Edgar Filing: HYDRON TECHNOLOGIES INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the year ended December 31, 2006 or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ________ to ________.

Commission file Number 0-6333

HYDRON TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)

NEW YORK 13-1574215
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4400 34TH STREET NORTH, SUITE F, ST. PETERSBURG, FL 33714
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (727) 342-5050
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Securities registered pursuant to Section 12(b) of the Act: NONE
----

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
other amendment to this Form 10-KSB. [ ]

Indicate by check mark whether the registrant is a shell company
accelerated filer (as defined in Exchange Act Rule 12b-2). YES [ ] NO [X]

The issuers revenues for the fiscal year ended December 31, 2006 was
$1,474,003

The aggregate market value of the voting stock held by non-affiliates
of the Registrant was $1,432,463 based upon the closing price of $0.15 on March
22, 2007.

Number of shares of Common Stock outstanding as of March 31, 2007:
16,115,336.

No documents are incorporated by reference into this Report except
those Exhibits so incorporated as set forth in the Exhibit index.

Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X].

INDEX
PART I

Item 1. Business..............................................................3

Item 2. Properties...........................................................10

Item 3. Legal Proceedings....................................................10

Item 4. Submission of Matters to a vote of security holders..................10

PART II

Item 5. Market for common equity and related stockholder matters.............11

Item 6. Management's discussion and analysis or plan or operation............14

Item 7. Consolidated Financial Statements....................................24

Item 8. Changes & Disagreements with Accountants.............................51

Item 8a. Controls & Procedures................................................51

Item 8b. Other Information....................................................52

PART III

Item 9. Directors, Executive officers, Promoters and
Control persons & Corporate Governance;
Compliance with Section 16(a) of the Exchange Act....................52

Item 10. Executive Compensation...............................................55

Item 11. Security Ownership of certain beneficial owners and
Management & Related Stockholder matters.............................58

Item 12. Certain relationships and related transactions.......................58

Item 13. Exhibits ............................................................59

Item 14. Principal Accounting Fees and Services ..............................61

PART I

ITEM 1. BUSINESS

INTRODUCTION

Hydron Technologies, Inc. ("the Company"), a New York corporation
organized on January 30, 1948, maintains its principal office at 4400 34th
Street North, Suite F, St. Petersburg, FL 33714 and its telephone number is
(727) 342-5050.

During early 2005, the Company returned its focus to the development
and sales of its skin care products. For several years prior, the Company's
research and development efforts were concentrated on products and medical
applications utilizing its patented tissue oxygenation technology, and on
accumulating data for a Food & Drug Administration (FDA) application related to
this technology. On January 10, 2005, the Company attended a Pre-Investigational
Device Exemption meeting with the FDA in the belief that a clear pathway for
safety and clinical research requirements could be determined at that time;
however, a defined methodology could not be agreed upon at that time. As a
result of that meeting, and in consideration of the Company's limited working
capital, management decided to refocus its efforts on non-medical technologies.
The Company continues to believe that its tissue oxygenation technology has
significant potential, and expects to re-institute research and development in
that area when working capital allows.

The Company's current focus is on furthering development and sales of
its other proprietary products, including a newly patented evaporating
emulsifier technology for use in cosmetic treatments and acne products, a number
of patented polymer skin care formulas using a moisture-attracting ingredient
(the "Hydron(R) polymer") that provide superior skin moisturization benefits and
sunscreen delivery, and a patented formula for a wrinkle reduction serum.

Currently, the Company markets a broad range of cosmetic and oral
health care products using a moisture-attracting ingredient (the "Hydron(R)
polymer") and a topical delivery system for active ingredients including
pharmaceuticals. The Company holds U.S. and international patents on, what
management believes is, the only known cosmetically acceptable method to suspend
the Hydron polymer in a stable emulsion for use in personal care/cosmetic
products. The Company is developing other personal care/cosmetic products for
consumers using its patented technology and would, when appropriate, either seek
licensing arrangements with third parties, or develop and market proprietary
products through its own efforts. Management believes that because of their
unique properties, products that utilize the Hydron polymer have the potential
for wide acceptance in consumer and professional health care markets.

On July 1, 2005, the Company purchased Clinical Results, Inc. ("CRI"),
for two million (2,000,000) shares of the Company's common stock. Through the
purchase of CRI the Company has entered the business of proprietary formulations
and contract manufacturing for other consumer product companies. CRI's clients
range from mass-market retailers to marketers of high-end brands, and of certain
health food store brands.

Management believes that Hydron Technologies will benefit from lower
manufacturing costs, and be better positioned to build its catalog and internet
business, as well as expand the sale of its skin care treatments beyond its
historical direct response TV and catalog operations, by utilizing CRI's broker
network. The Company's ultimate ability to attain profitable operations is
dependent upon obtaining additional financing or achieving a level of sales
adequate to support its cost structure.

HYDRON(R) BRANDED SKIN CARE PRODUCTS

The Company has been developing various consumer products using Hydron
polymers since 1986. The Company's products are designed to address concerns
about the visible signs of aging, and include Hydron(R) skincare, hair care,
bath and body and sun care lines. The Company currently has forty seven
individual branded products available in the following product categories: skin
care (34 products), hair care (6 products), bath and body (12 products), dental
(3 products) and sun care (2 products). These products are also packaged into
collections and sold at a more favorable value than the individual products sold
separately. All of the products are available through the Hydron catalog and web
site at www.hydron.com ("Catalog"). The Company also markets a number of
customized formulations under private label and contract manufacturing for
various outside brands.

Management believes that the Company's moisturizers and skin treatments
are unique and offer the following competitive benefits: they self-adjust to
match the skin's optimal pH balance soon after they are applied to the skin;
they become water-insoluble on the skin's surface, and unlike all other
water-based cremes and lotions, are not removed by the skin's perspiration or
plain water; they are oxygen-permeable, allowing the skin to breathe; they do
not emulsify the skin's natural moisturizing agents, as do conventional cremes
and lotions; and they attract and hold water, creating a cushion of moisture on
the skin's surface that promotes penetration of other beneficial product
ingredients, all while leaving no greasy after-feel.

The Company's products are independently tested by dermatologists and,
in their opinion, are considered to be safe, non-irritating and applicable to
most skin types. Products for use around the eye area are also ophthalmologist
tested and safe for contact lens wearers. Most of the Company's branded
moisturizing products are based on the Company's patented emulsion system, which
permits the product ingredients to deliver their intended benefits over an
extended period of time and in a more efficient manner.

Management believes that the Hydron(R) emulsion system can enhance the
effectiveness of topical over-the-counter medications. The emulsion system is
designed to deposit a polymer film on the skin's surface which has a number of
advantages over traditional lotions: it promotes hydration of the outer layer of
skin, improves penetration into the skin's pores, and has good tactility and
flexibility. The Company expects to continue to focus research and development
resources on proprietary technology-based products as determined by management's
assessment of consumer demand.

The Company discovered that the Hydron emulsion system also adjusts pH
on the skin to match the pH of the stratum corneum, the skin's surface layer.
The pH range of the emulsion system is ideal for promoting the skin's natural
healing process and enzyme production responsible for rebuilding the skin's
lipid barrier. In January 2006, the Company was granted U.S. Patent Number
6,984,391 for its Compositions and Method for Delivery of Skin Cosmeceuticals to
cover this technology, which also applies to a new acne treatment system.

CATALOG SALES - The Company offers personal care products for sale directly to
consumers. Augmenting direct mail, the Company sells its products on the World
Wide Web and regularly transmits E-mail broadcasts to its customer base. Catalog
sales represented approximately 41% of Hydron's total sales for the year ended
December 31, 2006. The Company is continuing to explore new ways to enhance
Catalog sales and operations, including direct sales initiatives.

PRIVATE LABEL CONTRACTING - Since March 1, 2001, the Company has been a supplier
to Reliv International, Inc ("Reliv") to develop and manufacture a line of
private label skin care products under their brand name, ReversAge(R). Reliv is
a public company traded on NASDAQ (symbol RELV). Private label sales represented
approximately 9% of Hydron's total sales for the year ended December 31, 2006.

CONTRACT MANUFACTURING - Through its acquisition of CRI, the Company now
manufactures consumer products for a number of companies. Products include
proprietary formulations for skin and hair care. During the year ending December
31, 2006, contract manufacturing revenue represented 38% of Hydron's total
sales.

