGULATIONS AND IMPLEMENTATION OF ANY LAW OR
CONSTRUCTION OF ANY CURRENT LAW WHICH HAS THE EFFECT OF MAKING IT MORE COSTLY TO
PRODUCE OUR PRODUCTS MAY DETRIMENTALLY AFFECT OUR ABILITY TO PRODUCE AND SELL
OUR PRODUCTS WHICH WILL CAUSE US TO CURTAIL OUR OPERATIONS AND CEASE OUR
BUSINESS.

Our cleaning products may be regulated by the Consumer Product Safety Commission
under authority of the Hazardous Substances Act. The Consumer Product Safety
Commission's jurisdiction covers most non-cosmetic, non-drug substances used in
the home. The Federal agency develops voluntary standards with industry and
issues and enforces mandatory standards or bans consumer products if no feasible
standard would adequately protect the public. It conducts research on potential
product hazards and obtains the recall of products that it believes pose
potential risk for serious injury or death, or arranges for their repair.
Additionally, the Consumer Product Safety Commission informs and educates
consumers through the media, state and local governments, private organizations
and by responding to consumer inquiries on, among other things, what safety
features to look for in products. We do not believe that we are currently
subject to any other direct federal, state or local regulation except in
connection with regulations applicable to businesses generally or directly
applicable to retailing or electronic commerce. However, from time to time in
the future, Congress, the FDA or any other federal, state, local or foreign
legislative and regulatory authorities may impose additional laws or regulations
that apply to us, repeal laws or regulations that we consider favorable to us or
impose more stringent interpretations of current laws or regulations. If these
agencies determine to implement any law, or construe any current law in such a
way which will make it more costly to produce our products, we may be forced to
reduce our business and cease operations. In addition, if any of these agencies
determine that there is no feasible way to adequately protect the public from
any of our products, we will immediately be forced to curtail our business. Any
such developments could detrimentally affect our ability to sell our products
and become profitable and cause our business to fail.

IF WE FAIL TO PAY OUR FRANCHISE TAXES AND TO TIMELY FILE A RENEWAL AND REVIVAL
AND ANOTHER CORPORATION SHALL ADOPT A NAME THAT IS SIMILAR AND/OR
INDISTINGUISHABLE FROM OUR NAME, WE COULD LOSE THE RIGHT TO USE OUR NAME AND
WILL BE REQUIRED TO SEEK A RENEWAL AND REVIVAL OF OUR CERTIFICATE OF
INCORPORATION UNDER ANOTHER NAME.

On March 1, 2004, our Certificate of Incorporation was voided by the State of
Delaware for non-payment of franchise taxes in the amount of $114.40, including
interest, fees and penalties for 2002 and $164.49, including taxes, fees and
penalties for 2003, which outstanding amounts were paid on June 27, 2005. Our
Certificate of Incorporation was renewed and revived, effective February 29
2004. The revival has the effect of validating all actions taken by our officers
and directors pursuant to the Certificate of Incorporation during the period
when we were voided. If we fail to pay our franchise taxes and to timely file a
renewal and revival and another corporation shall adopt a name that is similar
and/or indistinguishable from our name, we could lose the right to use our name
and will be required to seek a renewal and revival of our Certificate of
Incorporation under another name. This could result in the loss of any good will
and recognition which has been established with respect to our name.

OUR OFFICERS AND DIRECTORS ARE INVOLVED IN OTHER BUSINESSES WHICH MAY CAUSE THEM
TO DEVOTE LESS TIME TO OUR BUSINESS.

Michael Metter, our President and Chief Executive Officer, serves a director and
officer for other companies. In addition to serving as our President and Chief
Executive Officer, Mr. Metter also serves as the President and Chief Executive
Officer of BusinessTalk Radio.net, Chairman of Tiburon Capital Group, a
privately held holding corporation and Vice-President of ERC Corp., a
privately-held marketing consultant. Mr. Metter devotes 10 hours each week,
constituting 20% of his time, to our business. Mr. Moskowitz, our Chief
Financial Officer and Secretary, also serves as a director and officer for other
companies. Mr. Moskowitz also serves as the CEO and President of Azuel, Ltd, a
publicly traded entity and Vice President of ERC Corp., a privately-held
marketing consultant. Mr. Moskowitz devotes 40 hours each week, constituting 75%
of his time, to our business. Mr. Lazaukas, one of our directors, serves also as
President of FJL Enterprises, Inc. and TNJ Enterprises, Inc., which own and
operate eight Dominos Pizza Stores. Our officers' and directors' involvement
with other businesses may cause them to allocate their time and services between
us and other entities. Consequently, they may give priority to other matters
over our needs which may materially cause us to lose their services temporarily
which could affect our operations and profitability.

OUR CHIEF FINANCIAL OFFICER AND SECRETARY, STEVEN MOSKOWITZ, SERVES AS PRESIDENT
AND CEO OF AZUREL, LTD. A PUBLICLY TRADED ENTITY THAT BECAME DELINQUENT IN ITS
FILING OBLIGATIONS. IN ADDITION, CERTAIN OF OUR OTHER OFFICERS AND DIRECTORS
WERE PREVIOUSLY AFFILIATED WITH AZUREL, LTD.

Michael Metter, our President and a director and Frank Lauzaskas, one of our
directors, were previously executive officers and directors of Azurel Ltd., a
publicly traded entity. Steven Moskowitz, our Chief Financial Officer, Secretary
and director serves also as President and CEO of Azurel. Azurel is delinquent in
its reporting requirements with the SEC in that it has failed to file any of its
required quarterly and annual reports since the filing of its Annual Report on
Form 10-KSB for the year ended December 31, 2002. On January 31, 2006, Azurel
terminated its obligation to file reports by filing a Form 15 with the
Securities and Exchange Commission. If we were to become delinquent in our
filing obligations under the federal securities laws, the Securities and
Exchange Commission may halt trading in the Company's securities which would
strongly reduce the value of the securities offered hereby.

Risks Related to Our Common Stock

THERE IS PRESENTLY NO MARKET FOR OUR COMMON STOCK. ANY FAILURE TO DEVELOP OR
MAINTAIN A TRADING MARKET COULD NEGATIVELY AFFECT THE VALUE OF OUR SHARES AND
MAKE IT DIFFICULT OR IMPOSSIBLE FOR YOU TO SELL YOUR SHARES.

