Edgar Filing: PROFILE TECHNOLOGIES INC

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------------

FORM 10-KSB

----------------

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

For the fiscal year ended:
June 30, 2005

Commission File Number
0-21151

----------------

PROFILE TECHNOLOGIES, INC.
--------------------------------------------
(Name of small business issuer in its charter)

DELAWARE 91-1418002
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

2 Park Avenue, Suite 201
MANHASSET, NY 11030
------------- -----
(Address of Principal (Zip Code)
Executive Offices)

----------------

Issuer's telephone number: (516) 365-1909

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

Securities registered under Section 12(g) of the Act:

Common Stock, $.001 Par Value

Title of Class

----------------

Check whether the issuer (1) has 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 pursuant to Item 405
of Regulation S-B is not 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]

Issuer's revenues for the most recent fiscal year. $0.

The aggregate market value of the voting stock held by non-affiliates of
the registrant was $7,501,000, computed by reference to the price at which the
common stock last sold or the average bid and ask price as reported by the
NASD'S Over the Counter Bulletin Board on September 15, 2005.

There were 8,334,44 5shares of common stock, $.001 par value, outstanding
as of September 15, 2005.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for its annual shareholder meeting to be
held on December 12, 2005 to be filed pursuant to Regulation 14A.

Transitional Small Business Format (check one): Yes [_] No [X]

Table of Contents

--------------------------------------------------------------------------------

Description Page Number

--------------------------------------------------------------------------------

PART I
------

ITEM 1 DESCRIPTION OF BUSINESS..................................1

ITEM 2 DESCRIPTION OF PROPERTIES................................8

ITEM 3 LEGAL PROCEEDINGS........................................8

ITEM 4 SUBMISSION OF MATTERS TO VOTE
OF SECURITY HOLDERS......................................8

PART II
-------

ITEM 5 MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS..............................8

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........11

ITEM 7 FINANCIAL STATEMENTS....................................19

ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................40

ITEM 8A CONTROLS AND PROCEDURES.................................40

PART III
--------

ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS........................41

ITEM 10 EXECUTIVE COMPENSATION..................................42

ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................42

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................................42

ITEM 13 EXHIBITS................................................43

ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES..................44

SIGNATURES .......................................................... 45

EXHIBITS

Preliminary Note Regarding Certain Risks
----------------------------------------
and Forward-Looking Statements
------------------------------

This Annual Report on Form 10-KSB contains "forward-looking statements."
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company's projected future results, future plans, objectives or
goals or future conditions or events are also forward-looking statements. Actual
results are inherently difficult to predict. Any such forward-looking statements
are subject to the risks and uncertainties that could cause actual results of
operations, financial condition, acquisitions, financing transactions,
operations, expenditures, expansion and other events to differ materially from
those expressed or implied in such forward-looking statements. Any such
forward-looking statements would be subject to a number of assumptions
regarding, among other things, future economic, competitive and market
conditions generally. Such assumptions would be based on facts and conditions as
they exist at the time such statements are made as well as predictions as to
future facts and conditions, the accurate prediction of which may be difficult
and involve the assessment of events beyond the Company's control.

The forward-looking statements contained in this report are based on
current expectations that involve a number of risks and uncertainties. Such
forward-looking statements are based on assumptions that the Company will obtain
or have access to adequate financing for each successive phase of its growth,
that the Company will market and provide products and services on a timely
basis, that there will be no material adverse competitive or technological
change with respect to the Company's business, demand for the Company's products
and services will significantly increase, that the Company's executive officers
will remain employed as such by the Company, that the Company's forecast
accurately anticipates market demand, and that there will be no material adverse
change in the Company's operations, business or governmental regulation
affecting the Company or its customers. The foregoing assumptions are based on
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Although the Company believes the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements.

PART I

Item 1. Description of Business.

Introduction

Profile Technologies, Inc. (the "Company"), a Delaware corporation, was
incorporated in 1986 and commenced operations in fiscal year 1988. The Company
is in the business of inspecting pipelines for corrosion and is in the final
stages of researching and developing a patented, non-destructive and
non-invasive, high speed scanning process using electro magnetic waves to
remotely inspect buried, encased and insulated pipelines for corrosion (the "EMW
Inspection"). The EMW Inspection process analyzes the waveforms of electrical
impulses by extracting point-to-point information along a segment of pipeline to
determine the integrity of the entire pipeline. During the EMW Inspection
process electromagnetic pulses are directed along the length of a pipeline from
either one ("Single-Pulse") or two ("Dual-Pulse") directions. In Dual-Pulse
mode, the intersecting point of the two electro magnetic pulses is moved down
the pipeline by computerized delays of one pulse and data received from these
locations is analyzed to determine if an anomaly on the pipeline exists and
whether such anomaly is likely to be identified as corrosion.

The EMW Inspection process provides a corrosion inspection method which
does not require the inspector to physically remove the pipeline's insulation or
otherwise dig up the pipeline to visually inspect for corrosion. In certain
instances, limited access points to buried pipelines exist for reasons unrelated
to corrosion inspection. As a result, corrosion inspection may be conducted at
these access points. Where such access points are not already available, the EMW
Inspection process permits the inspection of pipelines with a minimal amount of
disturbance to the coating or insulation on the pipeline. In addition, the EMW
Inspection process permits corrosion inspection over the entire pipeline, as
opposed to other technologies, which only provide for spot point inspections.
Such "spot inspections" are not necessarily accurate in indicating the overall
condition of a pipeline.

Refineries, chemical plants, utilities, natural gas transmission companies
and the petroleum industry have millions of miles of pipeline much of which may
be exposed to harsh and severe environments subjecting such pipeline to higher
incidence of corrosion. As a result of such environments these industries are
continually challenged to ensure that the quality of its pipeline meets
applicable standards established by relevant regulatory bodies to protect
operating personnel and the environment.

During the summer of 1998, the Company completed work on its first
commercial contract with ASCG Inspection, Inc. testing British Petroleum
pipelines at approximately 100 road and caribou crossings located on the North
Slope of Alaska. During the summer of 1999, the Company continued work testing
pipelines under a contract with another large multi-national oil company related
to the inspection of approximately 250 below-grade pipelines. During the summer
of 2000, the Company expanded its Alaska efforts by testing a total of 372
below-grade pipelines. In 2001, the Company completed the testing of
approximately 441 pipelines in Alaska and in 2002 the Company inspected 364
pipelines.

Based on estimates provided by its then current Alaska customers based on
their recently completed road and caribou crossing inspections, the Company was
expected to complete the inspection of approximately 400 to 500 below-grade
pipelines in Alaska during the 2003 calendar year. However, the Company was able
to successfully test only 250 below-grade pipelines during this time period as a
result of lack of current budgeting for the remainder of such program.

The remainder of the inspection work is expected to be completed at some
future date. In anticipation of this possibility, the Company designed,
fabricated, and began testing new hardware for the inspection of direct-buried
pipe in the lower-48 states. The new hardware has been designed with a view
toward improving efficiency, ease of use, portability, accuracy of test data and
customer acceptance.

More importantly, the new hardware provides a different pulse waveform
specifically tailored to the buried pipe requirement. The improved waveform has
increased low frequency energy content, which enables efficient wave propagation
through sand, soil, and moist earth.

The new hardware was designed to be much smaller than the previous
generation hardware used in Alaska. The entire test hardware package weighs less
than 25 pounds including data acquisition digitizer and battery power supply.
The new hardware can be hand-carried and operated by a single person and does
not require the gasoline powered AC generator, utility trailer, and external
computer data acquisition system which were necessary with the previous
generation hardware. The portable system is designed to allow testing of both
underground and above-grade pipelines with one test set.

The buried pipe inspection hardware is currently being tested at the
Company's Ferndale, Washington pipe test facility. The new hardware has
demonstrated good results in initial testing. Proper pulse waveforms have been
transmitted through several hundred feet of pipe buried in moist earth. The
hardware is now being optimized and evaluated for ability to detect various
types of anomalies. This work is currently the focus of the research effort at
Ferndale. When this work is successfully completed, the improved highly portable
system will increase field productivity, reduce operator training time, and
significantly reduce the cost of field operations. The new system will also be
compatible with production in quantity and operation with minimal training,
enabling licensing of the technology to the industry.

Although several important milestones have been achieved in the fabrication
and testing of this new hardware, there can be no assurance that the remaining
portion of the testing program can be funded or that the new hardware can be
successfully tested and deployed on a commercial basis. Failure to do so could
have a serious and material effect on the business and financial condition of
the Company.

On December 15, 2003, the U.S Department of Transportation ("DOT") issued
regulations under the Pipeline Safety Improvement Act of 2002 requiring
regulated companies to gather baseline integrity data on pipelines in so-called
"high consequence areas" ("HCA's") (e.g., populated areas) initially over a
ten-year period and then every seven years thereafter. Based on consultations
with industry representatives, the Company believes that its new buried pipe
inspection hardware will provide such regulated companies with a superior tool
for gathering required baseline integrity data.

Pending the deployment of its new hardware and the receipt of new
contracts, and in an effort to reduce its out-of-pocket expenses to the lowest
practicable level, the Company has furloughed all of its field crews. If and
when commercial contracts are obtained, the Company may re-hire former crew
personnel or may hire and train new crews.

Throughout its development stage, the Company has filed and continues to
file many patents in order to protect the proprietary nature of its technology.

Pipeline Corrosion

A combination of federal state, and industry rules combine to regulate
corrosion protection. The U.S. Department of Labor, operating through the
Occupational Safety and Health Administration has jurisdiction over numerous
plants and facilities containing corrosion protected pipeline that, if breached,
could cause serious bodily injury or death to on-site workers. The U.S.
Department of Transportation has jurisdiction over interstate natural gas and
hazardous liquids pipelines. Counterpart state agencies have jurisdiction over
intrastate natural gas and hazardous liquids pipelines. In addition, the
American Petroleum Institute has promulgated a comprehensive Piping Inspection
Code which requires that extensive corrosion testing be done by all members
(which includes the vast majority of the petroleum and petrochemical
industries). As a result of extensive regulation and testing requirements, the
industry is faced with the requirement to engage in extensive testing for
corrosion. In 1993, the American Petroleum Institute imposed even stricter test
standards regarding the problem of corrosion under the insulation on pipelines.
When pipeline is uninsulated and above ground, external corrosion can be
identified visually. The petroleum and other related industries, however,
insulate much of their piping to conserve energy and to prevent injury to
personnel from high temperature levels on the pipelines. As soon as piping is
insulated, a very complex situation is created. Corrosion can occur underneath
the insulation due to moisture or corrosive products that find their way through
broken or poorly sealed insulation. This corrosion under insulated pipelines is
very difficult and costly to locate. In the past, testing for this problem had
been on a limited sample basis and relied upon inspection processes that were
very cumbersome and costly.