FORMULATION AND COMMISSION - The Company received a $60,000 payment for
formulation services that its subsidiary Clinical Results, Inc had previously
performed. Formulation sales represented 5% of sales and Commissions represented
1% of sales for the year ended December 31, 2006. When certain additional
consulting services are completed, the Company expects to receive another
milestone payment and may receive continuing royalties thereafter.

RESEARCH AND DEVELOPMENT

For several years prior to 2005, the Company's research and development
efforts advanced groundbreaking research into oxygenated wound treatments,
healing enhancement, and skin care that may provide anti-aging treatments. Where
possible, the Company may license these technologies to other companies with
expertise in specific applications. Research and development efforts include
product formulation, clinical testing, packaging design and prototypes,
extensive product safety and stability testing conducted by medical
professionals, efficacy studies to support product claims, and consumer
research.

The Company currently continues to concentrate research and development
on proprietary technology-based products as determined by management's
assessment of consumer demand. Management has completed development of an acne
ingredient delivery system. The technology allows for acidic ingredients to be
delivered to the skin's stratum corneum at neutral pH (~6.8 to 7.0),

where it then gradually adjusts to match the pH of the stratum corneum below
5.5. This delivery technique avoids the irritation and burning associated with
traditional acne treatments that deliver ingredients at pH values as low as 2.0.
The Company was granted U.S. patents on this technology in January 2006.

In the current acne market, medicinal treatments can often be more
irritating and elicit more redness than the skin condition itself. The Company's
new system significantly reduces the harshness and irritation associated with
such products.

Prior to June 2005, Charles Fox, a consultant and a former member of
the Company's Board of Directors from September 1997 to October 1998, led the
Company's research and development efforts. Mr. Fox was formerly director of
product development for Warner Lambert Company's personal products division and
was a former president of the Society of Cosmetic Chemists.

Beginning on July 1, 2005 David Pollock and Dr. Richard Douglas Reitz,
the Company's CEO and EVP, respectively, head the Company's R&D effort.

PATENTED TECHNOLOGY

The Company believes that technology and patent protection are
essential to providing a sound foundation for a new product. In January 2006,
the Company was granted U.S. Patent Number 6,984,391 for its Compositions and
Method for Delivery of Skin Cosmeceuticals. This patent covers a unique
evaporating emulsifier system that the Company believes is a significant
breakthrough in skin care. It is evident in recent skin research that the pH
range of the emulsion system is essential in contributing to the skin's natural
healing process and the enzyme production responsible for rebuilding the skin's
lipid barrier. The benefits provided by this pH self-adjusting system provides
clinically proven benefits over competitive products.

The Company was granted a U.S. patent on its super-oxygenation
technology in November 2003. This patent covers the process of applying a liquid
containing pure oxygen micro-bubbles to the surface of the skin such that the
oxygen penetrates the skin and oxygenates the underlying tissue. The Company has
applied for international patents on this technology in approximately 29
countries, which are in various stages of review as of December 31, 2006. The
Company expects these patent applications to be approved over the next few
years.

The Company was granted U.S. Patent No. 4,883,659, dated November 28,
1989, and U.S. Patent No. 5,039,516, dated August 13, 1991, which cover a stable
moisturizing emulsion containing an unusual emulsifying agent, as well as the
Hydron polymer and a unique combination of ingredients. These patents have
expiration dates of November 28, 2006 and August 13, 2008, respectively. During
1999 the Company was granted U.S. Patent No. 5,879,684 for its "Line Smoothing
Complex" formula. This product has been clinically shown to reduce fine lines
and wrinkles. The patent has an expiration date of April 11, 2017. In addition,
the Company has registered several trademarks relating to its cosmetic products.

The Company has also received patent protection for its emulsification
process in several countries to facilitate distribution and sale of these
products outside of the United States. The Hydron polymer, utilized in cosmetic
emulsions, creates a thin moisture-attracting film that is non-greasy; is not
dissolved by sebaceous oils or perspiration; does not emulsify the skin's
natural oils and humectants; and allows the skin to breathe. The film is
insoluble in water and resistant to rub-off, but can easily be removed with
cleanser and water.

MANUFACTURING AND RAW MATERIALS

Until July 1, 2005, Hydron polymer-based products were manufactured
exclusively for the Company by independent third parties. The Company had used
principally two manufacturers of cosmetic products because of the quality of
their production and reasonable costs. All raw material and packaging components
for the Company's consumer and professional product lines are readily available
to the Company from a variety of sources.

Since July 1, 2005 the Company is manufacturing the majority of its
products at its own facility.

The Company is not dependent upon any sole manufacturer or supplier for
any of its raw materials or ingredients.

AGREEMENT WITH VALERA PHARMACEUTICALS ("VALERA")

Under the terms of an agreement with Valera, which was assigned from GP
Strategies Corporation ("GPS"), the Company has an exclusive worldwide license
to manufacture, market or use non-prescription products that include the Hydron
polymer in the consumer field, including in connection with cosmetic products
and certain personal care products, and in the oral health field, including
dentures. Under the Valera Agreement, Valera retains the exclusive right to
manufacture, sell or distribute any prescription drug or medical device made
with the Hydron polymer, other than in the oral health field. In addition, under
the Valera Agreement, the Company and Valera may each manufacture, sell, and use
non-prescription drug products that include the Hydron polymer as an active
ingredient, that are not included in their respective exclusive fields.

Under the Valera Agreement, Valera also licenses to the Company the
trademark Hydron for use in connection with the manufacture, marketing and use
of products using Hydron polymers as permitted under the Valera Agreement.

Under the terms of the Valera Agreement, the Company and Valera are
each required to pay to the other a royalty of five percent (5%) of their
respective net sales of Hydron polymer products, except for sales of certain
specified non-prescription drug products utilizing the Hydron polymer as an
active ingredient to third parties. Where either party receives an up-front
license fee, royalty or similar payment from non-prescription drug products,
that party shall pay the other party a royalty of twenty-five percent (25%) of
such payments.

An aggregate of $28,108 and $29,512 was accrued and unpaid as of
December 31, 2006 and 2005, respectively. This amount is adequate to cover any
royalties that are payable through that date. The Company has not received any
royalty payments, or been advised of any sales that would entitle it to royalty
payments.

On February 1, 2006 Valera Pharmaceuticals became a publicly traded
company through an Initial Public Offering of its common shares. The Company's
shares are traded on NASDAQ under the symbol VLRX. On December 11, 2006, Indevus
Pharmaceuticals, Inc.("Indevus"), Hayden Merger Sub, Inc. ("Merger Sub"), a
wholly-owned subsidiary of Indevus, and Valera Pharmaceuticals, Inc. ("Valera")
entered into an Agreement and Plan of Merger, pursuant to which Indevus will
acquire Valera. In connection with the proposed merger between Valera
Pharmaceuticals, Inc. and Indevus Pharmaceuticals, Inc. (Nasdaq: IDEV), on March
12, 2007, Indevus' Registration Statement on Form S-4, which includes the joint
proxy statement / prospectus relating to both Indevus' and Valera's stockholder
meetings, was declared effective by the Securities and Exchange Commission. Each
company will hold a special meeting of its stockholders on April 17, 2007 to
approve matters relating to the proposed merger.

LIMITED LIABILITY PARTNERSHIP

In August 2004, The Company established Hydron Royalty Partners, LLLP,
a limited liability limited partnership, to fund the then existing royalty
obligations in consideration for the right to receive future royalty receipts
from Valera Pharmaceuticals, Inc. Hydron Technologies, Inc., the general
partner, assigned its rights in the Valera Agreement to the Partnership. The
Partnership assumed the existing liability for prior period royalties ($127,984)
and will annually pay the first $30,000 of any future royalties due to Valera
through 2008 in return for the right to receive any future royalties that may be
due from Valera on their new products. The Company, as general partner, holds
50.001% of the partnership interests, and the limited partnership interests
represent in the aggregate the remaining 49.999%.

INVENTORY

The Company did not have any backorder of firm booked orders of Hydron
branded product as of December 31, 2006 and generally delivers its orders within
two weeks of the date orders are booked. Although the Company's business in not
seasonal, orders placed by Hydron's private label customers and television
retailers fluctuate on a monthly and quarterly basis. Orders placed by the
Company's Catalog customers are generally shipped within two business days of
the placement of the order.