Presently there is no market for our common stock. We have filed a Form 211 with
the NASD to have our common stock quoted on the OTC Bulletin Board, however, no
assurance can be given that our application will be successfully approved.
Failure to develop or maintain an active trading market could negatively affect
the value of our shares and make it difficult for you to sell your shares or
recover any part of your investment in us. Even if a market for our common stock
does develop, the market price of our common stock may be highly volatile. In
addition to the uncertainties relating to our future operating performance and
the profitability of our operations, factors such as variations in our interim
financial results, or various, as yet unpredictable factors, any of which are
beyond our control, may have a negative effect on the market price of our common
stock.

OUR CONTROLLING SHAREHOLDERS MAY EXERCISE SIGNIFICANT CONTROL OVER US DEPRIVING
OTHER STOCKHOLDERS OF THE ABILITY TO ELECT DIRECTORS OR EFFECT OTHER CORPORATE
ACTIONS, AND INVESTORS MAY NOT HAVE A VOICE IN OUR MANAGEMENT.

Our directors, executive officers and principal shareholders beneficially owned
approximately 76% of the outstanding shares of our common stock. Our
shareholders do not have cumulative voting rights with respect to the election
of directors. If our principal shareholders vote together, they could
effectively elect all of our directors.

Item 7. Financial Statements.

All financial information required by this Item is attached hereto at the end of
this report.

Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.

Not applicable.

Item 8A. Controls and Procedures.

a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of the date of
this report, the Company's management carried out an evaluation, under the
supervision of the Company's Chief Executive Officer and the Chief Financial
Officer of the effectiveness of our disclosure controls and procedures pursuant
to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the
Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer that our disclosure controls and procedures are effective to
ensure that the information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is (i) recorded, processed, summarized
and reported within the time periods specified in the Commission's rules and
forms, and (ii) is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, to allow timely decisions
on required disclosure.

b) CHANGES IN INTERNAL CONTROLS. There were no changes in internal
controls or in other factors that could affect these controls during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

Item 8B. Other Information.

None.

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.

The following table sets forth certain information regarding our current
Executive Officers, Directors and Key Employees:

Name Age Position Since
------------------- --- ------------- ------
Michael Metter* 54 President,
Chief Executive Officer,
Director 5/2001

Steven Moskowitz* 42 Secretary, Treasurer
Chief Financial Officer
and Director 6/1999

Frank Lazauskas 46 Director 7/2001

* Michael Metter and Steven Moskowitz are promoters of Spongetech. In addition,
RM Enterprises International, Jerome Schlanger and Michael Sorrentino were our
promoters.

Background of Officers and Directors

Michael Metter has been President, Chief Executive Officer and a Director since
May 2001. Mr. Metter has served as President of RM Enterprises International,
Inc., our majority stockholder, since April, 2001, and as its Chief Executive
Officer since March 2, 2004. He has been a director of Western Power and
Equipment Corp. (OTCBB) since February 2003. Mr. Metter served as the President
of Azurel, Ltd. (OTCBB and subsequently Pink Sheets) from October 2002 to
February 2003, and as its Chief Operating Officer from October 2002 to June
2003. Azurel is delinquent in its reporting requirements with the SEC due to the
fact that it has failed to file any of its required quarterly and annual reports

since the filing of its Annual Report on Form 10-KSB for the year ended December
31, 2002. Since June 2002, Mr. Metter has served as President and Chief
Executive Officer of BusinessTalkRadio.net, a syndicated radio network based in
Greenwich, Connecticut. Since June 2003, he has been chairman of the board of
Tiburon Capital Group, a privately held holding corporation. He has served since
May 2000 as Vice-President ERC Corp., a privately held marketing consultant. He
was compliance director of Securities Capital Trading, Inc., a securities
broker-dealer, from October 1998 to February 2001. On April 19, 2001, Mr. Metter
filed a petition in personal bankruptcy in the District of Connecticut,
Bridgeport Division, and was discharged on December 14, 2001. Mr. Metter
received his MBA in Finance in 1975 and his B.A. in Marketing and Accounting in
1973 from Adelphi University.

Steven Moskowitz has been Secretary, Treasurer and a Director since June 1999.
In February 2006, Mr. Moskowitz was appointed to serve as our Chief Financial
Officer. Mr. Moskowitz has served as a director of RM Enterprises International,
Inc. since April 2001, and as its Secretary since March 2, 2004. He has been a
director of Western Power and Equipment Corp. (OTCBB) since February 11, 2003.
Mr. Moskowitz was a director and CEO of Azurel, Ltd, (OTCBB and subsequently
Pink Sheets) from October 31, 2002 to October 10, 2003. Mr. Moskowitz rejoined
Azurel from May 1, 2004 through July 26, 2004 as CEO and President. On July 25,
2005, Mr. Moskowitz was elected as CEO and President of Azurel. Azurel is
delinquent in its reporting requirements with the SEC due to the fact that it
has failed to file any of its required quarterly and annual reports since the
filing of its Annual Report on Form 10-KSB for the year ended December 31, 2002.
Since June 2003, he has been director of Tiburon Capital Group, a privately held
holding corporation, and since May 2000, he has served as Vice President of ERC
Corp., a privately-held marketing consultant. He served as Vice President,
Marketing and Business Development for H. W. Carter & Sons, a distributor of
children's clothing, from 1987 to 2002. He was President of the H. W. Carter &
Sons division of Evolutions, Inc. from 1996 to 1997. Mr. Moskowitz served in
various capacities at Smart Style Industries, a manufacturer and distributor of
children's apparel, from 1986 to 1987 from sales assistant to Vice President
Sales and Marketing. He received his B.S. in Management from Touro College in
1986.

Frank Lazauskas has been a Director since July 2001. Mr. Lazauskas is the
founder and President of FJL Enterprises, Inc. and TNJ Enterprises, Inc., formed
in 1999 and 1997, respectively, which own and operate eight Dominos Pizza
Stores. He was elected a director of RM Enterprises International, Inc., our
majority stockholder, in March 2004. Mr. Lazauskas was a director of Azurel,
Ltd, (OTCBB and subsequently Pink Sheets) from October 2002 to June 2003. Azurel
is delinquent in its reporting requirements with the SEC due to the fact that it
has failed to file any of its required quarterly and annual reports since the
filing of its Annual Report on Form 10-KSB for the year ended December 31, 2002.
He received his B.A. in Mathematics from Central Connecticut State University in
1983.

Pursuant to our bylaws, our directors are elected at our annual meeting of
stockholders and each director holds office until his successor is elected and
qualified. Officers are elected by our Board of Directors and hold office until
an officer's successor has been duly appointed and qualified unless an officer
sooner dies, resigns or is removed by the Board. There are no family
relationships among any of our directors and executive officers.

