WORKOUT AGREEMENT

Exhibit 10.6

WORKOUT AGREEMENT

            This Workout Agreement (“Agreement”) is entered into by and between The Trustees of the University of Pennsylvania, a Pennsylvania nonprofit corporation (“Penn”) and Material Technologies, Inc., a Delaware corporation (“Matech” or the “Company”) with regard to the following facts:

RECITALS

            Penn and Matech are parties to a License Agreement dated August 26, 1993, as amended by Amendment 1 dated December 17, 1997 (together, the “Amended Licensed Agreement”).  Penn and Matech are also parties to a Sponsored Research Agreement dated August 26, 1993 (the “SRA Agreement”), as amended by a Repayment Agreement dated December 17, 1997 (the “Repayment Agreement”, and together with the SRA Agreement, the “SRA/Repayment Agreement”). 

            Matech desires to reach an agreement with Penn to delay payment of some of the principal debt owed, and interest accrued, and otherwise agree to the terms in this Agreement; and

            Penn, in furtherance of its education and research missions and desire to benefit society through the timely commercialization of Penn’s invention(s), is willing to postpone, temporarily, its right to pursue legal remedies against Matech in connection with the SRA/Repayment Agreement, receive certain payments from Matech, and otherwise agree to the terms in this Agreement.

            NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows:

AGREEMENT

1.         Acknowledgment of Debt Owed.  Penn and Matech acknowledge and agree that:

            (a)        as of December 31, 2004, all amounts due and owing to Penn pursuant to the SRA/Repayment Agreement is Seven Hundred Sixty Thousand Eight Hundred Thirty-One Dollars ($760,831.00) (the “Remaining Obligation”); and

            (b)        the maturity date, and all other dates upon which payments are required to be made to Penn under the SRA/Repayment Agreement are hereby modified as set forth in this Agreement.

2.         Payment Toward Obligation. 

            (a)        Upon execution of this Agreement by both parties, Matech shall deliver to Penn via wire transfer the sum of Twenty-Five Thousand Dollars ($25,000), as a partial payment of the Remaining Obligation owed pursuant to the SRA/Repayment Agreement (the “Partial Payment”).

            (b)        On or before each one-year anniversary of the Agreement Effective Date (defined below), Matech shall pay Penn an additional sum equal to Twenty Five Thousand Dollars ($25,000), which will be applied toward reducing the then-current Remaining Obligation and Accrued Interest (defined below) owed.

Page 1 of 8

3.         Interest Rate.  Effective January 1, 2005, simple interest shall accrue on the Remaining Obligation at the rate of one-half of one percent (0.5%) per month of the Remaining Obligation, until paid in full.  All interest that accrues after the Agreement Effective Date shall be referred to herein as the “Accrued Interest”.  The Partial Payment, and all payments made pursuant to Sections 2 and 4 of this Agreement, shall be credited first against the Remaining Obligation, and then credited against Accrued Interest.

4.         Payments.  Beginning with Matech’s Second Quarter 2005, and continuing for so long as any portion of the Remaining Obligation or Accrued Interest are outstanding, Matech shall pay, or shall cause a Matech Affiliate to pay, to Penn quarterly payments (each, the “Quarterly Payment”), toward the full payment of the Remaining Obligation and Accrued Interest.  Such Quarterly Payment shall be due to Penn by the earlier of:  (a) ten days following the filing of Matech’s quarterly Form 10-Q or Form 10-K for each year that any portion of the Remaining Obligation or Accrued Interest is outstanding; or (b) sixty (60) days after the end of the calendar quarter for any quarter in which any portion of the Remaining Obligation or Accrued Interest in outstanding.  Notwithstanding the foregoing, the Quarterly Payments shall be made only out of, and not to exceed ten percent (10%) of, Matech’s Net Income Before Extraordinary Items and Provision for Income Taxes (“Net Income”).  For purposes of this Section 4, “Net Income” shall have the same meaning as “Net Income Before Extraordinary Items and Provision for Income Taxes” as set forth in Matech’s publicly-filed quarterly and annual financial statements with the Securities and Exchange Commission or successor regulatory authority and determined by Matech’s accountant in accordance with generally accepted accounting principles consistently applied, or, in the case of an Affiliate, as “net income” determined by the Affiliate’s accountant in accordance with generally accepted accounting principles consistently applied.  If Matech or a Matech Affiliate has any Net Income for a quarter, Matech shall pay, or shall cause the Matech Affiliate or Licensee to pay, some amount to Penn as a Quarterly Payment up to the 10% of Net Income; if Matech or a Matech Affiliate does not have Net Income for the quarter, then no Quarterly Payment shall be due.