Most items can be produced within a 45-day period. Since the Company
manufactures products in-house and has reduced the lead time for production, the
finished goods inventory can be reduced to an average between 3 - 6 months of
sales. Packaging components must be printed in larger quantities and the level
of those types of items may exceed 12 months of sales. The inventory level of
the Hydron polymer exceeds several years.

GOVERNMENT REGULATION

The Company's oxygenation process uses pure oxygen, which is a natural
substance and is not controlled. However, the containers, devices used, and the
handling of oxygen require the Food and Drug Administration's approval (FDA).
The Company complies with the Federal Food, Drug and Cosmetic Act ("FDC Act")
and must comply with the labeling requirements of the FDC Act, the Fair
Packaging and Labeling Act ("FPL Act"), and the regulations thereunder. Many
products and applications that are derived from Hydron's oxygenation technology
will be considered medical in nature and FDA approval will be required for this
area. New skin care products and most of the Company's existing products are
"cosmetics" as that term is defined under the FDC Act. Some of the Company's
products (i.e. its topical analgesic and products that contain a sunscreen or
Triclosan) are also classified as over-the-counter drugs.

Additional regulatory requirements for existing products include
certain labeling requirements, registration of the manufacturer and semi-annual
update of the drug list. Management believes that it is in compliance with these
requirements and that it faces no material costs associated with such
compliance.

COMPETITION

The skin care business is characterized by vigorous competition
throughout the world. Product recognition, quality, performance and price have
significant influence on customers' choices among competing products and brands.
Advertising, promotion, merchandising, the pace and timing of new product
introductions, and line extensions also have a significant impact on consumer
buying decisions. The Company competes against a number of marketers of skin
care products, many of which have substantially greater resources than the
Company.

SEASONALITY

The Company's results of operations are not subject to seasonal
fluctuations.

EMPLOYEES

The Company satisfies its human resource needs utilizing an outsourcing
firm that provides all administrative services relating to payroll, personnel
and employee benefits. Management continues to hire, fire, set pay rates and
supervise its staff. This arrangement enables the Company to reduce its
administrative and benefits costs relating to employees. The Company, as of
December 31, 2006, had eighteen full time positions and one part time position.

ITEM 2. PROPERTIES

The Company currently leases office space at 4400 34th Street North,
Suites E, F and H, under three non-cancelable leases in St. Petersburg, Florida,
which expire between April and September 2008. The lease on this office space
(35,000 square feet) requires a monthly rent of approximately $13,200, including
taxes and common area expenses.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to, and its property is not the subject of,
any material pending legal proceedings.

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

A Meeting of the Shareholders of the Company was held on November 15,
2004, in Boca Raton, Florida (the "Meeting"). At the Meeting, the shareholders
of the Company voted on proposals to (i) elect a Board of four directors to
serve until the Company`s next meeting of shareholders and until their
successors are elected and qualified and approved the Company's 2003 Stock Plan.
The results of the voting appointed the following Directors:

Richard Banakus
Joshua Rochlin
Karen Gray
Ronald J. Saul

The Shareholders also approved the adoption of the Company's 2003 Stock
Plan and ratified the Audit Committee's selection of Daszkal Bolton LLP as the
Company's independent Certified Public Accountants for the year ended December
31, 2004.There was no shareholder meeting held in 2006.

Mr. Joshua Rochlin resigned from the Board of Directors of Hydron
Technologies, Inc. effective March 31, 2005 due to his increased commitments at
Marc Ecko Enterprises. Mr. David Pollock was appointed to replace him on July 1,
2005.

No meeting of shareholders of the Company was held in 2006. Directors
elected by the shareholders at the last annual meeting, as well as David
Pollock, the director elected by the Board of Directors, have continued in
office. Moreover, in light of the absence of a meeting of shareholders, the
Board of Directors has appointed Sherb & Co. as the Company's independent
accounting firm.

PART II

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

MARKET INFORMATION

The Company's Common Stock is quoted on the OTC Bulletin Board, a
regulated quotation service for over-the-counter securities not listed or traded
on NASDAQ or a national securities exchange, under the symbol HTEC.OB. The
following tables indicate the high and low closing prices for the Company's
Common Stock as reported by the OTC Bulletin Board.

HIGH LOW
CLOSING CLOSING
PRICE PRICE
------- -------
2006
--------------
Fourth Quarter $0.30 $0.10
Third Quarter 0.54 0.15
Second Quarter 0.65 0.42
First Quarter 0.65 0.35

2005
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Fourth Quarter $0.45 $0.21
Third Quarter 0.50 0.13
Second Quarter 0.14 0.08
First Quarter 0.30 0.15

HOLDERS

As of December 31, 2006, there were approximately 1,015 shareholders of
record of the Company's Common Stock. The number of shareholders of record will
decline as the Company's transfer agent has notified the Company of its intent
to transfer shares, held in the name of shareholders that it has not been able
to locate, to the proper authorities in compliance with state law requirements
relating to unclaimed property.

DIVIDENDS AND DIVIDEND POLICY

The Company does not contemplate paying dividends in the near-term. The
Board of Directors will determine the payment of dividends in the future in
light of conditions then existing, including the Company's earnings and
financial condition.

RECENT SALES OF UNREGISTERED SECURITIES

There were no sales of securities in 2006.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes share information about the Company's
equity compensation plans, including the company's Stock Option Plan ("the
Plan") and non-plan equity compensation agreements as of December 31, 2006:

NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED WEIGHTED-AVERAGE REMAINING AVAILABLE
UPON EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
----------------------------- -------------------- -------------------- --------------------

Equity compensation plans
approved by security holders 1,196,500 $ 0.38 (1)

Equity Compensation plans not
approved by security holders 169,500 $ 0.53 (1)

---------
Total 1,366,000 $ 0.36
=========

(1) The 2003 Stock Plan was approved at the November 15, 2004 sharteholders'
meeting. The aggregate number of shares that may be issued under the Plan
can not exceed 15% of the total outstanding shares. As of December 31, 2006,
the number of Securities for future issuance under the 2003 Stock Plan was
739,460 and 159,100 for all previous plans.

EQUITY COMPENSATION PLANS APPROVED BY SHAREHOLDERS

On November 10, 1997, the Board of Directors of the Company adopted the
1997 Non-Employee Director Stock Option Plan ("1997 Plan"). This plan was
approved by the shareholders on December 17, 1997. The purpose of the 1997 Plan
is to assist the Company in attracting and retaining experienced and
knowledgeable non-employee directors who will continue to work for the best
interests of the Company.

The 1997 Plan provides nonqualified stock options for non-employee
directors to purchase an aggregate of 100,000 shares of Common Stock, with
grants of options to purchase 2,000 shares to each non-employee director on
October 1, 1997, grants of options to purchase 2,000 shares on each May 1st
thereafter (starting in 1999), and grants of options to purchase 2,000 shares
upon election or appointment of any new non-employee directors. The options are
not exercisable for a one-year period and are to be granted at an exercise price
equal to the average fair market value of the Common Stock during the ten
business days preceding the day of the grant of the option.

The 1997 Plan also provides nonqualified stock options for non-employee
directors who serve on committees of the Board of Directors. The options are not
exercisable for a one-year period and are to be granted at an exercise price
equal to the average fair market value of the Common Stock during the ten
business days preceding the day of the grant of the option. No options were
granted under this provision of the 1997 Plan during the year ended December 31,
2006

During August 1999, the Company agreed to grant an option to purchase
18,000 shares of the Company`s Common Stock to each of the five individuals
comprising the Board of Directors, subject to shareholders' approval at the next
annual meeting, at an exercise price of $.64065 per share.

In August 2001, the Company agreed to increase the options granted to
Board members each year. Subject to shareholders' approval, the Company agreed
to grant options to purchase a total of 20,000 shares of the Company's Common
Stock to each of the five individuals comprising the Board of Directors,
beginning with the calendar year 2000. Each Board member will receive options to
purchase 18,000 shares of common stock at an exercise price of $.20157 for their
service in 2000, and options to purchase 20,000 shares of common stock at an
exercise price of $.4275 for their service in 2001, $.3155 for their services in
2002, $.2430 for their services in 2003, $.5945 for their services in 2004,
$.1105 for their services in 2005 and .5300 in 2006. On November 15, 2004, the
Shareholders' approved a new 2003 Stock Plan that ratified these actions by the
Board of Directors.