Two prevalent testing methods used to detect corrosion under insulated
pipelines are X-ray and eddy current methods, which are methods of detecting
defects in pipe by analyzing visual image and decay. After physically stripping
away coating for visual inspection, depth gauges, ultrasonics and X-ray are then
used to determine the severity of corrosion on questionable pipe. However, the
stripping of insulation to determine corrosion is a costly testing method for
the industry because it often involves the assembly of scaffolding for testing
otherwise inaccessible above ground pipe (particularly in refineries and
petrochemical plants) or an actual dig-up on below ground pipe. The Company's
technology enables it to test pipe segments in a refinery setting for a distance
up to three hundred feet and to use "cherry pickers" instead of costly
scaffolding.

Corrosion under insulated pipelines presents a very complicated testing
problem because corrosion cannot be easily identified by statistical sampling.
If, for example, a segment of pipe has a small insulation part removed every ten
feet and is visually inspected using eddy current or x-ray techniques, there is
no statistical basis to assume that the external condition of the piping between
the removed insulation parts is good or bad. The American Petroleum Institute
testing standard adopted in 1993, in essence, mandates either stripping even
larger amounts of coating or using an alternate system that will identify
corrosion under the insulation without stripping the coating on suspected and
unsuspected pipe. Because of the enormous cost involved in using the stripping
and visual testing process, the Company believes that the industry will be
receptive to an alternate testing system that is reliable and less costly. The
Company believes that its EMW process provides an alternate testing system that
could be widely accepted by the Industry. However, while the Company has
obtained some commercial contracts and prospects for expanded commercial
contracts in the future appear strong, there can be no assurance that such
acceptance will continue to grow or that competitors will not develop newer and
better technologies.

The Company's EMW Inspection Technology

The Company has developed two basic EMW inspection techniques, namely, Dual
Pulse or Pulse Propagation Analyzer and Single-Pulse or Calibration Mark Z. For
above-grade piping, the Company uses both the Dual-Pulse and CMZ to determine
the condition of a given pipe segment in the open field as well as in a
refinery, chemical plant or power plant. For below-grade piping under streets
and road crossings, we use only the Dual Pulse technique. The results of our two
basic techniques provide an assessment of the overall integrity of the pipe in
question and the location and classification of electromagnetic anomalies which,
in most instances, are related to external corrosion.

The Single-Pulse Technique

The Single-Pulse technique requires fixing the source location on one end
of the pipe segment in question and adjusting the signal receiver generally at
an equal incremental distance from the source across the length of pipe segment.
From the characteristics of the electromagnetic waves as a result of wave
propagation, attenuation, and dispersion, we determine whether electromagnetic
anomalies exist, as in the case of the Dual-Pulse techniques.

As simple as these concepts may appear, the Company believes that the EMW
process is not intuitively obvious. The petroleum industry has spent significant
funds trying to solve the problem of finding corrosion under insulation.
Correlating pipeline corrosion information using the Company's technology
requires a combination of state-of-the-art instrumentation plus an understanding
of the physical phenomena that are being measured. Although the principles of
the EMW process are simple to explain, management believes that the EMW
measurement and analysis are on the leading edge of inspection technology.

The Company believes that its technology has at least two significant
competitive advantages. First, its technology can inspect certain pipelines that
are inaccessible to other testing methods. Second, with respect to insulated,
coated, encased or buried facilities that are accessible to other inspection
technologies, because the Company's technology does not require the removal of
such insulation, coatings or encasements or pipeline excavation as a
prerequisite to testing, it has a much lower cost of site preparation and,
therefore, a significant cost advantage over other technologies. Research and
development efforts will continue in the development of new applications for the
Company's technology and to develop new products for the petroleum industry and
other industries.

The Dual-Pulse Technique

The Dual-Pulse process extracts corrosion related information from segments
of both accessible and inaccessible pipelines underneath the entire insulation
barrier by analyzing the intersection of two electrical current pulses traveling
in opposite directions along the pipeline. This corrosion related information is
extracted without the need for removing the insulation protecting the pipeline.
Through laboratory and field testing the Company established that the electrical
response, called characteristic transfer function ("CTF"), of two intersecting

pulses traveling along the pipeline is uniquely defined with location specific
information that relates to the integrity of the pipeline at the point of
intersection. Constructive interference occurs when the two current impulses run
into and interfere with each other at the point of intersection on a pipeline.
The CTF is determined, not only by the nature and characteristics of the
original pulses, but by the physical characteristics of the pipeline segment in
its environment at the point of intersection.

The EMW process was developed to evaluate the condition and integrity of
pipelines. Electro-magnetic pulses are applied at both ends of the pipe segment
being tested. Under computer control, the timing of the pulses is controlled so
that the intersection point of the two pulses moves sequentially from one end of
the pipe to the other end. A unique CTF is obtained for each intersection point
of the pipeline segment being tested on some predetermined interval, such as, in
one foot intervals. When this data is geophysically displayed, it provides a
visual display of data related to the physical condition of the pipe at each
point of intersection. Information can also be derived using the EMW process to
determine the condition of the coating and the effectiveness of the existing
corrosion protection system that is being used to protect each point of
intersection. Where there are indications of problems, closer interval
inspection can be performed and/or one of the other location specific processes
used in the industry may be utilized before the insulation is removed to inspect
the pipe condition.

Sales and Marketing

The Company's sales and marketing strategy has been to position the
Company's EMW inspection process as the method of choice to detect pipeline
corrosion where the pipelines are either inaccessible to other inspection tools
or much more costly to inspect with tools other than the Company's EMW
technology. Pipelines are commonly found in refinery and chemical plants (such
as insulated, overhead pipes), natural gas distribution systems (such as pipes
buried in city streets), and natural gas transmission systems (such as road,
bridge and stream crossings and concrete-encased pipes).

As described above, the Company has fabricated new buried pipe inspection
hardware and is actively seeking industry and other financing sources in order
to rigorously and scientifically test that hardware. In order to obtain
additional revenue generating contracts, the Company intends to emphasize the
reliability of its buried pipeline testing method, the flexibility of the
method's application, and its cost effectiveness as compared to other methods.
The Company intends to concentrate its fiscal year 2006 marketing efforts on the
pipeline and utility buried pipe inspection markets in the lower-48 states,
particularly in "high consequence areas" as defined in the federal Department of
Transportation's regulations ("HCAs"). However, there can be no assurance that
the Company will be successful in concentrating its marketing efforts for the
EMW technology on natural gas utility and pipeline markets.

Revenues

The Company derives revenue solely from the sale of the EMW inspection
technology service. The Company relies solely upon several employees, including
the Chief Executive Officer and the Chief Operating Officer to conduct the
Company's sales activities.

The Company did not have revenues during the twelve months ended June 30,
2005. During the twelve months ended June 30, 2004, all of the Company's
revenues were attributable to two customers. These customers individually
accounted for 9% and 91% of revenues for the twelve months ended June 30, 2004.

Patents, Intellectual Property and Licensing

The Company pursues a policy of generally obtaining patent protection both
in the United States and abroad for patentable subject matter in its proprietary
technology. As of June 30, 2005, the Company had ten issued U.S. patents, five
issued foreign patents, one U.S. patent application pending, and three foreign
patents pending.

The Company's success depends in large part upon its ability to protect its
process and technology under United States and international patent laws and
other intellectual property laws. U.S. patents have a term of 17 years from date
of issuance or, for more recently filed patent applications, 20 years from the
filing of such applications, and patents in most foreign countries have a term
of 20 years from the proprietary filing date of the patent application. The
first U.S. patent was issued in 1990; three patents were issued in 1993; one
patent was issued in 1998; two patents were issued in 2000, and one patent was
issued in 2002.

The Company believes that it owns and has the right to use or license all
proprietary technology necessary to license and market its EMW process under
development. The Company is not aware of the issuance of any patents or the
filing of any patent applications which relate to processes or products which
utilize the Company's proprietary technology in a manner which could be similar
to or competitive with the Company's products or processes. The Company has no
knowledge that it is infringing on any existing patent such that it would be
prevented from marketing or licensing products or services currently being
developed by the Company.

The Company may decide for business reasons to retain a patentable
invention as a trade secret. In such event or if patent protection is not
available, the Company must rely upon trade secrets, internal knowledge and
continuing technological innovation to develop and maintain its competitive
position. The Company's employees and consultants have access to the Company's
proprietary information and have signed confidentiality agreements. However,
even inadvertent disclosure of such a trade secret without a promise of
confidentiality could destroy trade secret protection. There can be no assurance
that inadvertent disclosures might not occur. If the Company's proprietary
information is disclosed to competitors, it may have a material adverse effect
on the Company's business.

Competition

Although a number of inspection technologies have been developed to aid in
ascertaining the condition of piping throughout the pipeline corrosion control
industry, information needed to determine the integrity of these critical
systems is often difficult and costly to acquire. The Company has numerous
indirect competitors, but the Company believes that its inspection services have
significant competitive advantages over other services provided by competitors.

The Company's EMW inspection service is designed to help pipeline operators
quickly and less expensively screen buried, insulated, or hard to-access piping
for external corrosion. Although its technology does not provide pipeline and
plant operators with all the data they will require to manage and remediate
corrosion, when used as a "front-end" screening tool in combination with one or
more spot inspection tools, it can dramatically lower the cost of acquiring all
of the data necessary to manage corrosion risks to their piping systems. There
can be no assurances, however, that the Company's competitors will not develop
newer, more efficient and less costly technologies.

Employees and Consultants

As of June 30, 2005, the Company had five employees, one of which was
part-time. In an effort to reduce its "burn rate" to the lowest practicable
level, the Company furloughed all of its field crews during the quarter ended
March 31, 2004. If and when revenue-generating contracts are obtained, the
Company may re-hire former crew personnel or may hire and train new crews.

Customers

The Company did not have revenues during the twelve months ended June 30,
2005 as it was engaged solely in the redevelopment of its testing hardware and
software. The testing of that hardware and software is nearing completion. The
Company now seeks funding required to pursue pipeline and utility customers in
the U.S. lower-48 states. However, there can be no assurance that funding
sufficient for this purpose can be obtained. For the twelve months ended June
30, 2004, the Company had two customers in Alaska that accounted for 100 percent
of the Company's revenues.

Supplier Relationships

Although there are other sources for EMW inspection equipment, the Company
intends for the foreseeable future to purchase same from a single supplier on
the basis of superior quality and performance.