Director Compensation

Our directors do not receive cash compensation for their services as directors
but are reimbursed for their reasonable expenses for attending board and board
committee meetings.

Committee of the Board of Directors

We have an audit committee composed of Frank Lazauskas.

Item 10. Executive Compensation.

The following table sets forth for the fiscal years ended May 31, 2005 and 2004,
the compensation we paid to our Chief Executive Officer(s) and any other
executive officers who earned in excess of $100,000 based on salary and bonus.

Long-Term
Compensation
-----------------------------------------
Annual Compensation Awards Payouts
----------------------------------- --------------------------- -----------
All
Other Securities Other
Annual Restricted Under-lying Compen-
Name and Compen- Stock Award(s) Options/ LTIP sation
Principal Position Year Salary ($) Bonus ($) sation ($) ($) SARs (#) Payouts ($) ($)
-------------------------- ---- ---------- --------- ---------- -------------- ----------- ----------- -------

Michael Metter 2006 0 0 0 0 0 0 0
Chief Executive Officer 2005 499,500 (1) 0 0 0 0 0 0
2004 0 0 0 0 0 0 0

Steven Moskowitz 2006 0 0 0 0 0 0 0
Chief Financial Officer and 2005 490,500 (2) 0 0 0 0 0 0
Secretary 2004 0 0 0 0 0 0 0

Frank Lazaukas 2006 0 0 0 0 0 0 0
Director 2005 499,500 (3) 0 0 0 0 0 0
2004 0 0 0 0 0 0 0

(1) 3,330,000 shares of common stock were issued to Mr. Metter as consideration
for services rendered to us which shares are valued at $499,500.

(2) 3,270,000 shares of common stock were issued to Mr. Moskowitz as
consideration for services rendered to us which shares are valued at $490,500.

(3) 3,330,000 shares of common stock were issued to Mr. Lazaukas as
consideration for services rendered to us, which shares were valued at $499,500.

Option Grants for the fiscal years ended May 31, 2006 and 2005

No options or SARs were granted to the named executive officers during fiscal
year ended May 31, 2006.

Aggregated Option Exercise for the fiscal years Ended May 31, 2006 and 2005 and
Fiscal Year-End Option Values

None.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table shows information with respect to each equity compensation
plan under which our common stock is authorized for issuance as of the fiscal
year ended May 31, 2006.

EQUITY COMPENSATION PLAN INFORMATION

---------------------------------------------------------------------------------------------------------------
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation plans
warrants and rights (excluding securities
reflected in column (a)
---------------------------------------------------------------------------------------------------------------
(a) (b) (c)
---------------------------------------------------------------------------------------------------------------

Equity compensation plans approved -0- -0- -0-
by security holders
---------------------------------------------------------------------------------------------------------------
Equity compensation plans not -0- -0- -0-
approved by security holders
---------------------------------------------------------------------------------------------------------------
Total -0- -0- -0-
---------------------------------------------------------------------------------------------------------------

Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.

The following table sets forth certain information, as of May 31, 2006, with
respect to the beneficial ownership of the outstanding common stock by (i) any
holder of more than five (5%) percent; (ii) each of our executive officers and
directors; and (iii) our directors and executive officers as a group. Except as
otherwise indicated, each of the stockholders listed below has sole voting and
investment power over the shares beneficially owned.

-------------------------------------------------------------------------------------------------------------
Shares of Common Stock Beneficially Owned(1)(2)
-------------------------------------------------------------------------------------------------------------
Name Title Number Percent
-------------------------------------------------------------------------------------------------------------

RM Enterprises International, Inc.(3) 12,382,636 36.3%
c/o Spongetech Delivery Systems, Inc.
The Empire State Building, Suite 2204
New York, New York 10118
-------------------------------------------------------------------------------------------------------------
The Rubin Family Irrevocable 7,377,667 21.7%
Stock Trust (4)
25 Highland Boulevard
Dix Hills, New York 11746
-------------------------------------------------------------------------------------------------------------
Michael Metter (3)(5) President, Chief 15,712,636 46.1%
One Tinker Lane Executive Officer and
Greenwich, CT 06830 Director
-------------------------------------------------------------------------------------------------------------
Steven Moskowitz (3) Secretary and Director 15,185,969 44.6%
c/o Spongetech Delivery Systems, Inc.
The Empire State Building, Suite 2204
New York, New York 10118
-------------------------------------------------------------------------------------------------------------
Frank Lazauskas (3) Director 15,712,636 46.1%
51 Niagara Street
Newark, New Jersey 07105
-------------------------------------------------------------------------------------------------------------
Officers and 21,845,969 64.1%
Directors (3 persons)(6)
-------------------------------------------------------------------------------------------------------------

(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
Unless otherwise indicated below, the persons and entity named in the table have
sole voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable. Under rules adopted
by the SEC, shares of common stock issuable pursuant to warrants or options or
upon conversion of convertible securities, to the extent such warrants or
options or convertible securities are currently exercisable or convertible
within 60 days of the date of the prospectus, are treated as outstanding for
computing the percentage of the person holding such securities but are not
treated as outstanding for computing the percentage of any other person.

(2) The percentage of beneficial ownership is based on 34,072,636 shares of our
common stock outstanding as of the date of the prospectus.

(3) Includes 215,969 shares of our common stock owned by Flo Weinberg, Inc., a
wholly-owned subsidiary of RM Enterprises International. The control persons of
RM Enterprises International are Michael Metter, Steven Moskowitz and Frank
Lazauskas, all of whom are directors of RM Enterprises International.

(4) Includes 466,667 shares of common stock owned by American United Global,
Inc., of which The Rubin Family Irrevocable Stock is a majority stockholder. The
trustees of The Rubin Family Irrevocable Stock Trust are Majorie Rubin and
Robert Shulman, CPA. The beneficiaries of The Rubin Family Irrevocable Stock
Trust are Linda Rubin, Andrew Rubin and Lisa Rubin.

(5) Includes 1,665,000 shares of our common stock beneficially owned by Deborah
Metter, Michael Metter's wife, through D.L. Investments, Inc. Mr. Metter
disclaims beneficial ownership of these shares.