On November 19, 2003, the Board approved, subject to shareholder
approval, the 2003 Stock Plan (the "2003 Plan"). The shareholders approved this
plan on November 15, 2004. The 2003 Plan permits the grant of nonqualified and
incentive stock options, as well as restricted stock purchases. The form of the
equity is left up to the discretion of the committee of the Board (or the Board,
if no committee) at the time of each grant. This 2003 Plan is designed to
consolidate and replace two Stock Option Plans, which have expired; the 1993
Stock Option Plan and the 1997 Non-Employee Director Stock Option Plan. The
purpose of the 2003 Plan is to assist the Company in attracting, retaining, and
motivating key employees, officers, directors, and consultants by offering
selected individuals an opportunity to acquire a proprietary interest in the
success of the Company.

EQUITY COMPENSATION PLANS NOT APPROVED BY SHAREHOLDERS

The Company has agreements with several consultants who provide
financial, business, and technical advice to the Company in connection with the
research, development, marketing and promotion of its products and other
matters. As part of their compensation, these consultants were granted warrants
and nonqualified stock options to purchase shares of the Company's common stock
at prices representing the fair market value of the shares at the date of grant.

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

FORWARD LOOKING INFORMATION

The following discussion and analysis of the Company's financial
condition and results of operations should be read with the consolidated
financial statements and related notes contained in this annual report on Form
10-KSB ("Form 10-KSB"). All statements other than statements of historical fact
included in this Form 10-KSB are, or may be deemed to be, forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements involve
known and unknown risks, uncertainties and other factors that may cause the
Company's actual results, levels of activity, performance or achievements to be
materially different than any expressed or implied by these forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue," or the negative of
these terms or other comparable terminology. Important factors that could cause
actual results to differ materially from those discussed in such forward-looking
statements include: 1. General economic factors including, but not limited to,
changes in interest rates and trends in disposable income; 2. Information and
technological advances; 3. Cost of products sold; 4. Competition; and 5. Success
of marketing, advertising and promotional campaigns. The Company is subject to
specific risks and uncertainties related to its business model, strategies,
markets and legal and regulatory environment You should carefully review the
risks described in this Form 10-KSB and in other documents the Company files
from time to time with the SEC. You are cautioned not to place undue reliance on
the forward-looking statements, which speak only as of the date of this Form
10-KSB. The Company undertakes no obligation to publicly release any revisions
to the forward-looking statements to reflect events or circumstances after the
date of this document.

OVERVIEW

In 2002 the Company virtually eliminated sales made through television
retailers, having terminated the exclusive relationship with HSN in late 2001,
and as revenues derived from resales by QVC to prior customers declined.
Management expects that in 2005 and beyond, an increasing portion of the
Company's skin care sales will be generated from direct marketing utilizing
direct response mail, the Company's catalog and web site, and licensing
arrangements. Management also expects that the Company will generate an
increasing portion of its revenues from sales made through private label
partners and will look for other opportunities to sell the Company's products
through similar arrangements. Management anticipates introducing new cosmetic
products based on its oxygenation technology, which it believes will open doors
for new distribution. However, the types and timing of the introduction of new
cosmetic products will depend upon the results of further clinical testing.

In November 2003, the Company was granted a patent on its new
oxygenation technology that provides a method for delivering oxygen into the
skin and tissue at depths considered medically therapeutic. This unique
technology utilizes topical applications, eliminating reliance on the blood
stream. Preliminary research was conducted at the University of Massachusetts
and Florida Atlantic University and the process to obtain FDA approval was
initiated. Management plans to research additional medical applications if and
when Hydron obtains FDA approval.

The Company raised $1.1 million in December 2003 in a non-brokered
private placement exempt from registration under the Securities Act to fund the
initial research and initiate the lengthy FDA approval process. As research
results begin to quantify the broad applications of this technology and the FDA
hurdles are passed, management anticipates that Hydron will attract key
strategic partners and new investment money will become available. Management
also expects that product development will accelerate in medical areas such as
wound and burn treatment, and skin care applications such as scar reduction,
acne, and diaper rash treatment, oral health, etc.

In August 2004, Hydron Technologies, Inc. (Hydron), as general partner,
formed Hydron Royalty Partners, LLLP (Partners) a Limited Liability Limited
Partnership for the purpose of funding existing royalty obligations and a
portion of future royalty obligations in consideration of sharing future royalty
income that may arise from Hydron's agreement with Valera Pharmaceuticals, Inc.
(Valera). Partners has completed a non-brokered private placement of Limited
Partnership Interest to ten accredited investors including Hydron's Chairman,
Richard Banakus and a Hydron Director, Ronald J. Saul. Each limited partner
invested $30,000 or an aggregate of $300,000 for a 49.999% interest in Partners.
The establishment of Partners allowed Hydron to meet its current and future
royalty obligations and retain the possibility of a significant royalty income
stream opportunity.

In late January 2005, the Company refocused its efforts to skin care
formulations and sales. On July 1, 2005, the Company purchased CRI, Inc. and
BRI, Inc., related companies providing both skin care formulation consulting and
a newly started contract manufacturing business. The Company believes that the
vertical capabilities added by this acquisition will be beneficial to the
Company as it expands beyond its historical base.

In January 2006, the Company was granted U.S. Patent Number 6,984,391
for its Compositions and Method for Delivery of Skin Cosmeceuticals, which also
applies to a new acne treatment system. The Company believes that this unique
emulsion system has significant advantages over the widely used surfactant
emulsions employed by most skin care formulators and manufacturers, and will
seek licensing opportunities whenever possible.

RESULTS OF OPERATIONS - 2006 VERSUS 2005

Total net sales for 2006 were $1,474,003, an increase of $11,364 or 1%
from net sales of $1,462,639 for the year ended December 31, 2005. Catalog Sales
net sales for 2006 were $610,677, a decrease of $69,223 or 10% from sales of
$679,900 for 2005. Private Label and Contract Manufacturing net sales for 2006
were $705,692, an increase of $34,636 or 5% from sales of $671,056 for 2005.
Formulation and commission net sales for 2006 were $86,434, from

zero in 2005. Professional sales consist of dental products sold to dental labs
for use in manufacturing dentures. Net sales of dental products for 2006 were
$18,490, an increase of $4,622 or 33% from sales of $13,868 in 2005. Shipping
and handling revenues for 2006 were $52,710, a decrease of $45,105 or 46% from
shipping and handling revenues of $97,815 in 2005. This decrease was due
primarily to increased sales promotions on the web involving shipping.

The decrease in catalog sales was the result of the attrition of the
Company's customer base without marketing spending to replace those customers.
Private Label and Contract Manufacturing sales increased due to the acquisition
of Clinical Results, Inc. on July 1, 2005. Clinical Results is in the early
stages of its manufacturing facility and has helped contribute to the overall
revenue.

Cost of sales was $669,049 for 2006, a decrease of $62,034 or 8% from
cost of sales of $731,083 for 2005. Cost of sales was 45% of total sales in 2006
compared to 50% in 2005. The decrease in cost of sales percentage reflects the
impact of this year's formulation and commission net sales. The Company monitors
its inventory levels closely and writes-down any inventory in excess of a
one-year supply. Cost of sales include charges of $7,394 in 2006 to adjust
inventories to a one-year supply valued at the lower of cost or realizable value
on a FIFO basis. Similar charges for 2005 were $100,853. Cost increases are not
material to catalog sales and the private label contracts provide for a pass
through of any cost increases incurred in that segment. Shipping and handling
costs for 2006 were $53,922, a decrease of $69,901 or 56% from shipping and
handling costs of $123,823 for the same period in 2005. This decrease reflects
the 10% decline in catalog sales plus savings realized by performing more of the
shipping and handling tasks in house and switching to a new trucking company and
the Company negotiating a reduction in shipping charges with one vendor.

The Company's overall gross profit margin increased to 55% of net sales
for 2006 versus 50% for 2005. This reflects the increase in formulation and
commission sales as discussed above, less the relative mix of higher margin
catalog sales versus lower margin private label sales.

Royalty expenses in 2006 were $19,211 and $36,211 in 2005. An aggregate
of $28,108 was accrued and unpaid as of December 31, 2006. This amount is
adequate to cover any royalties that are payable through December 2006.