Government Regulation

Natural gas and hazardous liquids pipelines are extensively regulated. The
Department of Transportation's Office of Pipeline Safety, and state public
utility commissions applying federal regulations, monitor operator compliance
with corrosion monitoring and other pipeline safety-related regulatory
requirements. The President signed the Pipeline Safety Improvement Act of 2002
into law in December of 2002. The legislation would require much more active
corrosion monitoring than is currently required and could generate significant
interest in the Company's technology, particularly by natural gas transmission
and hazardous liquids pipeline operators. In addition, there may be
opportunities to demonstrate the technology, in light of this legislation, to
industry and government pipeline safety advisory groups. However, eventually the
Company's inspection method must be certified for use by the federal Department
of Transportation if it is to satisfy customers' required inspection
obligations. Nevertheless, the Company expects that many companies will find the
Company's new methods useful and beneficial even prior to federal certification
and may, indeed, sponsor the Company in the certification process.

Research and Development Expenditures

During the last year, the Company has re-developed and improved the
hardware and software it uses to detect corrosion on direct-buried pipe. As a
result of such re-development and improvement, the Company believes that its
technology is now ready to obtain broad acceptance in the U.S pipeline and
utility industry segments. However, additional funding and certifications must
be acquired to gain significant market share in the Company's target markets.

Item 2. Description of Properties.

The Company's executive offices are located at 2 Park Avenue, Suite 201,
Manhasset, NY 11030. The Company leases on a month-to-month basis approximately
500 square feet of office space from a non-affiliate. The rental payment is
approximately $788 per month.

The Company's research and development facility is located in Ferndale,
Washington. The Company leases 1,800 square feet of space from a non-affiliate
at a monthly cost of approximately $2,026, pursuant to a lease that expires on
January 31, 2006.

The Company does not own any real estate.

Item 3. Legal Proceedings.

The Company is not aware of any legal proceedings contemplated by any
governmental authority or any other party involving the Company or its
properties. As of the date of this report, no director, officer or affiliate is
a party adverse to the Company in any legal proceeding or has an adverse
interest to the Company in any legal proceedings. The Company is not aware of
any other legal proceedings pending or that have been threatened against the
Company or its properties.

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

No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 2005.

PART II

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

Market Information

The Company's common stock traded on the NASDAQ Small Cap market from the
date it began to be publicly traded in February 1997 until August 10, 2001 under
the symbol PRTK. On August 13, 2001, the Company's common stock was delisted
from the NASDAQ Small Cap market and began trading on the NASD's Over the
Counter Bulletin Board (the "OTCBB") under the same symbol. The Company's common
stock continues to be traded on the OTCBB.

The following table sets forth the high and low bid prices for the
Company's common stock for each quarter within the past two fiscal years as
reported by OTCBB. The quotations reflect inter-dealer prices, with retail
mark-up, mark-down or commissions, and may not represent actual transactions.

Range of
Sale Prices
-----------
High Low
------ ------
Fiscal Year 2005
First Quarter $0.90 $0.35
Second Quarter $1.55 $0.35
Third Quarter $1.15 $0.60
Fourth Quarter $0.90 $0.55

Fiscal Year 2004
First Quarter $0.51 $0.17
Second Quarter $0.50 $0.23
Third Quarter $1.00 $0.27
Fourth Quarter $0.90 $0.50

As of September 15, 2005, the Company had approximately 1,000 holders of
record of the Company's common stock.

Dividends

The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements, debt covenants and financial condition. Since its inception, the
Company has not paid any dividends on its common stock and does not anticipate
paying such dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance its operations.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth certain information regarding the common
stock that may be issued upon the exercise of options, warrants and other rights
that have been or may be granted to employees, directors or consultants under
all of the Company's existing equity compensation plans, as of June 30, 2005.

--------------------------------- ------------------- ---------------- -------------------

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

Equity compensation plans 2,275,000 $1.14 225,000
approved by security holders (1)

--------------------------------- ------------------- ---------------- -------------------

Equity compensation plans not 1,182,500(3) $2.41 N/A
approved by security holders(2)

--------------------------------- ------------------- ---------------- -------------------

Total 3,457,500 $1.57 225,000

---------------------------------- ------------------- ---------------- -------------------

(1) Consists of grants under the Company's 1999 Stock Plan. On February 9,
2005, the Board of Directors approved an increase in the number of shares
of common stock that may be issued under the Plan from 500,000 to 2.5
million shares.

(2) Consists of grants under individual compensation arrangements approved
separately by the Board of Directors and are not part of any written or
formal plan under which the Company will be obligated to issue equity
compensation in the future.

(3) Consists of the following compensatory warrants: (A) 15,000 warrants at
$0.55 per share, expiring on December 9, 2007, (B) 40,000 warrants at $0.70
per share, expiring on December 16, 2008, (C) 12,500 warrants at $0.75 per
share, of which 8,000 expire on June 1, 2010 and 4,500 expire on June 17,
2010, (D) 50,000 warrants at $1.00 per share, expiring on January 2, 2007,
(E) 150,000 warrants at $1.05 per share, expiring on March 18, 2007, (F)
305,000 warrants at $1.125 per share, expiring on October 31, 2007, (G)
40,000 warrants at $1.50 per share, expiring on October 31, 2007, (H)
235,000 warrants at $3.00 per share, expiring on October 31, 2007, (I)
285,000 warrants at $3.50 per share, expiring on October 31, 2007, (J)
30,000 warrants at $7.20 per share, expiring on October 31, 2007, and (K)
20,000 warrants at $13.50 per share, expiring on October 31, 2007.

Recent Sales of Unregistered Securities

On June 19, 2003, the Board of Directors approved the offering (the "2003
Offering") of $1,000,000 in convertible debentures (the "Debentures"). The
Debentures are convertible into that number of shares of the Company's common
stock equal to the amount of the converted indebtedness divided by $0.50 per
share. The Debentures bear interest at a rate of 5% per annum, payable
quarterly. Delinquent interest payments bear interest at a rate of 12% per
annum. The Company is required to redeem each Debenture on the 5th anniversary
of the date of the Debenture. The Company may, in its discretion, redeem any
Debenture at any time prior to the mandatory redemption date of the Debenture by
providing no less than 60 days' prior written notice to the holder of the
Debenture. Certain events of default will result in the Debentures being
redeemable by the Company upon demand of the holder.

Upon the purchase of, and for each $0.50 of the Debenture's principal
amount, the Company issued to each investor a warrant (the "Warrant") to
purchase one (1) share of the Company's common stock at an exercise price of
$0.75 per share. The Warrants are exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture. The 2003 Offering is exempt
from registration under Section 4(2) of the Securities Act.

During the twelve months ended June 30, 2005, five investors exercised
their conversion right in accordance with the terms of the 2003 Offering. As a
result, 201,044 restricted shares of common stock were issued.

On January 19, 2005, the Board of Directors approved the offering (the
"2005 Offering") of 2,000,000 units (the "Units") consisting of shares of common
stock and attached warrants. The purchase price of one Unit is $0.50. Each Unit
consists of one share of common stock and a warrant to purchase one share of
common stock at an exercise price of $0.75. The warrants are exercisable at any
time prior to the fifth anniversary from the date of grant. The 2005 Offering is
exempt from registration under Section 4(2) of the Securities Act.

As of June 30, 2005, the Company had raised $62,500 and issued 125,000
restricted shares of common stock and warrants to purchase up to 125,000 shares
of restricted stock in accordance with the terms of the 2005 Offering.

On February 9, 2005, the Board approved the issuance of options exercisable
for 1,850,000 shares of common stock pursuant to the 1999 Stock Option Plan to
certain directors, officers, an employee and two consultants of the Company. The
Company granted the options on February 16, 2005. Directors, officers, and an
employee were granted options exercisable for 1,600,000 shares of common stock
and have a ten-year term. Options exercisable for the remaining 250,000 shares
of common stock were granted to two of the Company's consultants and have a
five-year term. The exercise price of the options are $1.16, ten percent over
the closing bid price of the Company's common stock as quoted on the Over the
Counter Bulletin Board on the grant date, February 16, 2005. These securities
were issued in reliance on exemptions from registration provided by Section 4(2)
of the Securities Act.

During the twelve months ended June 30, 2005, the Company issued of 150,000
restricted shares of common stock to two consultants of the Company as
compensation for rendering services related to fund raising strategies and
business and financial planning. These shares are exempt from registration under
Section 4(2) of the Securities Act.

Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Overview

The Company is currently focused on the buried pipe market in the United
States. Accordingly, failure to complete, finance and deploy its new buried pipe
hardware could have a material adverse effect on the business and financial
condition of the Company.

Revenue

Sales and Marketing

Critical Accounting Estimates and Policies

The discussion and analysis of financial condition and results of
operations is based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including contract revenue recognition and impairment of long-lived
assets. The Company bases its estimates on historical experience and on various
other assumptions that the Company believes to be reasonable under the
circumstances, the results of which form its basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates under
different assumptions and conditions, and such variations may be adverse.

The Company recognizes revenue from service contracts using the
percentage-of-completion method of contract accounting. Contract revenues earned
are measured using either the percentage-of-contract costs incurred to date to
total estimated contract costs or, when the contract is based on measurable
units of completion, revenue is based on the completion of such units.
Anticipated losses on contracts, if any, are charged to earnings as soon as such
losses can be estimated. Changes in estimated profits on contracts are
recognized during the period in which the change in estimate is known. The
Company records claims for additional compensation on contracts upon revision of
the contract to include the amount to be received for the additional work
performed. Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools and repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. Service contracts
generally extend no more than six months.

The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount which the carrying
amount of the asset exceeds the fair value of the asset.

The Company estimates the value of warrants and option grants using a
Black-Scholes pricing model based on management assumptions regarding the
expected volatility and risk free interest rates.

Results of Operations

The Company's operating results depend exclusively on its ability to market
its EMW inspection technology services. If the Company is not able to automate
completely the EMW inspection process and fully implement its new technology,
the Company may not be able to obtain future contracts to sell or license its
EMW technology. Since the Company's revenues are derived solely from sales of
its EMW technology, any failure to obtain future contracts will have a material
adverse effect on the business and financial condition of the Company.

Revenues for the twelve months ended June 30, 2005 were $0, as compared to
$222,579 for the twelve months ended June 30, 2004. The Company did not generate
any revenues during the twelve months ended June 30, 2005 as the Company was
engaged solely in the redevelopment and improvement of its testing hardware and
software. During calendar year 2003, the Company's Alaska customers completed a
five-year program of inspecting road-crossings and caribou crossings. Upon
completion of this initial program, the inspections were not budgeted for.
Revenues generated during the twelve months ended June 30, 2004 were derived
from the work performed on the North Slope of Alaska under the initial program.

Cost of revenues for the twelve months ended June 30, 2005 were $0, as
compared to $181,611 for the twelve months ended June 30, 2004. During the
twelve months ended June 30, 2005 the Company did not have any employees working
in the field because the Company did not have any revenue generating contracts
during this period. Cost of revenues for the twelve months ended June 30, 2004
consists of depreciation and equipment rental expense related to field equipment
and salaries related to the employees working in the field prior to the
termination of the Alaska contracts.