(6) Includes (i) 1,665,000 shares of our common stock held by Mr. Metter; (ii)
includes 1,665,000 shares of our common stock beneficially owned by Deborah
Metter, Michael Metter's wife, through D.L. Investments, Inc. Mr. Metter
disclaims beneficial ownership of these shares; (iii) 2,803,333 shares of our
common stock held by Mr. Moskowitz; (iv) 3,330,000 shares of our common stock
held by Mr. Lazauskas; and (v) 12,382,636 shares of our common stock held by RM
Enterprises International, including 215,969 shares of our common stock owned by
Flo Weinberg, Inc., a wholly-owned subsidiary of RM Enterprises International.
The control persons of RM Enterprises International are Michael Metter, Steven
Moskowitz and Frank Lazauskas, all of whom are directors of RM Enterprises
International.

Item 12. Certain Relationships and Related Transactions.

We were incorporated in New York State on July 18, 1999 as Romantic Scents, Inc.
by RM Enterprises International, Inc. which was issued 5,000 shares representing
all our issued and outstanding capital stock in consideration of forming our
company. We received advances from RM Enterprises International in the aggregate
amount of $113,414. These advances were paid back to RM Enterprises
International on an interest-free basis through the conversion of debt into
common stock. RM Enterprises International, Inc. may be considered a promoter.
Michael Metter, our President, and Steven Moskowitz, our Secretary, may also be
considered our promoters. Jerome Schlanger and Michael Sorrentino were former
presidents of us and may be considered promoters. Aside from the shares of our
common stock which it received in connection with our formation, RM Enterprises
International has received no additional consideration from us for its
activities related to our formation or business.

The control persons and beneficial owners of RM Enterprises International are
Michael Metter, Steven Moskowitz and Frank Lazauskas, all of whom are directors
of RM Enterprises International.

Jerome Schlanger was Treasurer and a director of RM Enterprises until his
resignation as of March 3, 2004. On July 15, 2002, under the name of RSI
Enterprises, we entered into a stock exchange agreement with Nexgen Acquisitions
under which we became a wholly-owned subsidiary. Our then sole stockholder, RM
Enterprises, received 12,000,000 shares of the common stock of Nexgen
Acquisitions VIII and became its majority stockholder. Guy Cohen, as the owner
of Nexgen Holdings, Inc., the parent of Nexgen Acquisitions was the promoter of
Nexgen Acquisitions; and he received no additional consideration from us for his
activities. Mr. Cohen, on November 22, 2004, transferred his interest in Nexgen
Holdings to The Rubin Family Irrevocable Stock Trust.

In September, 2002, the majority stockholder of Nexgen Acquisitions VIII
transferred 2,000,000 shares to The Rubin Family Irrevocable Stock Trust, a
stockholder but not a control person of RM Enterprises, 300,000 shares to Eugene
Dworkis, 200,000 shares to Maurice Harroch and 500,000 shares to Falcon Crest
Capital, Inc.

Michael Sorrentino, a former employee, loaned us $25,000 on February 21, 2001
payable on demand. We had been accruing interest at the rate of 10% per annum.
Between June 1, 2000 to May 31, 2001, RM Enterprises International, Inc., our
majority stockholder, loaned us during the fiscal year ended May 31, 2001, an
aggregate of $51,930. The loan did not bear interest, and the maturity date was
extended to December 31, 2004. From November, 2002 through November 30, 2003, RM
Enterprises International loaned us an aggregate of $73,600, payable on demand.
The loan which was now due December 31, 2004 did not bear interest. We used
these funds to pay rent in the amount of $15,000, telephone costs in the amount
of $7,500 and other administrative expenses relating to our occupancy of our
headquarters premises of $51,100. All of these loans were converted into shares
of our common stock.

In January 2003, we paid $24,500 to a company owned by Deborah Metter, the wife
of Michael Metter, our President, for marketing and promotional services in
connection with the preparation of an infomercial for the vehicular sponge,
including the use of her home. In 2003 and the first half of 2004, we marketed
our products on a radio talk show aired by BusinessTalkRadio.net, a syndicated
radio network of which Mr. Metter is President and CEO. BusinessTalkRadio.net
received a $1.00 commission on each item sold. We paid BusinessTalkRadio.net an
aggregate of $300 during that time but currently do not advertise on the
program.

From our inception in July 1999 until March 2, 2004, we occupied office and
warehouse space in premises in an industrial building leased by RM Enterprises
International. We paid RM Enterprises International an aggregate of $15,000 for
rent, $7,500 for telephone costs and $51,600 for administrative costs. From
March 3, 2004 through December 15, 2004, we occupied office space rent-free in
an office tower that was leased by the family of Steven Moskowitz. We currently
sublease office space from A&N Enterprises LLC, which is leased by the family of
Steven Moskowitz. We issued 60,000 shares of common stock to A&N Enterprises as
consideration for our use of the premises.

In January 2005, we issued 3,330,000 shares of our common stock to Michael. L.
Metter, our President and Chief Executive Officer, as compensation for managing
our day-to-day operations, introducing us to business, sales, contractual and
fundraising opportunities and evaluating potential acquisition candidates on our
behalf valued at $499,500.

In January 2005, we issued 3,270,000 shares of our common stock, valued at to
Steven Moskowitz, our Secretary, as compensation for managing our day-to-day
operations, introducing us to business, sales, contractual and fundraising
opportunities and evaluating potential acquisition candidates on our behalf
valued at $490,500.

In January 2005, we issued 100,000 shares of our common stock to Thomas Monahan,
our former Chief Financial Officer, as compensation for managing our financial
operations valued at $15,000.

In January 2005, we issued 3,330,000 shares of our common stock to Frank
Lazauskas, a director of the Company, as compensation for managing our
day-to-day operations, introducing us to business, sales, contractual and
fundraising opportunities and evaluating potential acquisition candidates on our
behalf at $499,500.

In January 2005, we issued 2,000,000 shares of our common stock to the Rubin
Family Irrevocable Stock Trust as directed by Robert Rubin, as compensation for
introducing us to business, sales and contractual opportunities and assisting us
with the review and evaluation of fundraising activities and potential
acquisition candidates, valued at $300,000.

In January 2005, we issued 533,333 shares of our common stock to Steven
Moskowitz, our Secretary and Director, in exchange for $114,400 in debt.

In January 2005, we issued 466,667 shares of our common stock to RM Enterprise
International and 215,969 shares of our common stock to Flo Weinberg, Inc., its
wholly-owned subsidiary, in exchange for an aggregate of $183,414 in debt.

In January 2005, we issued 466,667 shares of our common stock to American United
Global, Inc., which is majority-owned by The Rubin Family Irrevocable Stock
Trust, in exchange for $70,000 in debt.

In January 2005, we issued 500,000 shares of our common stock to Michael
Sorrentino, in exchange for $75,000 in debt.