Research and development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, obtain regulatory approval, develop and
package the products for commercial sale, perform appropriate efficacy and
safety tests, and conduct consumer panel studies and focus groups. R&D expenses
were $11,916 in 2006, a decrease of $43,121 or 78% from R&D expenses of $55,037
in 2005. This decrease was due principally to the Company eliminating the use of
outside FDA consultants in association with its oxygenation technology during
2006 versus 2005. The amount of annual R&D expenses will vary year to year
depending on the Company's research requirements.

Selling, general and administrative ("SG&A") expenses in 2006 were
$1,176,594, representing a decrease of $182,273 or 13% from SG&A expenses of
$1,358,867 in 2005. Sales commissions in 2006 were $12,308, an increase of
$11,340 or 1,117% from sales commissions of $968 in 2005.

The increased sales commissions reflect new sales initiatives. Postage
expense was $0 in 2006, a decrease of $30,523, or 100%, from $30,523 in 2005.
This decrease resulted from marketing through emails instead of using mailings
during 2006. Advertising and promotional expenses was $83,389 in 2006, an
increase of $2,660, or 3% from $80,729 in 2005. This increase is due to new
advertising initiatives taken by the Company to increase sales and redesigning
of the website. Professional expenses (legal and audit) were $144,538 in 2006, a
decrease of $21,494 or 13% from the $166,032 incurred in 2005.The decrease in
professional fees involved additional costs associated with the use of an
outside consultant instead of an in house CFO offset by decreases in legal fees
associated with the acquisition of CRI in 2005. Warehousing expense in 2006 was
$5,569, a decrease of $31,007, or 85% from $36,576 in 2005. This decrease is due
to bringing all products to one location eliminating the need for outside
storage. Insurance expense in 2006 was $44,790, a decrease of $35,619 or 44%
from $80,409 in 2005. The decrease was due to reducing certain insurance
coverage's. Employment expense in 2006 was $490,246, a decrease of $77,890 or
14% from $568,136 in 2005. This decrease was due primarily to the restructuring
of operations and staff. Moving expenses were $0 in 2006, a decrease of $26,899
from $26,899 in 2005. The decrease was due to the movement of operations to St.
Petersburg during 2005. Bad debts in 2006 were $19,575, a decrease of $20,985
from $40,560 in 2005. The decrease is due to better collection and less write
off of receivables deemed uncollectible. All other expenses were $376,179 for
2006, an increase of $48,144 or 15% from $328,035 in 2005.

Depreciation and amortization expense was $103,392 for 2006, an
increase of $44,302 or 75% from $59,090 in 2005. The increase was due primarily
to the amortization of the intangible of the purchase of CRI.

Net interest (expense) was ($74,098) in 2006 compared to net interest
(expense) of ($29,730) in 2005. The increase in interest expense was due
primarily to the interest on the loan payable and amortization of related debt
discount.

Minority interest in net loss in 2006 was $28,149 compared to $35,328
in 2005. This minority interest is created from a consolidated limited liability
partnership, Hydron Royalty Partners, LLLP, established by the Company in August
2004 (see Limited Liability Partnership, Item 1. Business).

The Company had a net loss of $552,108, representing a decrease of
$219,943 or 28% from the net loss of $772,051 for 2005, primarily as a result of
the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company anticipates that present working capital balances and
internally generated funds will not be sufficient to meet our working capital
needs for the next three months. It will be necessary to sell selected assets,
or obtain an infusion of capital. The Company's independent accountants issued a
"going concern" opinion on the Company's December 31, 2006 financial statements,
since the Company has incurred significant losses over the past five years and
generates a negative cash flow on a monthly basis.

The Company's working capital deficit was ($668,891) at December 31,
2006, including cash and cash equivalents of $6,940. Cash used by operating
activities during the twelve months ended December 31, 2006 was $33,175 and
$18,052 was used in investing activities. This was offset by proceeds from
financing activities of $21,886.

On February 1, 2007, the Company, commenced an offering ("Offering") of
up to 3,300,000 units ("Units") comprised of one (1) share ("Share") of its
Common Stock and one (1) warrant ("Warrant") for the purchase of one (1) share
of Common Stock having a total gross purchase price of $330,000. On February 1,
2007 the Company closed on the sale of 2,100,000 Units resulting in gross
proceeds to the Company of $210,000. On February 5, 2007, the Company closed on
the sale of an additional 1,100,000 Units resulting in gross proceeds to the
Company of $110,000. On February 8, 2007 the Company closed on the sale of an
additional 100,000 Units resulting in gross proceeds to the Company of $10,000.

After the offering the Company has a total of 15,615,336 shares of
Common Stock outstanding plus an additional 8,143,000 shares of Common Stock
issuable upon the exercise of options and warrants (including the Warrants).
Accordingly, the issuance of Units increased the number of shares of Common
Stock by approximately 26.8% and the fully-diluted number of shares of Common
Stock by 38.5%.

Among the individuals purchasing Units in the Offering are (i) Richard
Banakus, the Chairman, interim President and a director of the Company, who
purchased 350,000 Units, and (ii) Ronald J. Saul, a director of the Company who
with his spouse purchased 850,000 Units. Following the closings, Mr. Banakus
beneficially owns 4,309,040 shares of Common Stock, comprised of 2,484,040
shares held directly and 1,825,000 shares issuable upon the exercise of options
and common stock purchase warrants (including the Warrants), representing
beneficial ownership of 24.7% of the Common Stock, and Mr. Saul beneficially
owns 3,482,540 shares of Common Stock, comprised of 2,007,540 shares held
directly by him and his immediate family members and 1,475,000 shares of Common
Stock issuable upon the exercise of options and common stock purchase warrants
(including the Warrants), representing beneficial ownership of 20.4% of the
Common Stock.

Under the terms of the Offering, the Company has agreed that in the
event that the Company shall grant "piggy back" registration rights to any other
party to cause the Company's Common Stock or any security exercisable or
exchangeable for, or convertible into, shares of Common Stock to be included in
a registration statement filed by the Company for sale by any selling
shareholder or by the Company, the Company will grant the holders of the Shares
and Warrants similar registration rights.

Each purchaser of Units is an "accredited investor" as defined in Rule
501(a) under the Securities Act of 1933, as amended (the "Securities Act"). The
Company issued the Shares and the Warrants without registration under the
Securities Act in reliance on the exemptions from registration provided by Rule
506 of Regulation D and Section 4(2) of the Securities Act, as well as
preemption from applicable state registration requirements under Section 18(a)
of the Securities Act.

The Company used the proceeds of the Offering to pay current
obligations of the Company, including payments made to its landlord for
outstanding rent.

On March 21, 2007, The Company offered ("Offering") and sold 500,000
units ("Units") comprised of one (1) share ("Share") of its Common Stock and one
(1) warrant ("Warrant") for the purchase of one (1) share of Common Stock for a
total gross purchase price of $50,000 to Ronald J. Saul, a director of the
Company, and his spouse jointly.

After issuance of the Shares sold in the Offering, the Company has a
total of 16,115,336 shares of Common Stock outstanding plus an additional
8,643,000 shares of Common Stock issuable upon the exercise of options and
warrants (including the Warrants). Accordingly, the issuance of Units increased
the number of shares of Common Stock by approximately 3.2% and the fully-diluted
number of shares of Common Stock by 4.0%.

Following the closing, Mr. Saul beneficially owns 4,489,540 shares of
Common Stock, comprised of 2,514,540 shares held directly by him and his
immediate family members and 1,975,000 shares of Common Stock issuable upon the
exercise of options and common stock purchase warrants (including the Warrants),
representing beneficial ownership of 24.8% of the Common Stock.

The Company intends to use the proceeds of the Offering to pay current
obligations of the Company. The balance, if any, will be used for working
capital and general corporate purposes, including funding ongoing operations.

On October 24, 2005 the Company received proceeds of $112,500 through
the partial exercise of certain warrants relating to a previous private
placement of its securities in December 2002. These funds were received from
three individuals including two individuals who are (i) the Chairman of the
Board and Interim President, and (ii) a second director of the Company.