The Company did not have a gross profit or loss for the twelve months ended
June 30, 2005. The Company had a gross profit of $40,968 for the twelve months
ended June 30, 2004. The decrease in gross profit is due to the completion of
the inspection program on the North Slope of Alaska during calendar year 2003.

Research and development expenses for the twelve months ended June 30, 2005
were $261,617 as compared to $200,406 for the twelve months ended June 30, 2004.
The increase of $61,211 for the twelve months ended June 30, 2005 as compared to
the twelve months ended June 30, 2004 is substantially the result of recording
$174,000 for the fair value of the 200,000 options granted to a consultant
during the quarter ended March 31, 2005, offset by a significant decrease in
salary and other payroll related expenditures. The Company furloughed several
key employees during the quarter ended March 31, 2004 who were previously
spending time on research and development activities and revenue generating
contracts. Payroll expenses related to these employees were previously
classified as research and development expenses and cost of revenues.

General and administrative expenses for the twelve months ended June 30,
2005 were $705,542 as compared to $867,828 for the twelve months ended June 30,
2004. The decrease of $162,286 for the twelve months ended June 30, 2005 as
compared to the twelve months ended June 30, 2004 is the result of a general
reduction of operating expenditures as the Company focuses on reducing its

overall burn rate. Compensation and benefits expense decreased significantly for
the twelve months ended June 30, 2005 as compared to the twelve months ended
June 30, 2004 as a result of the Company furloughing certain employees during
the quarter ended March 31, 2004. Additionally, amortization decreased by
approximately $61,000 for the twelve months ended June 30, 2005 as compared to
the twelve months ended June 30, 2004 as a result of patents being fully
amortized during the quarter ended June 30, 2004.

Loss from operations for the twelve months ended June 30, 2005 was $967,159
as compared to $1,027,266 for the twelve months ended June 30, 2004. The
decrease of $60,107, or 6%, is primarily due to overall reductions in
compensation and benefit related expenses, depreciation and amortization and
other operating expenses as discussed above.

Interest expense for the twelve months ended June 30, 2005 was $179,857 as
compared to $139,081 for the twelve months ended June 30, 2004. The increase in
interest expense of $40,776 is in part the result of five investors who
exercised their conversion right under the terms of the 2003 Offering during the
twelve months ended June 30, 2005. The 2003 Offering includes a beneficial
conversion feature. As such, the Company recorded interest expense of
approximately $101,500 during the twelve months ended June 30, 2005 to expense
the unamortized debt discount remaining at the date of conversion. This increase
is offset by a decrease from the twelve months ended June 30, 2004 in which the
Company recorded a charge to interest expense of approximately $82,000 to
expense the unamortized convertible debt discount on the convertible debentures
that were in default with respect to principal and interest at June 30, 2004. As
a result of a larger aggregate principal balance outstanding on the Convertible
Debentures during the twelve months ended June 30, 2005 as compared to the
twelve months ended June 30, 2004, the Company recorded approximately $14,200
more in interest expense related to the Convertible Debentures during the twelve
months ended June 30, 2005 than during the same period in 2004. The Company also
recorded approximately $7,900 more interest expense on the notes payable to
stockholders during the twelve months ended June 30, 2005 than during the same
period in 2004 as a result of an increase in the outstanding principal balance.
Also, contributing to the increase in interest expense for the twelve months
ended June 30, 2005 as compared to the twelve months ended June 30, 2004 is
amortization of deferred financing fees of $5,200 related to the 2003 Offering.

Recently Issued Accounting Standards

SFAS No. 151, Inventory Costs, is effective for fiscal years beginning
after June 15, 2005. This statement amends the guidance in Accounting Research
Bulletin No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). The adoption of SFAS No. 151 is expected to have no impact
on the Company's financial statements.

SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions, is
effective for fiscal years beginning after June 15, 2005. This statement amends
SFAS No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in American Institute of Certified Public Accountants Statement of
Position 04-2, Accounting for Real Estate Time-Sharing Transactions. The
adoption of SFAS No. 152 is expected to have no impact on the Company's
financial statements.

SFAS No. 123(R), Share-Based Payment, replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. This statement requires that the compensation cost
relating to share-based payment transactions be recognized at fair value in the
financial statements. The Company is required to apply this statement in the
first interim period that begins after December 15, 2005. The Company is
currently analyzing the requirements of the adoption of SFAS No. 123(R).

SFAS No. 153, Exchanges of Nonmonetary Assets - an amendment of APB Opinion
No. 29, is effective for fiscal years beginning after June 15, 2005. This
statement addresses the measurement of exchange of nonmonetary assets and
eliminates the exception from fair-value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
Accounting for Nonmonetary Transactions, and replaces it with an exception for
exchanges that do not have commercial substance. The adoption of SFAS No. 153 is
not expected to have a significant impact on the Company's financial statements.

Financial Accounting Standards Board Interpretation ("FIN") No. 46(R)
revised FIN No. 46, Consolidation of Variable Interest Entities, requiring the
consolidation by a business of variable interest entities in which it is the
primary beneficiary. The adoption of FIN No. 46(R) did not have any impact on
the Company's financial statements.

The Emerging Issues Task Force ("EITF") reached consensus on Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments, which provides guidance on determining when an investment
is considered impaired, whether that impairment is other than temporary and the
measurement of an impairment loss. The FASB issued FSP EITF 03-1-1, Effective
Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
which delays the effective date for the measurement and recognition criteria
contained in EITF 03-1 until final application guidance is issued. The adoption
of this consensus or FSP is expected to have no impact on the Company's
financial statements.

The EITF reached a consensus on Issue No. 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share, which addresses when the
dilutive effect of contingently convertible debt instruments should be included
in diluted earnings (loss) per share. EITF 04-8 became effective for reporting
periods ending after December 15, 2004. The adoption of EITF 04-8 did not have
an impact on diluted earnings (loss) per share of the Company.

Liquidity and Capital Resources

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred cumulative losses
of $11,605,139 through June 30, 2005, and had negative working capital of
$2,349,380 as of June 30, 2005. Additionally, the Company has expended a
significant amount of cash in developing its technology and patented processes.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management recognizes that in order to meet the Company's
capital requirements, and continue to operate, additional financing, including
seeking industry-partner investment through joint ventures or other possible
arrangements, will be necessary. The Company is evaluating alternative sources
of financing to improve its cash position and is undertaking efforts to raise
capital. If the Company is unable to raise additional capital or secure
additional revenue contracts and generate positive cash flow, it is unlikely

that the Company will be able to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Deferred Wages and Accrued Professional Fees

To reduce cash outflows, certain of the Company's employees, officers and
directors have agreed to defer a portion of their salaries and consulting fees
until the Company has sufficient resources to pay the amounts owed or to
exchange such deferred amounts into options as described below. At June 30,
2005, the Company has accrued $807,276 related to the deferred payment of
salaries and consulting fees of which $639,126 is included under deferred wages
and $168,150 in accrued professional fees. On March 18, 2002, the Board approved
a conversion right on all deferred wages and accrued professional fees deferred
as of March 18, 2002. Pursuant to this conversion right, employees, officers,
consultants, and directors may elect to convert $1.00 of fees owed to them as of
March 18, 2002 for an option to purchase two shares of the Company's common
stock, at an exercise price of $1.00 per share for a term of five years.
Deferred salaries and fees as of March 18, 2002 were $111,500, resulting in the
potential issuance of 223,000 options under the terms mentioned above. No
conversions have occurred to date. As there was no intrinsic value associated
with these exchange rights, no additional compensation cost has been recorded.

Long-term Convertible Debt

Warrants issued in connection with the 2003 Offering were recorded based on
their relative fair value as compared to the fair value of the debt at issuance.
The relative fair value of the warrants were recorded as paid-in capital,
estimated at $101,978 and $185,868 for the years ended June 30, 2005 and 2004,
respectively. The fair value of the warrants issued during the year ended June
30, 2005 were determined based on an option pricing model with the following
assumptions: warrant lives of 10 years, risk free interest rates ranging from
4.14% to 4.30%, volatility of 120% and a zero dividend yield. The fair value of
the warrants issued during the year ended June 30, 2004 were determined based on
an option pricing model with the following assumptions: warrant lives of 10
years, risk free interest rates ranging from 3.74% to 4.72%, volatility of 120%,
and a zero dividend yield. The intrinsic value of the Debentures results in a
beneficial conversion feature that reduces the book value of the convertible
debt to not less than zero. Accordingly, the Company recorded a discount of
$158,000 and $293,023 during the years ended June 30, 2005 and 2004,
respectively on the convertible debt issued under the 2003 Offering. The Company
amortizes the discount using the effective interest method over the five-year
life of the Debentures.

During the quarter ended March 31, 2005, the Board of Directors terminated
the 2003 Offering. As of the closing date of the 2003 Offering, the Company had
raised $503,000 from the 2003 Offering.

As of June 30, 2004, the Company was in default on the accrued interest on
$137,500 of the total face value of the Debentures. Due to the default status as
of June 30, 2004 and the uncertainty regarding the Company's ability to remain
in compliance with the terms of the Debentures, and thereby preventing a future
default, the $137,500 debt in default was classified as a current liability.
Additionally, unamortized debt discount of $81,559 and debt issuance costs of
$5,200 were written off and were included in interest expense and general and
administrative expenses, respectively in the statement of operations for the
twelve months ended June 30, 2004.

During the twelve months ended June 30, 2005, five investors exercised
their conversion right under the terms of the Debentures. Accordingly, the
carrying value of the convertible debt was reclassified as equity upon
conversion. Since the convertible debt instruments include a beneficial
conversion feature, the remaining unamortized discount of approximately $100,000
at the conversion date was recognized as interest expense.

As of June 30, 2005, accrued interest on the Debentures was $5,024. The
Company recorded interest expense related to the accretion of the discount on
the Debentures and amortization of the convertible debt discount of $100,583 and
$85,523 for the twelve months ended June 30, 2005 and June 30, 2004,
respectively. As of June 30, 2005 the carrying value of the long-term debt
debenture was $61, net of unamortized debt discount of $265,439.

Common Stock

The Company engaged a law firm to help in the fund raising efforts of the
2005 Offering. Pursuant to the terms of the agreement with the law firm, the
Company will pay the law firm a ten percent cash commission on all funds that
the law firm helps raise. Additionally, the Company will issue warrants to
purchase restricted shares of common stock at $0.75 per share equal to ten
percent of the total warrants issued in connection with the 2005 Offering. The
warrants may be exercised up to five years from the date of issuance, which is
the date the proceeds are received under the 2005 Offering. As of June 30, 2005,
the Company has incurred $6,250 of fees to be paid in cash to the law firm and
issued warrants to purchase 12,500 restricted shares of common stock. The
Company recorded approximately $7,000 as a reduction to paid-in capital for the
fair value of the warrant grants. The fair value of the warrant grants were
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: expected volatility of ranging from 133% to 183%,
risk-free interest rates ranging from 3.63% to 3.88%, expected lives of five
years, and a 0% dividend yield.