We believe that these transactions were on terms as favorable as could have been
obtained from unaffiliated third parties. All future transactions we enter into
with our directors, executive officers and other affiliated persons will be on
terms no less favorable to us than can be obtained from an unaffiliated party
and will be approved by a majority of the independent, disinterested members of
our board of directors, and who had access, at our expense, to our or
independent legal counsel.

Item 13. Exhibits

3.1 Certificate of Incorporation of Nexgen VIII, Inc.(1)

3.2 Certificate of Amendment of Nexgen VIII, Inc. changing name to
Spongetech Delivery Systems, Inc.(1)

3.3 By-Laws of Spongetech Delivery Systems, Inc.(1)

3.4 Certificate of Incorporation of Romantic Scents, Inc. (2)

3.5 Certificate of Amendment changing name of Romantic Scents, Inc. to
RSI Enterprises, Inc. (2)

3.7 Certificate of Amendment changing name of RSI Enterprises, Inc. to
Spongetech Enterprises International, Inc. (2)

3.7 Certificate of Incorporation of Merger Sub, Inc. (2) 3.8 Merger
Certificate between Spongetech Delivery Systems and Merger Sub, Inc.
(2)

3.9 Merger Certificate between Spongetech Enterprises International,
Inc. and Merger Sub, Inc. (2)

3.10 Certificate of Amendment changing name of Merger Sub, Inc. to
Spongetech Delivery Systems, Inc. (2)

4.1 Specimen Certificate of Common Stock(1)

4.2 Warrant Certificate (3)

4.3 Warrant Agreement with Colebrook, Inc. and Olde Monmouth Stock
Transfer Co., Inc. (3)

4.4 Oral Understanding with Dicon (5)

10.1 Stock Purchase Agreement by and among Nexgen Acquisitions VIII,
Inc., RM Enterprises International, Inc. and RSI Enterprises,
Inc.(1)

10.2 Stock Purchase Agreement by and between Spongetech Delivery Systems,
Inc. and Colebrook, Inc. (2)

10.3 License Agreement dated July 1, 2001 with Dicon Technologies (2)

10.4 Supply and Requirements Agreement dated July 1, 2001 with Dicon
Technologies (7)

10.5 Manufacturer's Representative Agreement dated July 1, 2001 with
Dicon Technologies (2)

10.6 Extension of debt letter by Romantic Moments, Inc. dated August 15,
2002 (4)

10.7 Terms of oral understanding with Dicon Technologies to expand
license (5)

10.8 Factoring Agreement with Westgate (4)

10.9 Agreement with Paradigm (6)

10.10 Letter Agreement, dated February 15, 2005, between HH Brown Shoe
Technologies, Inc. (d/b/a Dicon Technologies) and Spongetech
Delivery Systems, Inc. (7)

10.14 Letter Agreement, dated January 31, 2006, between HH Brown Shoe
Technologies, Inc. (d/b/a Dicon Technologies) and Spongetech
Delivery Systems, Inc. (8)

10.15 Amendment to Exclusive License Agreement dated January 31, 2006 (8)

(1) Previously filed as an exhibit to registration statement on Form SB-2 filed
November 1, 2002

(2) Previously filed as an exhibit to first amendment to registration statement
on Form SB-2 filed January 13, 2003

(3) Previously filed as an exhibit to second amendment to registration statement
on Form SB-2 filed April 11, 2003

(4) Previously filed as an exhibit to third amendment to registration statement
on Form SB-2 filed July 8, 2003

(5) Previously filed as an exhibit to fourth amendment to registration statement
on Form SB-2 filed January 12, 2004

(6) Previously filed as an exhibit to fifth amendment to registration statement
on Form SB-2 filed March 15, 2004

(7) Previously filed as an exhibit to registration statement on Form SB-2 filed
May 6, 2005.

(8) Previously filed as an exhibit to registration statement on Form SB-2 filed
April 11, 2006.

Item 14. Principal Accountant Fees and Services.

Audit Fees

The aggregate fees billed for professional services rendered by our principal
accountants for the audit of our financial statements, for the reviews of the
financial statements included in our annual report on Form 10-KSB, and for other
services normally provided in connection with statutory filings were $18,000 and
$18,000 for the years ended May 31, 2006 and May 31, 2005, respectively.

Audit Related Fees

We incurred fees of $0and $0 for the years ended May 31, 2006 and May 31, 2005,
respectively, for professional services rendered by our principal accountants
that are reasonably related to the performance of the audit or review of our
financial statements and not included in "Audit Fees."

All Other Fees

We did not incur any other fees for professional services rendered by our
principal accountants during the years ended May 31, 2006 and May 31, 2005.

Audit Committee Pre-Approval Policies and Procedures

Not applicable.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

SPONGETECH DELIVERY SYTEMS, INC.

By: /s/ Michael L. Metter
------------------------------------
Michael L. Metter
President and Chief Executive
Officer

By: /s/ Steven Moskowitz
------------------------------------
Steven Moskowitz
Chief Financial Officer, Principal
Accounting Officer and Secretary

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Signature Title Date
--------- ----- ----

President, Chief Executive
/s/ Michael L. Metter Officer and Director August 29, 2006
-----------------------
Michael L. Metter

Chief Financial Officer, Principal
/s/ Steven Moskowitz Accounting Officer, Secretary and
----------------------- Director August 29, 2006
Steven Moskowitz

/s/ Frank Lazauskas Director August 29, 2006
-----------------------
Frank Lazauskas

INDEX TO FINANCIAL STATEMENTS

Part 1 - Financial Information

Page
----

Item 1 - Financial Statements

Report of Independent Auditors

Balance Sheet as of May 31, 2006 F-3

Statements of Operations for the years ended
May 31, 2006 and 2005 F-4

Statements of Changes in Stockholders' Equity
for the years ended May 31, 2006 and 2005 F-5 - F-6

Statements of Cash Flows for the years ended
May 31, 2006 and 2005 F-7

Notes to Financial Statements F-8 - F-12

F-1

DRAKEFORD & DRAKEFORD, LLC

CERTIFIED PUBLIC ACCOUNTANTS

A LIMITED LIABILITY COMPANY

554 Duncan Road
Royston, Georgia 30662
770-575-0915

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Directors of
SPONGETECH DELIVERY SYSTEMS, INC.