On October 24, 2005, the Board of Directors of Hydron Technologies,
Inc., a New York corporation (the "Company"), adopted a resolution authorizing
the extension of options of the exercise period for certain options to purchase
common stock (the "Options") granted in connection with a private placement of
securities by the Company from December 9, 2005 to December 9, 2007 (the "New
Expiration Date") in consideration of the agreement of certain holders to
immediately exercise a portion of the Options and purchase the underlying common
stock. The shares underlying the original Options were registered by the Company
under the Securities Act of 1933, as amended (the "Securities Act"). The shares
of common stock underlying the Options totaled 1,750,000 shares or approximately
14.3% of the total outstanding shares of the Company.

Richard Banakus, the Chairman, interim President and a director of the
Company, and Ronald J. Saul, a director of the Company, together with his
spouse, Antonette G. Saul, are among the holders of the Options. Mr. Banakus
assigned for nominal consideration certain of his Options exercisable for
250,000 shares to Mr. Saul and effective October 27, 2005 exercised Options
representing an aggregate of 250,000 shares of common stock in consideration of
the extension of the exercise period to the New Expiration Date for Options
representing an aggregate of 750,000 shares of common stock. Mr. Saul exercised
Options effective October 28, 2005, representing an aggregate of 250,000 shares

and had Options representing an aggregate of 125,000 extended to the New
Expiration Date. In 2006 Mr. Saul exercised the remaining 125,000 options. In
addition, certain other holders of Options exercised Options representing an
aggregate of 62,500 shares and had the exercise period for Options representing
an aggregate of 62,500 shares extended to the New Expiration Date bringing the
total number of shares represented by the new Options (the "New Options")
exercisable at any time prior to the New Expiration Date to 812,500 or
approximately 6.6% of the total outstanding shares.

Each party receiving New Options is an "accredited investor" as defined
in Rule 501(a) under the Securities Act of 1933, as amended (the "Securities
Act"). The Company issued the New Options without registration under the
Securities Act in reliance on the exemptions from registration provided by Rule
506 of Regulation D and Section 4(2) of the Securities Act.

The Company received no proceeds for the issuance of the New Options
other than proceeds from the exercise of Options pursuant to the agreement of
holders of Options to exercise certain Options and proceeds the Company may
receive upon exercise of the New Options. The Company intends to use the
proceeds of the exercise of the Options and the New Options for general working
capital purposes.

The Company completed a non-brokered private placement of 1,750,000
Units at $.20 per Unit ($350,000) on December 10, 2002 to several accredited
investors. Each Unit is comprised of one share of Common Stock and one
three-year option to buy one additional common share at $.20.

On November 14, 2003, the Company completed a non-brokered private
placement of 2,210,000 Units at $.50 per Unit ($1,105,000) to accredited
investors. Each Unit is comprised of one share of Common Stock and one five-year
warrant to buy one additional common share at $1.00. As of December 31, 2006,
all 2,210,000 warrants are outstanding.

The Company registered these outstanding shares and the 4,481,500
underlying shares of outstanding warrants/options with the Securities and
Exchange Commission effective July 22, 2004. The warrants/options are a future
source of capital for the Company and could generate up to $3,082,862 if they
are exercised.

On July 1, 2005, the Company acquired CRI, a St. Petersburg,
Florida-based company. CRI was a privately held product development laboratory
and contract manufacturer of cosmeceuticals and other personal care products.
CRI's clients range from mass-market retailers to marketers of high-end brands,
and of certain health food store brands.

The Company does not have any material debt other than the loan payable
of $150,000 borrowed from three shareholders in May 2005 (see Note 11), and two
capital leases for equipment purchases of $56,551. The Company has a substantial
overdue trade accounts payables balance. Effective August 5, 2005, the Company
relocated its offices to St Petersburg, Fl. There are no capital expenditures
under construction and no long-term commitments other than royalty payments
under an agreement with Valera Pharmaceuticals, Inc. The Company does not have
any lines of credit. There are no purchase order commitments that exceed 90
days.

Management's plan includes implementing one or more of the following
elements:

o Emphasize and expand the marketing and manufacturing of private label
products.

o Implement new direct sales and networking initiatives.

o Emphasize Catalog sales, including sales made over the Internet, since
these sales have higher profit margins.

o Evaluate the possibilities of increasing direct marketing and direct
response television exposure to build brand awareness and revenues.

o Team with third parties to build the advertising and promotion of the
Hydron(R) brand, as the Company does not have the financial resources
to sustain a national advertising campaign to support distribution of
its production into retail stores.

o Develop and market new product lines based on the Company's proprietary
technologies.

o Continue to reduce overhead and operating costs.

o Obtain an infusion of capital that will sustain the Company's operation
until the newly established licensing initiatives can produce positive
cash flow.

There can be no assurances that management's plan will be successful
and the Company's actual results could differ materially. No estimate has been
made to the financial statements to account for the possibility that the plan
may be unsuccessful.

In September 2006, the Company received a letter from the staff of the
Securities and Exchange Commission (Commission) providing comments on the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
2005 and its Form 10-QSB for the fiscal quarter ended June 30, 2006. Among other
comments, the staff questioned the Company's failure to include audited
financial statements for Clinical Results, Inc. (CRI) as part of its Current
Report on Form 8-K filed in connection with the acquisition of CRI on June 30,
2005. The Company resolved all comments from the staff other than with respect
to the inclusion of CRI's financial statements. In December 2006, the Company
was notified by staff of the Commission that until the Company had filed two
years of financial statements for CRI it would not be permitted to offer shares
of its stock pursuant to a registration statement filed with the Commission,
excluding shares sold pursuant to Form S-8.

The Company anticipates that it will have on file two years of
financial statements for CRI following the filing of its Form 10QSB for the
period ending June 30, 2007 and will then be eligible to file registration
statements in connection with the offering of its securities thereafter.

CHANGE IN ACCOUNTING PRINCIPLE AND NEW ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes,"
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In accordance with FIN 48, the Company
must adjust its financial statements to reflect only those tax positions that
are more-likely-than-not to be sustained as of the adoption date. The effective
date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 is not
expected to have a material impact on the Company's condensed consolidated
financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"), which clarifies the definition of fair value,
establishes guidelines for measuring fair value, and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements and eliminates inconsistencies in guidance found in various prior
accounting pronouncements. SFAS 157 will be effective for the Company on January
1, 2008. The Company is currently evaluating the impact of adopting SFAS 157 on
its financial position, cash flows, and results of operations.

In September 2006, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides interpretive guidance on the SEC's
views on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provisions of SAB 108 will be effective for the Company for the fiscal year
ended December 31, 2006. The Company is currently evaluating the impact of
applying SAB 108 but does not believe that the application of SAB 108 will have
a material effect on its financial position, cash flows, and results of
operations.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
sales and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, management evaluates these estimates, including those
related to bad debts, inventories, investments, intangible assets, income taxes,
restructuring, and contingencies and litigation. Management bases these
estimates on historical experience and on various other assumptions that
management believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies are
significant in preparation of our financial statements.

ALLOWANCE FOR SALES RETURNS

The Company records product sales when persuasive evidence of an
arrangement exists, shipment has occurred, the price to the buyer is fixed or
determinable, and collectibility is reasonably assured. Catalog sales are sold
on a cash basis with a 30-day guarantee. Returns have been less than $10,000
annually for the last five years. A provision is made at the time sales are
recognized for the estimated cost of product warranties. Private label sales are
sold on account and are collected in 30 to 45 days. If there is a production or
packaging problem, the Company would correct the problem and replace the product
sold. To minimize that possibility, the Company inspects all production batches
before they are packaged to ensure quality, efficacy, and consistency.

INVENTORY VALUATION

Shifting sales from one item in our product line to another or minimum
production requirements may create a situation where inventory levels of
specific items may exceed the annual sales of that item. This can create
inventory levels in excess of net realizable value. Management regularly reviews
inventory quantities on hand and, where necessary, records provisions for excess
and obsolete inventory based on either estimated forecast of product demand or
historical usage of the product. If sales do not materialize as planned or
decline below historic levels, management increases the reserve for excess
(quantities in excess of one year's sales) and obsolete inventory. This would
reduce earnings and cash flows.

Packaging changes are planned far in advance in order to limit the
impact of out-dated or obsolete components. Private label customers are required
to prepay the cost of packaging materials in order to take advantage of volume
discounts and protect the Company from any sudden packaging changes.