Other Commitments

The Company's other contractual obligations consist of commitments under
deferred wages and accrued professional fees, payments under an operating lease,
and repayment of loans payable to certain officers, directors and stockholders.
As of June 30, 2005, deferred wages and accrued professional fees were $807,276.
The salaries and professional fees will continue to be deferred until the
Company has sufficient resources to pay the amounts owed, or the employees,
officers, or directors exchange such amounts as described above.

As of June 30, 2005, the Company had outstanding loans payable to certain
officers, directors and stockholders with principal amounts, in the aggregate,
equal to $1,128,990. The terms of the various notes are described below under
"Note 3: Related Parties: Notes Payable - Stockholders."

As of June 30, 2005, the Company has future minimum lease payments of
approximately $14,000 under its operating lease.

Capital will be expended to support operations until the Company can
generate sufficient cash flows from operations. In order for the Company to
generate cash flows from operations, the Company must secure revenue generating
contracts. Management is currently directing the Company's activities towards
obtaining service contracts, which, if obtained, will necessitate the Company
attracting, hiring, training and outfitting qualified technicians. If service
contracts are obtained, additional field test equipment purchases will be
necessary to provide the services. The Company intents to purchase such
equipment for its field crews in the foreseeable future, at such time as the
scope of operations require alternate sources of financing equipment. The
Company expects that if additional contracts are secured, and revenues increase,
working capital requirements will increase. There can be no assurance that the
Company's process will gain widespread commercial acceptance within any
particular time frame, or at all. The Company will incur additional expenses as
it hires and trains field crews and support personnel related to the successful
receipt of commercial contracts. Additionally, the Company anticipates that cash
will be used to meet capital expenditure requirements necessary to develop
infrastructure to support future growth. There can be no assurance that the
Company will be able to secure additional revenue generating contracts to
provide sufficient cash.

Pending the deployment of the Company's new hardware and software (as
discussed in the "Introduction" section) and the receipt of new contracts, and
in an effort to reduce its out-of-pocket expenses to the lowest practicable
level, the Company has furloughed all of its field crews. If and when
revenue-generating contracts are obtained, the Company will re-hire former crew
personnel or may hire and train new crews. The Company was not obligated to make
any severance payments for salaries, health benefits or accrued vacation and
sick time related to the termination of any of its employees.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have had or are
reasonably likely to have a material current or future effect on the Company's
financial condition or financial statements.

Item 7. Financial Statements

Profile Technologies, Inc.

Table of Contents

Page

Reports of Independent Registered Public Accounting Firms 20

Balance Sheet as of June 30, 2005 22

Statements of Operations for Years Ended June 30, 2005 and 2004 23

Statements of Stockholders' Deficit for Years Ended June 30, 2005 and 2004 24

Statements of Cash Flows for Years Ended June 30, 2005 and 2004 25

Notes to Financial Statements 26

Report of Independent Registered Public Accounting Firm

The Board of Directors
Profile Technologies, Inc.:

We have audited the accompanying balance sheet of Profile Technologies,
Inc. as of June 30, 2005, and the related statements of operations,
stockholders' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with the 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. The Company has
determined that it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Profile Technologies, Inc.
as of June 30, 2005, and the results of its operations and its cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States.

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has incurred cumulative losses and had
negative working capital of $2,349,380 at June 30, 2005. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan regarding those matters is also described in Note 8. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ Peterson Sullivan

Seattle, Washington
September 9, 2005

Report of Independent Registered Public Accounting Firm

The Board of Directors
Profile Technologies, Inc.:

We have audited the accompanying statements of operations, stockholders'
deficit, and cash flows of Profile Technologies, Inc. for the year ended June
30, 2004. 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 audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and the cash flows of
Profile Technologies, Inc. for the year ended June 30, 2004, in conformity with
U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 8 to the
financial statements, the Company has incurred net losses since inception and
has a working capital deficit at June 30, 2004 that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 8. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP

Seattle, Washington
October 11, 2004

PROFILE TECHNOLOGIES, INC.
Balance Sheet
June 30, 2005

Assets

Current assets:
Cash $ 27,045
Prepaid expenses and other current assets 17,651
------------

Total current assets 44,696

Equipment, net of accumulated depreciation of $538,931 7,635
Deferred financing fees 11,360
Other assets 2,415
------------

Total assets $ 66,106
============

Liabilities and Stockholders' Deficit

Current Liabilities:
Accounts payable $ 196,364
Notes payable to stockholders 1,128,990
Current portion of convertible debt 137,500
Deferred wages 639,126
Accrued professional fees 168,150
Accrued interest 103,352
Other accrued expenses 20,594
------------

Total current liabilities 2,394,076

Long-term convertible debt, net of unamortized
discount of $265,439 61

Stockholders' deficit:
Common stock, $0.001 par value.
Authorized 25,000,000 shares;
issued and outstanding 5,925,705 shares 5,926
Common stock issuable; 45,000 shares 45
Additional paid-in capital 9,271,137
Accumulated deficit (11,605,139)
------------

Total stockholders' deficit (2,328,031)

Commitments, contingencies and subsequent events

------------
Total liabilities and stockholders' deficit $ 66,106
============

See accompanying notes to financial statements.

PROFILE TECHNOLOGIES, INC.
Statements of Operations
For the years ended June 30, 2005 and 2004

2005 2004
------------ -----------

Revenue $ -- $ 222,579

Cost of revenues -- 181,611
----------- -----------

Gross profit -- 40,968
----------- -----------

Operating expenses:
Research and development 261,617 200,406
General and administrative 705,542 867,828
----------- -----------

Total operating expenses 967,159 1,068,234
----------- -----------

Loss from operations (967,159) (1,027,266)

Interest expense 179,857 139,081
Other income -- 1,762
----------- -----------

Net loss $(1,147,016) $(1,164,585)
=========== ===========

Basic and diluted net loss per share $ (0.20) $ (0.21)

Weighted average shares outstanding
used to calculate basic and
diluted net loss per share 5,744,371 5,472,710

See accompanying notes to financial statements.

PROFILE TECHNOLOGIES, INC.
Statements of Stockholders' Deficit
For the years ended June 30, 2005 and 2004

Common stock Total
--------------------------- Additional stockholders'
Shares issued Shares paid-in Accumulated equity
and outstanding Issuable Amount capital deficit (deficit)
------------ ------------ ----------- ------------ ------------ -------------

Balance at June 30, 2003 5,461,661 -- $ 5,462 $ 8,349,701 $ (9,293,538) $ (938,375)

Issuance of common stock for services 33,000 -- 33 9,017 -- 9,050
Issuance of common stock warrants and
options for services -- -- -- 17,600 -- 17,600
Issuance of common stock warrants related
to the convertible debt -- -- -- 185,868 -- 185,868
Recording beneficial conversion feature
on convertible debt -- -- -- 107,155 107,155
Net loss -- -- -- -- (1,164,585) (1,164,585)
------------ ---------- ------------ ------------ ------------ ------------

Balance at June 30, 2004 5,494,661 -- 5,495 $ 8,669,341 $(10,458,123) $ (1,783,287)

Issuance of common stock for services 150,000 -- 150 69,850 -- 70,000
Issuance of common stock warrants and
options for services -- -- -- 224,525 -- 224,525
Issuance of common stock warrants
related to
the convertible debt -- -- -- 101,977 -- 101,977
Recording beneficial conversion feature
on convertible debt -- -- -- 56,023 -- 56,023
Issuance of common stock upon conversion
of convertible debt to equity 201,044 -- 201 100,321 -- 100,522
Issuance of common stock warrants related
to the 2005 Offering -- -- -- 33,059 -- 33,059
Issuance of common stock related to the
2005 Offering 80,000 -- 80 18,439 -- 18,519
Common stock issuance costs -- -- -- (13,275) (13,275)
Common stock issuable related to
the 2005 Offering -- 45,000 45 10,877 -- 10,922

Net loss -- -- -- -- (1,147,016) (1,147,016)
------------ ---------- ------------ ------------ ------------ ------------

Balance at June 30, 2005 5,925,705 45,000 $ 5,971 $ 9,271,137 $(11,605,139) $ (2,328,031)
============ ========== ============ ============ ============ ============

See accompanying notes to financial statements.

PROFILE TECHNOLOGIES, INC.
Statements of Cash Flows
For the years ended June 30, 2005 and 2004

2005 2004
------------ -----------

Cash flows from operating activities:
Net loss $(1,147,016) $(1,164,585)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 8,323 98,494
Impairment loss of assets -- 64,008
Accreted discount on convertible debt 61 3,964
Amortization of convertible debt discount included in interest expense 100,000 81,559
Accrued interest on convertible debt converted to equity 522 --
Amortization of debt issuance costs 5,240 7,000
Equity issued for services 294,525 26,650
Changes in operating assets and liabilities:
Contract work-in progress -- 11,310
Prepaid expenses and other current assets 1,621 31,461
Accounts payable (61,827) 68,288
Deferred wages 255,800 236,668
Accrued professional fees 24,000 (20,345)
Accrued interest 45,105 45,186
Other accrued expenses 3,423 (7,173)
----------- -----------

Net cash used in operating activities (470,223) (517,515)

Cash flows from investing activies:
Purchases of equipment -- (1,820)
----------- -----------

Net cash used in investing activities -- (1,820)

Cash flows from financing activies:
Allocated proceeds from issuance of convertible debt 56,023 159,132
Allocated proceeds from issuance of warrants attached to convertible debt 101,977 185,868
Convertible debt issuance costs -- (23,600)
Common stock issuance costs (13,275) --
Allocated proceeds from issuance of common stock 29,441 --
Allocated proceeds from issuance of warrants attached to issuance of common stock 33,059 --
Proceeds from issuance of notes payable to stockholders 278,500 267,748
Repayments of notes payable to stockholders (48,270) (10,000)
----------- -----------

Net cash provided by financing activities 437,455 579,148
----------- -----------

Increase (decrease) in cash (32,768) 59,813

Cash at beginning of period 59,813 --
----------- -----------

Cash at end of period $ 27,045 $ 59,813
=========== ===========

Supplemental disclosure of cash flow information:
Debt discount recorded for beneficial conversion feature $ 56,023 $ 107,155
Cash paid for interest $ 21,720 $ --
Convertible debt converted into 201,044 shares of common stock
during the twelve months ended June 30, 2005
(no shares issued during the twelve months ended June 30, 2004) $ 100,522 $ --

See accompanying notes to financial statements.