We have audited the balance sheet of SPONGETECH DELIVERY SYSTEMS, INC. as of May
31,2006, and the related statements of operations, changes in stockholders'
equity (deficiency), and cash flows for the years ended May 31, 2006 and 2005.
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 auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit 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 financial position of SPONGETECH DELIVERY
SYSTEMS, INC., as of May 31, 2006 and the results of its operations and its cash
flows for the two years then ended, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that
SPONGETECH DELIVERY SYSTEMS, INC. will continue as a going concern. As more
fully described in Note 1, the company has incurred operating losses since the
date of organization and requires additional capital to continue operations.
These conditions raise substantial doubt about the company's ability to continue
as a going concern. Management's plans as to these matters are described in Note
1. The financial statements do not include any adjustments to reflect the
possible effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result from the possible
inability of SPONGETECH DELIVERY SYSTEMS, INC. to continue as a going concern.

/S/ Drakeford & Drakeford, LLC

August 15, 2006

F-2

SPONGETECH DELIVERY SYSTEMS, INC.

BALANCE SHEET

May 31,
2006
------------

ASSETS
Current Assets
Cash $ 2,805
Accounts receivable 9,885
Inventories 1,659
------------
Total current assets 14,349

Property and equipment 24,263

------------
Total assets $ 38,612
============

LIABILITIES, COMMON STOCK SUBJECT TO RESCISSION RIGHTS
AND SHAREHOLDERS' (DEFICIENCY)

Current Liabilities
Accounts payable and
accrued expenses $ 112,029
Loan payable-officer 10,500
Loan payable 66,000
Income taxes payable 1,600
------------
Total current liabilities 190,129

Total long-term liabilities 0
------------
Total liabilities 190,129

Common stock subject to rescission rights:
Issued and outstanding:219,000 shares in 2002 2,190
------------
Shareholders' Equity (Deficiency)
Common stock, $.001 par value;
Authorized 50,000,000 shares;
issued and outstanding 33,853,626
shares as of
May 31, 2006 33,854
Preferred stock $.001 par value;
Authorized 5,000,000 shares;
no shares issued and outstanding 0
Additional paid-in capital 2,647,940
Deficit (2,835,501)
------------

Total shareholders' (deficiency) (153,707)
------------
Total liabilities, common stock subject to rescission
rights and stockholders' (deficiency) $ 38,612
============

See Independent Auditors' Report and notes to financial statements.

F-3

SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS

For the
years ended
May 31,
---------------------------------
2006 2005
------------ ------------

Sales $ 12,859 $ 1,051

Cost of goods sold 4,320 1,012
------------ ------------
Gross profit 8,539 39
------------ ------------

Operating expenses
Selling 0 0
General and
Administrative
expenses 106,019 54,454
Depreciation expense 4,284 4,284
------------ ------------

Total operating expenses 110,303 58,738
------------ ------------

Loss before provision
for income taxes (101,764) (58,699)

Other income and expenses
Interest expense 0 0
------------ ------------
Total other income and
expense 0 0

Net loss $ (101,764) $ (58,699)
============ ============

Basic and diluted (loss) per
common stock

Net loss per share -
basic and diluted $ (.00) $ (.00)

Weighted average common
shares outstanding 33,962,636 18,985,000

See Independent Auditors' Report and notes to financial statements.

F-4

SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2006 and 2005

Total
Additional Common Shareholders'
Number of Capital Paid-In Stock Equity
Shares Stock Capital Subscribed Deficit (Deficiency)
------------ ------------ ------------ ------------ ------------ ------------

Balance -
June 1, 2000 12,000,000 $ 12,000 $ -- $ -- $ (52,200) $ (40,200)

Net loss for year
ended May 31, 2001
-- -- -- (198,318) (198,318)
------------ ------------ ------------ ------------ ------------ ------------
12,000,000 12,000 -- -- (250,518) (238,518)

Contributions -- -- 105,100 -- 105,100
------------ ------------ ------------ ------------ ------------ ------------

Balance -
May 31, 2001 12,000,000 12,000 105,100 -- (250,518) (133,418)

Contributions -- -- 86,943 -- 86,943

Reclassification of
common stock subject
to rescission rights (219,000) (219) (1,971) (2,190)

Net loss for year ended
May 31, 2002 -- -- -- (102,477) (102,477)
------------ ------------ ------------ ------------ ------------ ------------
Balance-
May 31, 2002(restated) 11,781,000 11,781 190,072 -- (352,995) (151,142)

Issuance of
common stock 6,985,000 6,985 (1,595) -- 5,390
Value of services
contributed by
officers -- -- 58,500 -- 58,500
Net loss for the
year ended
May 31, 2003 (265,517) (265,517)
------------ ------------ ------------ ------------ ------------ ------------
Balance -
May 31, 2003(restated) 18,766,000 $ 18,766 $ 246,977 -- $ (618,512) $ (352,769)

Common stock subscribed 526,814 526,814

Net loss for the
year ended
May 31, 2004 (2,056,526) (2,056,526)
------------ ------------ ------------ ------------ ------------ ------------
Balance -
May 31, 2004(restated) 18,766,000 $ 18,766 $ 246,977 $ 526,814 $ (2,675,038) $ (1,882,481)

Issuance of stock
for debt & service 14,967,626 14,968 2,367,346 (526,814) 1,855,500

F-5

SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2006 and 2005

Net loss for
The year ended
May 31, 2005 (58,699) (58,699)
------------ ------------ ------------ ------------ ------------ ------------
Balance-
May 31, 2005(restated) 33,733,626 $ 33,734 $ 2,614,323 $ 0 $ (2,733,737) $ (85,680)

Issuance of common
stock for services 120,000 120 33,617 33,737

Net loss for the
year ended
May 31, 2006 (101,764) (101,764)
------------ ------------ ------------ ------------ ------------ ------------
Balance-
May 31, 2006 33,853,626 $ 33,854 $ 2,647,940 $ 0 $ (2,835,501) $ (153,707)
============ ============ ============ ============ ============ ============

See Independent Auditors' Report and notes to financial statements.