5.         Repayment Agreement Amendments.

            (a)        Sections 5, 6 and 10 of the Repayment Agreement are hereby deleted.

            (b)        In Section 8 of the Repayment Agreement, the amount “$150,000” is hereby amended to state “$300,000” and the following sentence is inserted at the end of Section 8: “In the event Mr. Bernstein’s cash salary exceeds the sum of $250,000 (excluding for this purpose any noncash benefits, options, warrants which may otherwise be reportable as salary) in any calendar year Penn shall receive, on a dollar for dollar basis, an amount equal to any cash salary received by Mr. Bernstein in excess of $250,000. For example, if Mr. Bernstein’s annual cash salary is $275,000 for 2005, in the year ending 2005 Penn shall receive the sum of $25,000 to be credited to the Remaining Obligation.” This shall cease when the debt in Section 1(a) has been paid off.

6.         New Equity Issuance and Other Equity Issues. 

            (a)        Within ten business days following the Agreement Effective Date (defined below), Matech shall issue and deliver in the name of “The Trustees of the University of Pennsylvania”, that number of shares of Matech’s Class A Common Stock as will cause Penn to own and hold of record three and three-quarters percent (3.75%) of the issued and outstanding shares (excluding any and all unexercised: i) options, ii) warrants, iii) convertible debentures, or

Page 2 of 8

iv) convertible securities in any form) of Matech’s Class A Common Stock as set forth on Matech’s December 31, 2004 Form 10-K (the “Penn Settlement Shares”).  Within ten business days after receiving such representations and warranties as shall be agreed upon between Matech and Dr. Campbell Laird in his individual capacity (“Laird”), Matech shall issue and deliver in the name of Dr. Campbell Laird that number of shares of Matech’s Class A Common Stock as will cause Laird to own and hold of record three-quarters of a percent (0.75%) of the issued and outstanding shares (excluding any and all unexercised: (i) options, (ii) warrants, (iii) convertible debentures, or (iv) convertible securities in any form) of Matech’s Class A Common Stock as set forth on Matech’s December 31, 2004 Form 10-K (the “Laird Settlement Shares”).  Within ten business days after receiving such representations and warranties as shall be agreed upon between Matech and Dr. Li Yuan Feng in his individual capacity (“Li”), Matech shall issue and deliver in the name of Dr. Li Yuan Feng that number of shares of Matech’s Class A Common Stock as will cause Li to own and hold of record three-quarters of a percent (0.75%) of the issued and outstanding shares (excluding any and all unexercised: (i) options, (ii) warrants, (iii) convertible debentures, or (iv) convertible securities in any form) of Matech’s Class A Common Stock as set forth on Matech’s December 31, 2004 Form 10-K (the “Li Settlement Shares”).The Penn Settlement Shares, Laird Settlement Shares, and Li Settlement Shares collectively shall be defined to be the “Settlement Shares”. 

            (b)        Within ten business days following the Agreement Effective Date, Matech shall deliver to Penn an updated capitalization table setting forth the capital stock Matech is authorized to issue, the beneficial ownership of the shares of each class and series thereof and of the securities convertible, exercisable or exchangeable therefor, that are outstanding as of the Agreement Effective Date.

            (c)        The Penn Settlement Shares and all shares of Matech common stock owned and held of record on the Agreement Effective Date by Penn (collectively, the “Matech Shares”) shall be subject to a shareholder lock-up agreement as follows: 

              (1)  Except as otherwise provided in Section 6(c)(2) of this Agreement, any interest in the  Matech Shares may not be voluntarily or involuntarily transferred, by operation of law or otherwise, by Penn for a period of eighteen (18) months from the Agreement Effective Date (the “Lock Up Period”).

              (2)  The prohibition in Section 6(c)(1) shall not apply to a transfer of an interest in the Matech Shares, held by Penn for the benefit of and with the restrictive legends referred to in Section 6(c)(1) above, to Dr. Campbell Laird, Dr. Li Yuan Feng or to any employee of Penn who has developed or assisted in the development of the intellectual property described in the Amended License Agreement. Notwithstanding anything contained