Note 1: Description of Business

Profile Technologies, Inc. (the "Company"), was incorporated in 1986 and
commenced operations in fiscal year 1988. The Company is in the business of
inspecting pipelines for corrosion and is in the final stages of researching and
developing a patented, non-destructive and non-invasive, high speed scanning
process, using electro magnetic waves to remotely inspect buried, encased and
insulated pipelines for corrosion.

Note 2: Summary of Significant Accounting Policies

Contract Revenue Recognition

The Company recognizes revenue from service contracts using the percentage
of completion method of accounting. Contract revenues earned are measured using
either the percentage of contract costs incurred to date to total estimated
contract costs or, when the contract is based on measurable units of completion,
revenue is based on the completion of such units. This method is used because
management considers total cost or measurable units of completion to be the best
available measure of progress on contracts. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that the
estimates used may change in the near term.

Anticipated losses on contracts, if any, are charged to earnings as soon as
such losses can be estimated. Changes in estimated profits on contracts are
recognized during the period in which the change in estimate is known.

Cost of revenues include contract costs incurred to date as well as any
idle time incurred by personnel scheduled to work on customer contracts.

The Company records claims for additional compensation on contracts upon
revision of the contract to include the amount to be received for the additional
work performed. Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect labor,
supplies, tools and repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. Service contracts
generally extend no more than six months.

Research and Development

Research and development costs are expensed when incurred. During the twelve
months ended June 30, 2005 and June 30, 2004, the Company incurred $261,617 and
$200,406, respectively on research and development activities.

Equipment

Equipment is stated at cost and is depreciated using the straight-line
method over estimated useful lives of three to seven years.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company reviews long-lived assets, such as equipment and purchased
intangibles subject to amortization, for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.

The Company did not generate any revenues during the last two quarters of
the fiscal year ended June 30, 2004 and has not secured any future revenue
generating contracts. Absent future cash flows give rise to the uncertainty of
the recoverability of the Company's fixed assets and patents.

During the quarter ended June 30, 2004, the Company recorded an impairment
charge of approximately $64,000 for the write down of its patents and equipment
based on management's assessment of fair value. Fair value was determined based
on management's analysis of discounted future cash flows and approximate current
market value of the assets. The impairment charge is reported in the line item
titled, "General and administrative", in the Company's Statements of Operations.

Valuation of Warrants and Options

The Company estimates the value of warrants and option grants using a
Black-Scholes pricing model based on management assumptions regarding the
warrant and option lives, expected volatility, and risk free interest rates.

Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded for deferred tax assets when
it is more likely than not that such deferred tax assets will not be realized.

Major Customers

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss by the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. As the Company had a net loss attributable to common shareholders in
each of the periods presented, basic and diluted net loss per share are the
same.

Excluded from the computation of diluted net loss per share for the twelve
months ended June 30, 2005, because their effect would be antidilutive, are
options and warrants to acquire 5,762,318 shares of common stock with a
weighted-average exercise price of $1.40 per share. Also excluded from the
computation of diluted net loss per share for the twelve months ended June 30,
2005 are 806,000 shares of common stock that may be issued if investors exercise
their conversion right under the Debentures related to the 2003 Offering as
discussed in footnote 8 because their effect would be antidilutive.

Excluded from the computation of diluted net loss per share for the twelve
months ended June 30, 2004, because their effect would be antidilutive, are
options and warrants to acquire 3,578,818 shares of common stock with a
weighted-average exercise price of $1.58 per share. Also excluded from the
computation of diluted net loss per share for the twelve months ended June 30,
2004 are 690,000 shares of common stock that may be issued if investors exercise
their conversion right under the Debentures related to the 2003 Offering as
discussed in footnote 8 because their effect would be antidilutive.

For the twelve months ended June 30, 2005 and 2004, additional potential
dilutive securities that were excluded from the diluted net loss per share
computation are the exchange rights discussed in footnote 8 that could result in
options to acquire up to 223,000 shares of common stock with an exercise price
of $1.00 per share at June 30, 2005 and 2004.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Patents, Proprietary Technology, and Other Intellectual Property

The Company pursues a policy of generally obtaining patent protection both
in the United States of America and abroad for patentable subject matter in its
proprietary technology. The Company's success depends in a large part upon its
ability to protect its products and technology under United States of America
and international patent laws and other intellectual property laws. U.S. patents
have a term of 17 years from date of issuance or, for more recently filed patent
applications, 20 years from the filing of such applications, and patents in most
foreign countries have a term of 20 years from the proprietary filing date of
the patent application.

The Company believes that it owns and has the right to use or license all
proprietary technology necessary to license and market its products under
development. The Company is not aware of the issuance of any patents or the
filing of any patent applications, which relate to processes or products which
utilize the Company's proprietary technology in a manner which could be similar
to or competitive with the Company's products or processes. The Company has no
knowledge that it is infringing on any existing patent such that it would be
prevented from marketing or licensing products or services currently being
developed by the Company.

Financial Instruments and Concentrations of Credit Risk

At June 30, 2005, the Company has the following financial instruments:
notes payable to stockholders, convertible short-term and long-term debt,
accounts payable and accrued expenses. The carrying value of these instruments,
other than the convertible debt, approximate fair value based on their
liquidity. The fair value of the convertible debt was determined as the excess
of the proceeds over the fair value of the warrants. Credit is extended to
customers based on an evaluation of their financial condition. The Company does
not require any collateral.

Stock-Based Compensation

The Company has elected to follow the measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its employee stock options rather than
the alternative fair value accounting provided for by Statements of Financial
Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock Based
Compensation. Compensation cost for stock options issued to employees is

measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Had compensation cost for the Company's option awards been determined consistent
with SFAS No. 123, the Company's net loss would have been increased to the
proforma amounts indicated below:

For the years ended
June 30,
-----------------------------------
2005 2004
----------- ------------
Net loss:

As reported $(1,147,016) $(1,164,585)
Plus: stock-based employee compensation expense
included in reported net loss -- --

Less: stock based compensation expense determined under
fair value based method for all employee rewards (1,255,965) (21,600)
----------- -----------
Pro forma net loss $(2,402,981) $(1,186,185)
----------- -----------

Net loss per share
Basic and diluted - as reported $ (0.20) $ (0.21)
Basic and diluted - pro forma $ (0.42) $ (0.22)

The fair value of option and warrant grants is estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants made during the year ended June 30, 2005: expected
volatility of 163%, risk-free interest rate of 3.41%, expected lives of two
years, and a 0% dividend yield. The weighted average assumptions used for grants
made during the year ended June 30, 2004 were: expected volatility of 120%, risk
free interest rate of 3.26%, expected lives of 5 years, and a 0% dividend yield.

The Company recognizes compensation cost, if any, related to fixed employee
awards on an accelerated basis over the applicable vesting period using the
methodology described in FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans.

Segment Reporting

The Company has one operating segment. Revenues consist almost entirely of
fees generated from providing testing services. Expenses incurred to date are
reported according to their expense category.

The Company's customers are located in the United States and various
foreign countries. However, no revenue has been generated from contracts with
customers in foreign countries during the years ended June 30, 2005 or 2004.

Comprehensive Income (Loss)

Comprehensive income (loss) is equal to net income (loss) for the years
ended June 30, 2005 and 2004.

Recently Issued Accounting Pronouncements

abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). The adoption of SFAS No. 151 is expected to have no impact
on the Company's financial statements.

Note 3: Related Parties

Notes Payable - Stockholders

In April 2002, the Company issued a non-interest bearing bridge note
payable to an officer of the Company in the amount of $7,500. The note is
payable in full when the Company determines it has sufficient working capital to
do so. On September 29, 2002, the officer who was owed the $7,500 died.

The Company has entered into various loan agreements with Murphy Evans,
President, a director and stockholder of the Company. On March 6, 2003, the
Company's Board of Directors approved the Loan Amendment and Promissory Note
(the "Amended Evans Loan") between the Company and Murphy Evans. The Amended
Evans Loan aggregates all previous debt and supercedes and replaces all of the
terms of the previous loans with Mr. Evans, including any conversion features.
The Amended Evans Loan bears interest on the aggregate principal balance at a
rate of 5% per annum, payable on June 30 and December 31 of each year, with the
principal balance due and payable in full on December 31, 2003. The Amended
Evans Loan is exempt from registration under Section 4(2) of the Securities Act.

During the year ended June 30, 2005, Mr. Evans loaned the Company an
additional $278,500. Accrued interest and the outstanding principal balance of
the Amended Evans Loan were $98,328 and $1,071,490, respectively as of June 30,
2005. Due to insufficient funds, the Company has not made the interest payments
due on the Amended Evans Loan on June 30 and December 31 of each year and did
not repay the outstanding principal balance. Corresponding interest expense
related to the Amended Evans Loan was $47,533 and $37,734 for the twelve months
ended June 30, 2005 and 2004, respectively. All advances from Mr. Evans are
convertible into any debt or equity offerings made by the Company. Mr. Evans has
not made any demand for payment, or exercised any of his remedies, under the
Amended Evans Loan.

On May 9, 2002, the Company cancelled 150,000 warrants held by Mr. Evans
with exercise prices ranging from $3.00 per share to $7.50 per share issued
under the terms of a previous loan with Mr. Evans ("Old Warrants"), and issued
to Mr. Evans 150,000 five-year warrants with an exercise price of $1.05 per
share, which expire on May 13, 2007.

The cancellation of the Old Warrants is an effective re-pricing and will be
accounted for as a "variable plan" until such time as the warrants are
exercised, expire or are forfeited. Variable plan accounting will result in
intrinsic value associated with the warrants being adjusted to compensation
expense based on each reporting period's ending stock value. As of June 30, 2005
and 2004, no intrinsic value had been recorded related to these warrants as the
stock price was below the exercise price.

In September 2002, the Company entered into two non-interest bearing bridge
loans in the respective principal amounts of $40,000 and $10,000 (the
"Stockholder Loans") payable to two stockholders of the Company. The terms of
the Stockholder Loans provide for payment at such time as the Company determines
it has sufficient working capital to repay the principal balances of the
Stockholder Loans. The Stockholder Loans are convertible into 57,142 and 14,286
equity units, respectively, at any time prior to re-payment. Each equity unit is
comprised of one share of the Company's common stock, with a detachable 5-year
warrant to purchase one additional share at an exercise price of $1.05 per
share. Neither stockholder has converted either Stockholder Loan into equity
units.

On June 19, 2003, the Board of Directors approved a promissory note (the
"2003 Gemino Note") in the principal amount of $34,047 payable to Henry E.
Gemino, the Chief Executive Officer, Chief Financial Officer and a director and
stockholder of the Company. The 2003 Gemino Note bears interest at the rate of
5% per annum, payable on June 30 and December 31 of each year. During the year
ended June 30, 2005, the Company repaid the outstanding principal balance of
$48,270 and accrued interest to Mr. Gemino. Interest expense related to the 2003
Gemino Note was $892 and $2,765 for the twelve months ended June 30, 2005 and
2004, respectively.