F-6

SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS

For the
Years Ended May 31,
-------------------------------
2006 2005

Operating Activities:
Net loss $ (101,764) $ (58,699)
Adjustments to reconcile net loss to
net cash provided by (used in)
Operating activities:
Depreciation 4,284 4,284
Common stock issued for services 33,737 24,000
Changes in operating assets and
liabilities
Accounts receivable (9,094) (791)
Inventories (201) (1,014)
Accounts payable and accrued
expenses 12,366 (9,353)
Due to notes and related parties 62,000 14,500
------------ ------------

Net cash provided by (used in)
operating activities 1,328 (27,073)
------------ ------------
Investing Activities:

Net cash used in investing
activities
Stock Settlement of litigation 0 28,500
------------ ------------

Financing
Activities:

Net cash provided by
financing activities 0 0
------------ ------------

Net increase in cash 1,328 1,427

Cash - beginning 1,477 50
------------ ------------
Cash - end $ 2,805 $ 1,477
============ ============

Supplemental Information
Interest paid $ 0 $ 0
Income taxes paid $ 0 $ 0
Common stock subscribed in release
of company debt $ 0 $ (526,814)

Noncash Transactions:
Parent company debt contributed
to additional paid-in capital $ 0 $ 0
Issuance of common stock $ 33,737 $ 2,382,314
Reduction in accrued expenses $ 0 $ (1,789,500)

See Independent Auditors' Report and notes to financial statement.

F-7

SPONGETECH DELIVERY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

1 - Summary of Significant Accounting Policies

Nature of Operations

Spongetech Delivery Systems, Inc. (the "Company") was formed on June 18,
1999, as Romantic Scents, Inc. On June 12, 2001, the Company changed its name to
RSI Enterprises, Inc., and, on October 2, 2002, changed its name to Spongetech
International Ltd. ("SIL"). On July 15, 2002, the Company was acquired by
Spongetech Delivery Systems, Inc. ("SDS") (formerly Nexgen Acquisitions VIII,
Inc.). The transaction was accounted for as a reverse acquisition using the
purchase method of accounting, whereby the shareholder of SIL retained
approximately 63% of the Company's outstanding common stock. On December 16,
2002, SIL changed its domicile to Delaware by merging with and into Spongetech
Sub, Inc. ("SUB"). SUB's parent, Spongetech Delivery Systems, Inc. then merged
with and into SUB so that SUB became the surviving corporation, and changed its
name to Spongetech Delivery Systems, Inc.

The Company distributes a line of hydrophilic polyurethane sponge cleaning
and waxing products.

Basis of Presentation / Going Concern

The financial statements have been prepared for purposes of registration
with the Securities and Exchange Commission ("SEC"), and have been prepared in
in accordance with auditing standards of the Public Company Accounting Oversight
Board (United States) which contemplates continuation of the Company as a going
concern. However, the Company has sustained substantial operating losses in
recent years, current liabilities exceed current assets, and total liabilities
exceed total assets.The Company has incurred losses since inception and expect
to incur losses for the foreseeable future. For the fiscal years ended May
31,2006 and May 31, 200, the Company incurred net losses of $101,764,and $58,699
respectively. As of May 31, 2006 the Company had an accumulated deficit of
$153,707 and a working capital deficiency of $175,780. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The recovery of assets and continuation of future operations are dependent upon
the Company's ability to obtain additional debt or equity financing and its
ability to generate revenues sufficient to continue pursuing its business
purposes. The Company is actively pursuing financing to fund future operations.

F-8

1 - Summary of Significant Accounting Policies (Continued)

Accounts Receivable

Accounts receivable have been adjusted for all known uncollectible
accounts. At May 31, 2006 there were no doubtful accounts.

Inventories

Finished products inventories are carried at cost, principally first-in,
first-out, but not in excess of market.

Property and Equipment

Property and equipment are carried at cost. Depreciation has been provided
using straight-line and accelerated methods over the estimated useful lives of
the assets. Repairs and maintenance are expensed as incurred, and renewals and
betterments are capitalized.

Deferred Income Taxes

The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences of temporary differences between the
carrying amounts and the income tax bases of assets and liabilities and the
effect of future income tax planning strategies to reduce any deferred income
tax liability.

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 certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.

Offering Costs

Deferred offering costs incurred by the Company in connection with the
proposed registration statement will be expensed as incurred.

Advertising Costs

Advertising costs are expensed as incurred. For the years ended May 31,
2006 and 2005, advertising costs totaled $0 and $0, respectively.

F-9

Shipping and Handling Costs

Shipping and handling costs are included in selling expenses. For the
years ended May 31, 2006 and 2005, shipping and handling costs totaled $0 and $0
respectively.

Net Income (Loss) Per Share

Per share data has been computed and presented pursuant to the provisions
of SFAS No. 128, earnings per share. Net income (loss) per common share - basic
is calculated by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. Net income (loss) per common share
- diluted is calculated by dividing net income (loss) by the weighted average
number of common shares and common equivalent shares for stock options
outstanding during the period.

Recent Accounting Pronouncements

New accounting statements issued, and adopted by the Company, include the
following:

In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123R"). This
standard requires expensing of stock options and other share-based payments and
supersedes SFAS No. 123, which had allowed companies to choose between expensing
stock options or showing pro forma disclosure only. SFAS 123R also supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS
No. 95, " Statement of Cash Flows." This standard was adopted by us as of
January 2006 and will apply to all awards granted, modified, cancelled or
repurchased after that date as well as the unvested portion of prior awards.
SFAS No. 123R permits public companies to adopt its requirements using one of
three methods: the "modified prospective" method, the "modified retrospective"
method to January 1, 2005, or the "modified retrospective" method to all prior
years for which SFAS No. 123 was effective. We shall use the modified
prospective method. We adopted the provisions of this standard on January 1,
2006 and will apply to all awards granted, modified, cancelled or repurchased
after that date as well as the unvested portion of prior awards on that date.

As permitted by SFAS No. 123, we currently follow APB Opinion No. 25 which
provides for the accounting for share-based payments to employees and directors
using the intrinsic value method and, as such, we generally recognized no
compensation cost for such stock options.

F-10

2 - Property and Equipment

Property and equipment is summarized as follows:

Estimated
Useful Lives May 31,
Years 2006
------------ --------

Furniture and fixtures 5 - 10 $ 761
Machinery and equipment 5 - 10 17,828
Molds 5 - 10 38,312
--------

56,901

Less: Accumulated depreciation 32,638
--------

$ 24,263
========

Depreciation expense for the years ended May 31, 2006 and 2005 was $4,284
and $4,284, respectively.

3 - Accounts payable and accrued expenses consist of the following:

May 31,
2006
---------

Product development (Packaging & mold
Development) $ 99,663 No Related Party
Other 12,365
---------

Total $ 112,028
=========

4 - Related Party Transactions

Since December 8, 2004, the Company has been occupying their principal
offices, which consist of 800 square feet of office space located at The Empire
State Building, 350 Fifth Avenue, Suite 2204, New York, New York. The premises
are leased by members of the family of Steven Moskowitz, secretary of the
Company. Pursuant to a sublease agreement, the Company issued 60,000 shares of
common stock valued at $.15 per share to A & N Enterprises. The sublease expires
on January 31, 2008. The Company pays directly for telephone, utilities and
other expenses.