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

Page
-------

Reports of Independent Registered Public Accounting Firms ............. 25 & 26

Consolidated Financial Statements:

Balance Sheet as of
December 31, 2006 ............................................ 27

Statements of Operations for the
Years ended December 31, 2006 and 2005 ....................... 28

Statements of Changes in Shareholders' Equity / (Deficit)
for the Years ended December 31, 2006, and 2005 .............. 29

Statements of Cash Flows for the
Years ended December 31, 2006 and 2005 ....................... 30

Notes to Consolidated Financial Statements ................... 31 - 50

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Hydron Technologies, Inc.

We have audited the accompanying consolidated statement of operations,
changes in shareholders' equity and cash flows for the year ended December 31,
2005 of Hydron Technologies, Inc. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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
consolidated financial statements are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used, and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of their operations and
their cash flows for the year ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has a working
capital deficiency at December 31, 2005 and has experienced losses from
operations in 2005 and 2004. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management has implemented
direct marketing techniques to increase the more profitable catalog sales, add
new customers, and take advantage of new distribution channels (see Note 14 to
consolidated Financial Statements). The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

/s/ DaszkalBolton LLP
---------------------
Boca Raton, Florida
April 14, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee
Hydron Technologies, Inc.

We have audited the accompanying consolidated balance sheet of Hydron
Technologies, Inc. as of December 31, 2006 and the related consolidated
statements of operations, changes in shareholders' equity (deficit) and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has a working
capital deficiency at December 31, 2006 and has experienced losses from
operations in 2006 and 2005. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regards
to these matters is discussed in Note 14. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

/s/ Sherb & Co., LLP
--------------------
Certified Public Accountants

Boca Raton, Florida
February 20, 2007

HYDRON TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET

DECEMBER 31,
2006
------------
ASSETS

Current Assets
Cash and cash equivalents .................................. $ 6,940
Trade accounts receivable, net ............................. 63,176
Inventories ................................................ 269,253
Prepaid expenses and other current assets .................. 4,299
------------
Total current assets ..................................... 343,668

Property and equipment, net .................................. 121,064
Deferred product costs, net .................................. 126,700
Intangible assets, net ....................................... 186,836
Restricted cash .............................................. 90,155
Deposits ..................................................... 29,252
------------
Total Assets ............................................. $ 897,675
============

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities
Accounts payable ........................................... $ 389,226
Loans payable, net ......................................... 162,858
Royalties payable .......................................... 28,108
Deferred revenues .......................................... 130,032
Accrued liabilities ........................................ 276,133
Current portion of obligation under capital leases ......... 26,202
------------
Total current liabilities ................................ 1,012,559

Obligation under Capital leases payable .................... 24,373
Minority interest in consolidated partnership .............. 221,713

Shareholders' deficit
Preferred stock - $.01 par value
5,000,000 shares authorized;
no shares issued or outstanding .......................... -
Common stock - $.01 par value
30,000,000 shares authorized;
12,239,736 shares issued and outstanding ................. 122,397
Additional paid-in capital ................................. 21,276,269
Accumulated deficit ........................................ (21,751,820)
Treasury stock, at cost; 10,000 at 2006 .................... (7,816)
------------
Total Shareholders' deficit .............................. (360,970)
------------
Total liabilities and shareholders' deficit .............. $ 897,675
============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HYDRON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
2006 2005
------------ ------------

Net Sales .................................... $ 1,474,003 $ 1,462,639
Cost of sales ................................ 669,049 731,083
------------ ------------
Gross profit ................................. 804,954 731,556

Expenses
Royalty expense ............................ 19,211 36,211
Research and development ................... 11,916 55,037
Selling, general and administration ........ 1,176,594 1,358,867
Depreciation and amortization .............. 103,392 59,090
------------ ------------
Total expenses ........................... 1,311,113 1,509,205

------------ ------------
Operating loss ............................... (506,159) (777,649)

Interest income (expense) - net .............. (74,098) (29,730)
------------ ------------
Loss before income taxes and
minority interest ........................ (580,257) (807,379)

Income taxes ................................. - -
Minority interest in net loss of
consolidated partnership ................... 28,149 35,328
------------ ------------
Net loss ................................. $ (552,108) $ (772,051)
============ ============

Basic and diluted loss per share
Net loss per common share .................. $ (0.05) $ (0.07)
============ ============

Weighted average shares
outstanding (basic and diluted) ............ 12,178,334 10,439,817
============ ============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HYDRON TECHNOLOGIES, INC.
Consolidated Statements of Changes in Shareholders' Equity (Deficit)

Common Stock Additional Treasury
-------------------- Paid-in Accumulated Stock Total
Shares Amount Capital Deficit (at cost) Equity
---------- -------- ----------- ------------ --------- ---------

Balance at December 31, 2004 ...... 9,320,336 $ 93,203 $20,736,049 $(20,427,661) $(7,816) $ 393,775
Exercise of stock options ....... 562,500 5,625 106,875 - - 112,500
Issuance of common shares in lieu
of interest on loan payable .... 44,000 440 10,560 - - 11,000
Warrents issued in connection
with loan payable .............. - - 24,000 - - 24,000
Issuance of Common shares for
CRI acquisition ................ 2,000,000 20,000 240,000 - - 260,000
Compensation expense from
stock option awards ............ - - 9,441 - - 9,441
Net loss ........................ - - - (772,051) - (772,051)
---------- -------- ----------- ------------ ------- ---------
Balance at December 31, 2005 ...... 11,926,836 119,268 21,126,925 (21,199,712) (7,816) 38,665
---------- -------- ----------- ------------ ------- ---------
Exercise of stock options ....... 199,500 1,995 42,540 - - 44,535
Issuance of common shares in lieu
of interest on loan payable .... 113,400 1,134 49,896 - - 51,030
Compensation expense from
stock option awards ............ - - 56,908 - - 56,908
Net loss ........................ - - - (552,108) - (552,108)
---------- -------- ----------- ------------ ------- ---------
Balance at December 31, 2006 ...... 12,239,736 $122,397 $21,276,269 $(21,751,820) $(7,816) $(360,970)
========== ======== =========== ============ ======= =========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HYDRON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
2006 2005
--------- ---------
OPERATING ACTIVITIES
Net Loss ........................................... $(552,108) $(772,051)
Adjustments to reconcile net loss to
net cash used by operating activities
Minority Interest .............................. (28,149) (35,328)
Depreciation and amortization .................. 103,392 59,090
Compensation expense from stock option awards .. 56,908 9,441
Deferred financing costs ....................... 14,268 7,470
Interest expense ............................... 51,030 11,000
Change in operating assets and liabilities net
of assets acquired
Restricted cash ................................ 22,179 (112,334)
Trade accounts receivable ...................... 83,954 (110,526)
Inventories .................................... 136,911 88,332
Prepaid expenses and other current assets ...... 26,894 39,059
Deposits ....................................... (21,673) 14,224
Accounts payable ............................... 55,828 197,328
Royalties payable .............................. (1,404) 380
Deferred revenues .............................. (4,501) 43,353
Interest payable ............................... 1,890 13,230
Accrued liabilities ............................ 21,406 20,050
--------- ---------

Net cash used by operating activities ............ (33,175) (527,282)

INVESTING ACTIVITIES
Cash acquired ...................................... - 6,977
Purchases of property and equipment ................ (18,052) (24,989)
--------- ---------

Net cash used by investing activities ............ (18,052) (18,012)

FINANCING ACTIVITIES
Loan payable, proceeds, net ........................ - 149,249
Payments on capital leases ......................... (22,649) (19,853)
Proceeds from exercise of stock options ............ 44,535 112,500
--------- ---------

Net cash provided by financing activities ........ 21,886 241,896
--------- ---------
Net decrease in cash and cash equivalents ........ (29,341) (303,398)

Cash and cash equivalents at beginning of year ....... 36,281 339,679
--------- ---------
Cash and cash equivalents at end of year ............. $ 6,940 $ 36,281
========= =========

SUPPLEMENTAL CASH FLOW INFORMATION
Warrants issued in connection with loans payable ... $ - $ 24,000
========= =========
Stock issued in acquisition ........................ $ - $ 260,000
========= =========
Stock issued to pay accrued interest ............... $ 51,030 $ 11,000
========= =========
Cash paid for interest ............................. $ - $ -
========= =========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hydron Technologies, Inc
Notes to Consolidated Financial Statements
December 31, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization of Business

Hydron(R) Technologies, Inc. (the "Company") manufactures and sells
consumer and professional products, primarily in the personal care/cosmetics
field. The Company holds the exclusive license from Valera Pharmaceuticals
(VLRX), the assignee of GP Strategies Corporation (formerly National Patent
Development Corporation) ("GPS") to a Hydron(R) polymer-based drug delivery
system for topically applied, nonprescription pharmaceutical products, which the
Company uses to develop proprietary products or to license to third parties. The
Company owns U.S. and international patents on a method to suspend the Hydron
polymer in a stable emulsion for use in personal care/cosmetic products.