The following is a summary of notes payable to stockholders as of June 30,
2005.

Amended Evans Loan $1,071,490
2003 Gemino Note --
Deceased Officer Note 7,500
Stockholder Loans 50,000
----------

Total $1,128,990
==========

Royalty Arrangement

In September, 1988, at the time Gale D. Burnett, a beneficial shareholder
of more than 10% of the Company's common stock, first transferred certain
technology, know-how and patent rights to the Company, a royalty interest of 4%
of all pre-tax profits derived from the technology and know-how transferred was
granted to Northwood Enterprises, Inc., a family-owned company controlled by Mr.
Burnett. Northwoods Enterprises subsequently assigned such royalty interest back
to Mr. Burnett. On April 8, 1996, Mr. Burnett assigned 2% of this royalty
interest to certain shareholders of the Company, 1 1/4% of which was assigned to
Henry Gemino, currently the Chief Executive Officer and Chief Financial Officer,
and a director of the Company. This royalty arrangement also applies to all
future patent rights and technology developed by Mr. Burnett and assigned to the
Company. To date, no royalty payments have been made or earned under the above
described arrangement.

Note 4: Income Taxes

Federal income taxes reported by the Company differ from the amount
computed by applying the statutory rate due primarily to an increase in the
valuation allowance for deferred tax assets.

The tax effect of temporary differences that give rise to federal deferred
tax assets are comprised of the following at June 30, 2005:

Deferred tax assets.
Net operating loss carryforwards $3,258,439
Depreciation and amortization 7,008
Wages and professional fees 236,564
Stock compensation 415,200
Research and development credit carry forwards 101,517
----------
Gross deferred tax assets 4,018,728

Less: valuation allowance (4,018,728)
Net deferred tax assets $ --
==========

The net increase in the valuation allowance for deferred tax assets was
$389,123 and $335,605 for the years ended June 30, 2005 and 2004, respectively.
The increases were primarily due to net operating loss carry forwards, the
realization of which was uncertain.

For federal income tax purposes, the Company has net operating loss carry
forwards at June 30, 2005 available to offset future federal taxable income, if
any, of approximately $9,583,645 which begin to expire in 2005 through 2025. In
addition, the Company has research and development tax credit carry forwards of
approximately $101,517 at June 30, 2005, which are available to offset federal
income taxes and begin to expire during the year ended June 30, 2006.

The utilization of the tax net operating loss carry forwards may be limited
due to ownership changes that have occurred as a result of sales of common
stock.

The effects of state income taxes were insignificant for the years ended
June 30, 2005 and 2004.

Note 5: Common Stock

During the year ended June 30, 2005, the Company recorded stock
compensation expense totaling $70,000 for the fair market value of 150,000
shares of restricted common stock issued to third parties in exchange for
services. The restricted common stock was valued based on the market price of
the Company's common stock, as traded on the NASD's Over the Counter Bulletin
Board, on the day of grant.

During the year ended June 30, 2005, five investors exercised their
conversion right in accordance with the terms of the 2003 Offering. As a result,
201,044 restricted shares of common stock were issued. Additionally, pursuant to
the terms of the 2005 Offering, the Company issued 125,000 restricted shares of
common stock during the year ended June 30, 2005.

During the year ended June 30, 2004, the Company recorded stock
compensation expense totaling $9,050 for the fair market value of 33,000 shares

of restricted common stock issued to third parties in exchange for services. The
restricted common stock was valued based on the market price of the Company's
common stock, as traded on the NASD's Over the Counter Bulletin Board, on the
day of grant.

Note 6: Stockholders' Equity

Stock Option Plan

The Company has granted stock options to compensate key employees,
consultants, and board members for past and future services. During 1999, the
Company adopted a stock option plan (the "Plan"). The Plan provides for both
incentive and nonqualified stock options to be granted to employees, officers,
directors, and consultants. In accordance with the Plan, the Company may grant
options to purchase up to 500,000 shares of common stock. On February 9, 2005,
the Board of Directors approved an increase in the number of shares of common
stock that may be issued under the Plan from 500,000 to 2.5 million shares.

A summary of stock option-related activity follows:

Options outstanding
-------------------------
Weighted
Shares Number average
available for of exercise
granted shares price
---------- ---------- ------------

Balance at June 30, 2003 135,000 365,000 $ 2.70
Grants (150,000) 150,000 0.67
Expirations 25,000 (25,000) 10.50
---------- ----------
Balance at June 30, 2004 10,000 490,000 1.68

Increase in options available for grant 2,000,000
Grants (1,850,000) 1,850,000 1.16
Cancellations 15,000 (15,000) 5.00
Expirations 50,000 (50,000) 6.20
---------- ----------
Balance at June 30, 2005 225,000 2,275,000 1.14
========== ==========

The following is a summary of stock options outstanding, all of which are
exercisable at June 30, 2005:

Options outstanding
--------------------------------------------
Weighted
average Weighted
remaining average
Number contractual exercise
Exercise prices outstanding life (years) price
--------------- ----------- ------------ -----

$ 0.50 30,000 3.56 $ 0.50
0.55 90,000 2.75 0.55
0.70 130,000 3.46 0.70
1.00 135,000 1.38 1.00
1.16 1,850,000 8.96 1.16
2.00 5,000 0.68 2.00
4.00 35,000 0.26 4.00
-------------

$ 0.50 - 4.00 2,275,000 7.73 1.14
=============

The Company applies APB Opinion No. 25 and related interpretations in
accounting for option grants to employees.

During the year ended June 30, 2005, the Company recorded stock
compensation expense totaling $217,500 for the fair market value of 250,000
options granted to third-parties in exchange for services. The options were
valued using the Black-Scholes option pricing model with the following
assumptions: Expected volatility of 120%, risk free interest rate of 3.78%,
expected lives of five years, and a 0% dividend yield.

During the year ended June 30, 2004, the Company recorded stock
compensation expense totaling $10,400 for the fair market value of 30,000
options granted to third-parties in exchange for services. The options were
valued using the Black-Scholes option pricing model with the following
assumptions: Expected volatility of 120%, risk free interest rates ranging from
3.26 % to 3.92%, expected lives of five years, and a 0% dividend yield.

The weighted average fair value per share of the option grants made during
the years ended June 30, 2005 and June 30, 2004 were $0.80 and $0.21,
respectively.

Warrants

The Company has granted warrants to compensate key employees, consultants,
and board members for past and future services, and as incentives during
placements of stock and convertible debt.

A summary of warrant-related activity follows:

Number of Weighted
warrants average
outstanding exercise price
-------------- --------------

Outstanding at June 30, 2003 2,458,818 $ 2.01
Grants 730,000 0.75
Expirations (100,000) 6.50
--------------
Outstanding at June 30, 2004 3,088,818 1.57
Grants 453,500 0.75
Expirations (55,000) 5.31
--------------
Outstanding at June 30, 2005 3,487,318 1.57
==============

The following is a summary of warrants outstanding, all of which are
exercisable at June 30, 2005:

Weighted
average Weighted
remaining average
Number contractual exercise
Exercise prices outstanding life (years) price
--------------- ----------- ------------ -----

$ 0.55 - 0.75 1,198,500 8.19 $ 0.75
1.00 - 1.50 1,718,818 1.68 1.05
3.00 - 3.50 520,000 3.28 2.36
7.20 30,000 2.34 7.20
13.50 20,000 2.34 13.50
------------
$ 0.55 -13.50 3,487,318 4.03 1.57
============

During the year ended June 30, 2005, the Company recorded expense related
to warrants totaling $7,025 for the fair market value of 12,500 warrants granted
to a third-party in exchange for services. The warrants were valued using the
Black-Scholes option pricing model with the following assumptions: expected
volatility ranging from 133% to 183%, risk free interest rates ranging from
3.63% to 3.88%, expected lives of five years, and a 0% dividend yield.

During the year ended June 30, 2004, the Company recorded expense related
to warrants totaling $7,200 for the fair market value of 40,000 warrants granted
to a third-party in exchange for services. The warrants were valued using the
Black-Scholes option pricing model with the following assumptions: expected
volatility of 120%, risk free interest rate of 3.26%, expected lives of five
years, and a 0% dividend yield.

The weighted average fair value per share of the warrant grants made
during the years ended June 30, 2005 and June 30, 2004 were $0.31 and $0.41,
respectively.

Note 7: Operating Leases

The Company's research and development facility is located in Ferndale,
Washington under a lease that renewed on January 31, 2003 for a one-year term.
The lease automatically renews thereafter for one year-terms. The lease may be
terminated upon ninety days written notice. The future minimum payments under
the lease extension are at the same monthly rate of approximately $2,026 per
month as under the terms of the original lease.

The Company's executive office is located in Manhasset, New York under a
lease agreement that is month to month.

The Company expects to continue to incur costs on leased properties, as the
Company has extended such leases in the past or will use alternate facilities.

Total rent expense under operating leases with third parties was $33,521
and $34,407 during the years ended June 30, 2005 and 2004, respectively.

Note 8: Liquidity

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred cumulative losses
of $11,605,139 and $10,458,123 through June 30, 2005 and June 30, 2004,
respectively, and had negative working capital of $2,349,380 and $1,818,260 as
of June 30, 2005 and June 30, 2004, respectively. Additionally, the Company has
expended a significant amount of cash in developing its technology and patented
processes. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management recognizes that in order to meet the
Company's capital requirements, and continue to operate, additional financing,
including seeking industry-partner investment through joint ventures or other
possible arrangements, will be necessary. The Company is evaluating alternative
sources of financing to improve its cash position and is undertaking efforts to
raise capital. If the Company is unable to raise additional capital or secure
additional revenue contracts and generate positive cash flow, it is unlikely
that the Company will be able to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Deferred Wages and Accrued Professional Fees

Long-Term Convertible Debt

During the quarter ended March 31, 2005, the Board of Directors terminated
the 2003 Offering. As of the closing date of the 2003 Offering, the Company had
raised $503,000 from the 2003 Offering.

Common Stock

The Company engaged a law firm to help in the fund raising efforts of the
2005 Offering. Pursuant to the terms of the agreement with the law firm, the
Company will pay the law firm a ten percent cash commission on all funds that
the law firm helps raise. Additionally, the Company will issue warrants to
purchase restricted shares of common stock at $0.75 per share equal to ten
percent of the total warrants issued in connection with the 2005 Offering. The
warrants may be exercised up to five years from the date of issuance, which is
the date the proceeds are received under the 2005 Offering. As of June 30, 2005,
the Company has incurred $6,250 of fees to be paid in cash to the law firm and
issued warrants to purchase 12,500 restricted shares of common stock. The
Company recorded approximately $7,000 as a reduction in paid-in capital for the
fair value of the warrant grants. The fair value of the warrant grants were
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: expected volatility of ranging from 133% to 183%,
risk-free interest rates ranging from 3.63% to 3.88%, expected lives of five
years, and a 0% dividend yield.