In January 2005, the Company issued an aggregate of 12,030,000 shares of
common stock in consideration for services at an average of $.15 per share as
follows:

Shares Value

Robert Rubin 2,000,000 $ 300,000 Related
Frank Lazauskas 3,330,000 499,500 Related
Steven Moskowitz 3,270,000 499,500 Related
Michael L.Metter 3,330,000 499,500 Related
Thomas Monahan 100,000 15,000
--------- ---------
Total 12,030,000 $1,813,500
========== =========

F-11

In January 2005, the Company issued an aggregate of 2,802,636 shares of
common stock valued at $.15 per share in consideration for the forgiveness of
debt aggregating $526,814 as follows:

Shares Value

Flow Weinberg 215,969 $ 70,000 Related
Robert Rubin 120,000 18,000 Related
RM Enterprises 466,667 113,414 Related
Michael Sorrentino 500,000 75,000
Steven Moskowitz 533,333 114,400 Related
DDK Accounting 500,000 66,000
American United Global 466,667 70,000
--------- ---------
Total 2,802,636 $ 526,814
========= =========

5 - Deferred Income Taxes

At May 31, 2006 and May 31, 2005, the Company had approximately $2,835,501
and $2,733,737 respectively, of net operating loss carryforwards available,
which expire in various years through May 31, 2022. The significant component of
the Company's deferred tax asset as of May 31,2006 and May 31, 2005 is as
follows:

May 31, May 31,
2006 2005
----------- -----------

Non-Current
Net operating loss carryforwards $ 2,835,501 $ 2,733,737

Valuation allowance for
deferred tax asset (2,835,501) (2,733,737)
----------- -----------

$ -- $ --
=========== ===========

SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax asset will not be realized.
At May 31, 2006 and May 31, 2005, a valuation allowance for the full amount of
the net deferred tax asset was recorded.

6 - Commitments and Contingencies

Supply and License Agreements

In July 2001, the Company entered into a supply and requirement agreement
with Dicon Technologies ("Dicon"), a manufacturing company that has
technological know-how and patented and proprietary information relating to
hydrophilic foam materials (sponges) and their applications. The agreement
requires the Company to purchase all of their requirement from Dicon, and Dicon
grants exclusive worldwide rights to distribute the products. Minimum annual
purchase requirements are set forth in the agreement. On January 6, 2006, the
agreement was amended and extended until December 31, 2006.

The Company and Dicon have also entered into an exclusive license
agreement for certain molded hydrophilic foam products which the Company helped
develop, with super absorbent polymer and detergent soaps and waxes used for the
cleaning and polishing of land, sea and transportation vehicles. The term of the
agreement is for the full life of any design patent, which may be issued on the
molded sponge design.

F-12

The Company settled a lawsuit commenced against, among others, the
Company, by Westgate Financial Corporation ("Westgate"). On January 6, 2003, the
Company and Westgate entered into a factoring agreement wherein the Company
assigned to Westgate its accounts receivable arising out of its sale of goods or
rendition of services to customers (the "Contract"). On July 25, 2006 the
parties entered into a Consent Order pursuant to which the Companies agreed to
pay the sum of $20,000 to Westgate.

Employment Contracts

The Company is currently negotiating with two executives to establish
employment contracts. No terms of these negotiations have been disclosed.

7 - Common Stock Issuances

On April 27, 2006 the Company issued 120,000 shares of common stock for
legal services at a value of $.28 per share.

Common Stock Subject to Rescission Rights:

As of May 31, 2002, the Company re-classified a total of 219,000 shares of
common stock aggregating $2,190 in value or $.01 per share sold through a
private placement, which management has determined have rescission rights,
outside of stockholders' equity (deficit), as the redemption features were not
within the control of the Company. The Company intends to retire all shares held
by the shareholders who accept the rescission offer. Such shares shall become
authorized but unissued shares of the Company.

In March 2002 through May 2002, the Company's predecessor, Nexgen VIII,
sold an aggregate of 219,000 shares pursuant to a private placement offering
aggregating $2,190 or $.01 per share. The Company's current management was not
involved in said offering but was advised that the private placement was made
pursuant to Rule 504, promulgated pursuant to Regulation D of the Securities Act
of 1933, as amended (the "Act"). At the time of the issuances in March through
May 2002, there was no written agreement between Nexgen and the Company.
However, Nexgen's plan was to merge with the Spongetech International, Ltd and
therefore Nexgen had a specific plan to engage in a merger with an identified
company, Spongetech International, Ltd., as permitted by Rule 504(a)(3). This
rule prohibits the use of an offering under Rule 504 if the issuer intends "to
engage in a merger or acquisition with an unidentified company or companies, or
other entity or person." Accordingly management believed that at the time of the
issuances from March through May 2002, Nexgen was not a blank check company and
was permitted to avail itself of the exemption provided by Rule 504. Despite the
belief that Nexgen was not a blank check company at the time of the issuances,
Nexgen may have been a blank check company and as such the reliance on Rule 504
was misplaced and the transaction was not exempted pursuant to such Rule 504 and
the issuances were made in violation of Section 5 of the Act. In order to cure
any violation that may have occurred or that may have been deemed to have
occurred by any regulatory agency, management has determined to offer a
rescission to the shareholders who purchased shares from the Company's,
predecessor in March through May 2002. The rescission offer is intended to
address any federal and state securities laws compliance issues by allowing the
holders of the shares covered by the rescission offer to rescind the underlying
securities transactions and sell those securities back to us.

o The Company is offering to repurchase 219,000 shares of our common stock
from persons who are or were residents of Colorado and Texas. These
persons are shareholders who purchased those shares in a private placement
conducted by Nexgen VIII, our predecessor in 2002.

o The repurchase price for the shares of the common stock subject to the
rescission offer is $.01 per share, and is equal to the price paid by
those persons who purchased these shares. If shareholder accepts the offer
of rescission and surrenders the shares, they will receive interest, based
on the repurchase price $.01 and calculated from the date the shares were
purchased through the date that the rescission offer expires at the
interest rate based on your state of residence.

Although the balance sheets and statements of changes in stockholders'
equity (deficiency) have been restated, the correction had no effect on
the statements of operations or on the earnings per share. Also, there is
not any future impact on the financial statements.

As of August 2006, all of the shareholders of Colorado and Texas have elected to
reject the rescission offer and desired to retain their respective shares.

F-13