Note 9: Subsequent Events

On August 9, 2005, Mr. Evans converted $400,000 of his stockholder loan
payable in accordance with the terms of the 2005 Offering. Accordingly, Mr.
Evans was issued 800,000 shares of restricted common stock and warrants to
purchase 800,000 shares of restricted common stock at an exercise price of $0.75
per share.

On September 1, 2005 Mr. Evans converted $75,000 of his stockholder loan
payable in accordance with the terms of the 2005 Offering. Accordingly, Mr.
Evans was issued 150,000 shares of restricted common stock and warrants to
purchase 150,000 shares of restricted common stock at an exercise price of $0.75
per share.

Subsequent to June 30, 2005, four investors exercised their conversion
right under the terms of the 2003 Offering. Accordingly, $180,000 of principal
was converted into 360,000 shares of restricted common stock.

Subsequent to June 30, 2005, the Company has raised $548,000 and issued
1,096,000 restricted shares of common stock and warrants to purchase up to
1,096,000 shares of restricted stock in accordance with the terms of the 2005
Offering. Additionally, pursuant to an agreement with a law firm, the Company
has incurred $51,650 of commission related fees and issued warrants to purchase
1,033,000 restricted shares of common stock at $0.75 per share.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

(a) Previous independent accountant.

On November 4, 2004, the Company dismissed KPMG LLP ("KPMG") as its
independent accountant. The decision to change independent accountant was
approved by the Company's Audit Committee and Board of Directors.

During the audits of the Company's two most recent fiscal years ended June
30, 2004 and through the date of this report, the Company has had no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused it
to make reference to the subject matter of such disagreements in its report on
the financial statements of the Company for such period. During the Company's
two most recent fiscal years and through the date of this report, the Company
has had no reportable events under Item 304(a)(1)(iv) of Regulation S-B, except
as discussed in the next paragraph below.

During the audit for the year-ended June 30, 2004, KPMG advised the
Company's audit committee that they identified one material weakness in the
Company's internal controls. The material weakness identified related to the
accounting and financial reporting for the non-payment of interest on the
convertible debt, causing certain of the notes to be in default as of June 30,
2004. The accounting for this default is included in the Company's financial
statements for the year-ended June 30, 2004. The Company has implemented
processes and procedures to review debt agreements, on a quarterly basis, to
ensure that the Company is in compliance with the terms of its debt instruments
and covenants. In instances of non-compliance, the Company will take the
necessary actions to remedy the non-compliance and consider the impact of any
non-compliance in the reporting of the Company's financial statements.

The audit reports of KPMG on the financial statements of the Company as of
and for each of the past two fiscal years ended June 30, 2004 and 2003 did not
contain any adverse opinion or a disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles, except as
follows:

KPMG's report on the financial statements of the Company as of and for the
years ended June 30, 2004 and 2003, contained a separate paragraph stating that
"the Company has incurred net losses since inception and has a working capital
deficit at June 30, 2004 that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 7. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty."

The Company has requested KPMG to furnish it with a letter addressed to the
Commission stating whether or not KPMG agrees with the above statements. A copy
of such letter, dated November 9, 2004, is filed as Exhibit No. 16 to this
report.

(b) New independent accountant.

The Company has engaged Peterson Sullivan PLLC ("Peterson Sullivan") as its
new independent accountant as of November 4, 2004. During the Company's two most
recent fiscal years and through the date of their engagement by the Company, the
Company did not consult with Peterson Sullivan regarding the issues of the type
described in Item 304(a)(2) of Regulation S-B.

Item 8A. Controls and Procedures.

Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms. The Company's executive officers, including the
Company's Chief Executive Officer, who also serves as Chief Financial Officer,
and the Chief Operating Officer, are responsible for establishing and
maintaining disclosure controls and procedures for the Company. These executives
have designed such controls to ensure that all material information related to
the Company is made known to them by others within the organization. As of June
30, 2005, the Company's Chief Executive Officer and Chief Operating Officer
completed an evaluation of the Company's disclosure controls and procedures and
have determined that such disclosure controls and procedures are functioning
properly and effectively. They did not discover any significant deficiencies or

material weaknesses within the controls and procedures that require
modification. There were no changes in the Company's internal control over
financial reporting identified in connection with the Company's evaluation that
occurred during the Company's fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

PART III

Item 9. Directors and Executive Officers.

Directors, Executive Officers, Promoters and Control Persons

The information regarding directors contained under the caption "Proposal
One: Election of Directors" in the Company's Proxy Statement for the 2005 Annual
Meeting of Shareholders, which will be filed with the Commission not later than
120 days after the end of the fiscal year covered by this report, is
incorporated herein by reference.

Executive Officers of the Company

In addition to Murphy Evans and Henry Gemino, who also serve as directors,
the following constitutes the executive officer of the Company:

Positions Held and Principal
Name Age Occupations During the Past 5 Years
---- --- -----------------------------------

Philip L. Jones 63 Mr. Jones has served as the Chief perating
Officer and Executive Vice President for the
Company during the past five years. Previous to
his employment with the Company, he provided
energy consulting services to certain utility
companies for a period of one year. Prior to tha
time, Mr. Jones held various executive positions
with Consolidated Natural Gas Company before
retiring in April 2000.

Compliance with Section 16(a) of the Exchange Act

The information regarding reports required under Section 16(a) of the
Securities Exchange Act of 1934, as amended, contained under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy

Statement for the 2005 Annual Meeting of Shareholders, which will be filed with
the Commission not later than 120 days after the end of the fiscal year covered
by this report, is incorporated herein by reference.

Code of Ethics

The Company has adopted a Code of Ethics applicable to its chief executive
officer, chief operating officer, chief financial officer, president and other
finance leaders. A copy of the Code of Ethics may be obtained by any person
without charge, upon request, by contacting the principle office of the Company.

Audit Committee

The information contained under the caption "Board of Directors and
Committees" in the Company's Proxy Statement for the 2005 Annual Meeting of
Shareholders, which will be filed with the Commission not later than 120 days
after the end of the fiscal year covered by this report, is incorporated herein
by reference.

Item 10. Executive Compensation.

The information contained under the caption "Executive Compensation" in the
Company's Proxy Statement for the 2005 Annual Meeting of Shareholders, which
will be filed with the Commission not later than 120 days after the end of the
fiscal year covered by this report, is incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the 2005
Annual Meeting of Shareholders, which will be filed with the Commission not
later than 120 days after the end of the fsical year covered by this report, is
incorporated herein by reference.

Item 12. Certain Relationships and Related Transactions.

The information contained under the caption "Certain Relationship and
Related Transactions" in the Company's Proxy Statement for the 2005 Annual
Meeting of Shareholders, which will be filed with the Commission not later than
120 days after the end of the fiscal year covered by this report, is
incorporated herein by reference.

Item 13. Exhibits.

The following exhibits were filed with or incorporated by reference into this
report.

Exhibit No. Description of Exhibit
----------- ----------------------

Exhibit 3.i Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 filed with the Commission on May 10, 1996).

Exhibit 3.ii Bylaws of the Company (incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement on
Form SB-2 filed with the Commission on May 10, 1996).

Exhibit 3.iii Amendment to Certificate of Incorporation (incorporated
by reference to Exhibit A to the Company's Definitive
Proxy Statement filed with the Commission on October
28, 2002).

Exhibit 10.1 Service Agreement dated as of August 16, 2001 between
Profile Technologies, Inc. and BP Exploration (Alaska)
Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-KSB filed with the
Commission on September 28, 2001).

Exhibit 10.2 Loan Agreement dated March 6, 2003, by and between the
Company and Murphy Evans (incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form
10-QSB filed with the Commission on May 15, 2003).

Exhibit 10.3 Loan Amendment and Promissory Note dated March 6, 2003,
by and between the Company and Murphy Evans
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB filed with
the Commission on May 20, 2003).

Exhibit 10.4 Lease Agreement dated January 26, 2001 by and between
the Company and Fatum LLC. (incorporated by reference
to Exhibit 10.4 to the Company's Annual Report on Form
10-KSB filed with the Commission on October 12, 2004).

Exhibit 10.5 Lease Extension dated February 26, 2003 by and between
the Company and Fatum LLC. (incorporated by reference
to Exhibit 10.5 to the Company's Annual Report on Form
10-KSB filed with the Commission on October 12, 2004).

Exhibit 10.6 Royalty Agreement (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form
SB-2 filed with the Commission on May 10, 1996).

Exhibit 10.7 Assignment of Patent Rights (incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement
on Form SB-2 filed with the Commission on May 10,
1996).

Exhibit 10.8 ConocoPhillips Alaska, Inc., Contract No. AK 990156,
Amendment No. 3 dated February 1, 2003, by and between
the Company and ConocoPhillips Alaska, Inc.
(incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-QSB filed with
the Commission on May 20, 2003).

Exhibit 10.9 1999 Stock Option Plan (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form
10-KSB filed with the Commission on October 12, 2004).

Exhibit 11.1 Code of Ethics (incorporated by reference to Exhibit 14
to the Company's Annual Report on Form 10-KSB filed
with the Commission on October 12, 2004).

Exhibit 23.1 Consent of Independent Registered Public Accounting
Firm.

Exhibit 23.2 Consent of Independent Registered Public Accounting
Firm.

Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Henry E.
Gemino, as Chief Executive Officer and Chief Financial
Officer of the Company.

Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Philip L.
Jones, as Chief Operating Officer and Executive Vice
President of the Company.

Exhibit 32.1 Certification under Section 906 of the Sarbanes-Oxley
Act of 2002 by Henry E. Gemino, as Chief Executive
Officer and Chief Financial Officer of the Company.

Exhibit 32.2 Certification under Section 906 of the Sarbanes-Oxley
Act of 2002 by Philip L. Jones, as Chief Operating
Officer and Executive Vice President of the Company.

Item 14. Principal Accountant Fees and Services.

The information required by this item is incorporated by reference to the
section entitled "Independent Public Accountants" in the Company's Proxy
Statement for the 2005 Annual Meeting of Shareholders, which will be filed with
the Commission not later than 120 days after the end of the fiscal year covered
by this report, is incorporated herein by reference.

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.

PROFILE TECHNOLOGIES, INC.

By /s/ Henry E. Gemino
-------------------------------------------
Henry E. Gemino
Chief Executive Officer
and Chief Financial Officer

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

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

/s/Charles Christenson Director September 27, 2005
----------------------
Charles Christenson

/s/Murphy Evans Director September 27, 2005
---------------
Murphy Evans

/s/Henry E. Gemino Director September 27, 2005
------------------
Henry E. Gemino

/s/William A. Krivsky Director September 27, 2005
---------------------
William A. Krivsky