The Company also owns a patent entitled "Compositions and Methods for
Delivery of Skin Cosmeceuticals." This patent covers the Company's unique
self-adjusting pH emulsion system.

The Company also owns U.S. and international patents on a method to
infuse oxygen into the skin and tissue topically without using the blood stream.
The oxygenation technology was submitted to the Food & Drug Administration to
obtain the necessary approvals for medical applications; however, at this time,
the necessary steps for final approval has not been determined and this project
is currently on hold.

On July 1, 2005, the Company acquired Clinical Results, Inc. (CRI), a
St. Petersburg, Florida-based company. CRI was a privately held product
development laboratory and contract manufacturer of cosmeceutical and other
personal care products. CRI's clients range from mass market retailers to
marketers of high end brands, and certain health food store brands.

Principles of Consolidation

The consolidated financial statements include the accounts of Hydron
Technologies, Inc. and its wholly-owned subsidiary CRI purchased as of July 1,
2005, and its majority owned limited liability limited partnership, Hydron
Royalty Partners, LLLP. All significant inter-company transactions have been
eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The credit risk
associated with cash equivalents is considered low due to the credit quality of
the issuers of the financial instruments.

The cash and cash equivalent balances at December 31, 2006 and 2005 are
covered by the Federal Deposit Insurance Commission.

Restricted cash

At December 31, 2006, the Company had restricted cash of $90,155, all
of which were covered by the Federal Deposit Insurance Commission, which
represents funds from a consolidated entity, that are not available for use in
the Company's normal operations.

Concentration of Credit Risk

Trade accounts receivable are due primarily from contract manufacturing
customers and are usually paid to the Company within 45 days after receipt of
goods. The Company performs ongoing evaluations of its significant customers and
does not require collateral, although in many cases it requires deposits or
advances.

Inventories

Inventories are valued at the lower of cost or market, on a first-in,
first-out (FIFO) basis and include finished goods, components and raw materials.

Long-Lived Assets

The Company reviews long-lived assets and certain identifiable
intangibles held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In evaluating the fair value and future benefits of its intangible
assets, management performs an analysis of the anticipated undiscounted future
net cash flows of the individual assets (or asset groups) over the remaining
depreciation/amortization period. The Company recognizes an impairment loss if
the carrying value of the asset exceeds the expected future cash flows. During
the periods ended December 31, 2006 and 2005, management determined there was no
impairment of long-lived assets.

Property and Equipment

Property and equipment, consisting primarily of furniture and
equipment, is carried at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, ranging from four to six
years.

Deferred Product Costs

Deferred product costs consist primarily of costs incurred for the
purchase and development of patents and product rights. The deferred product
costs are being amortized over their estimated useful lives of five to seventeen
years using the straight-line method.

Common Stock, Common Stock Options

Prior to January 1, 2006, the Company accounted for employee
stock-based compensation using the intrinsic value method supplemented by pro
forma disclosures in accordance with APB 25 and SFAS 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No.148 "Accounting
for Stock-Based Compensation--Transition and Disclosures." Under the intrinsic
value method, the recorded stock-based compensation expense was related to the
amortization of the intrinsic value of stock options issued and other
equity-based awards issued by the Company. Options granted with exercise prices
equal to the grant date fair value of the Company's stock have no intrinsic
value and therefore no expense was recorded for these options under APB 25.
Other equity-based awards for which stock-based compensation expense was
recorded were generally grants of restricted stock awards which were measured at
fair value on the date of grant based on the number of shares granted and the
quoted price of the Company's common stock. Such value was recognized as an
expense over the corresponding service period.

Effective January 1, 2006 the Company adopted SFAS 123R using the
modified prospective approach and accordingly prior periods have not been
restated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards
granted prior to its adoption will be expensed over the remaining portion of
their vesting period. These awards will be expensed under the accelerated
amortization method using the same fair value measurements which were used in
calculating pro forma stock-based compensation expense under SFAS 123. For
stock-based awards granted on or after January 1, 2006, the Company will
amortize stock-based compensation expense on a straight-line basis over the
requisite service period, which is generally a four year vesting period. SFAS
123R requires that the deferred stock-based compensation on the consolidated
balance sheet on the date of adoption be netted against additional paid-in
capital.

For the year ended December 31, 2006, the Company recorded stock-based
compensation expense of $56,908. For the year ended December 31, 2005, the
Company recognized $9,441 of stock-based compensation expense under the
intrinsic value method.

Earnings (loss) Per Share

The financial statements are presented in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share". Basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflect the
potential dilution from the exercise or conversion of securities into common
stock.

Revenue Recognition

The Company recognizes revenue when

o Persuasive evidence of an arrangement exists,
o Shipment has occurred,
o Price is fixed or determinable, and
o Collectibility is reasonably assured.

Subject to these criterion, the Company recognizes revenue at the time
of shipment of the relevant merchandise. The Company offers its individual
consumer customers a thirty-day warranty and estimates an allowance for sales
returns based on historical experience with product returns. For the Company's
formulation and contract manufacturing business, revenue is recognized when the
work is complete, the client approves the formula by written correspondence, and
the product is shipped.

Shipping and Handling Fees

The Company follows the provisions of Emerging Issues Task Force Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Any amounts
billed to third-party customers for shipping and handling is included as a
component of revenue. Shipping and handling costs incurred are included as a
component of cost of sales.

Cost of Sales

Prior to the acquisition of CRI, products were manufactured through
third parties under contract and cost of sales included the cost of ingredients,
packaging material, assembly and processing costs. Currently, with manufacturing
capability, most products are manufactured in house. Inbound freight, internal
transfers, and component handling costs are charged to cost of sales. Costs
associated with shipping product to customers is included in cost of sales. The
cost of warehousing finished product that is available for sale is included in
selling, general and administrative expenses.

Research and Development Costs

Research and development expenditures, consist of costs incurred in
performing research and development activities, and are expensed as incurred.
For the years ended December 31, 2006 and 2005, expenses charged to Research and
Development were $11,916 and $55,037, respectively.

Advertising

Advertising costs are expensed as incurred and are included in
"Selling, general and administrative expenses." Advertising expenses amounted to
approximately $83,000 and $81,000 for the years ended December 31, 2006 and
2005, respectively.

Recent accounting Pronouncements

2. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash, accounts receivables, deposits, accounts
payable, and other payables approximates fair value because of their short term
maturities

3. INVENTORIES

At December 31, 2006, inventories consist of the following:

2006
----

Finished goods ............................... $ 71,970
Raw materials and components ................. 495,432
---------
567,402
Less Inventory valuation allowance ........... (298,149)
---------
Inventories, net ............................. $ 269,253
=========

The Company's earnings were reduced for surplus inventory in the amount
of $7,394 and $100,853 for the years ended December 31, 2006 and 2005
respectively.

4. TRADE ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at December 31, 2006:

2006
----

Accounts Receivable .......................... $ 83,176
Less: Allowance for Doubtful accounts ........ (20,000)
---------
Accounts Receivable, Net ..................... $ 63,176
=========

The Company's allowance for doubtful accounts was $20,000 and $25,000
for the years ended December 31, 2006 and 2005 respectively.

5. PROPERTY AND EQUIPMENT

At December 31, 2006, property and equipment consisted of the
following:

2006
----

Furniture and equipment ...................... $ 375,417
Less accumulated depreciation ................ (254,353)
---------
$ 121,064
=========

Depreciation for the year ended December 31, 2006 and 2005 was $33,340
and $11,684, respectively.

6. DEFERRED PRODUCT COSTS

The Company was granted U.S. Patent No. 6,984,391 dated January 10,
2006, which is titled "Compositions and Methods for Delivery of Skin
Cosmeceuticals." This patent covers the Company's unique self-adjusting pH
emulsion system.

At December 31, 2006 deferred product costs consisted of the following:

2006
----

Deferred product cost ........................ $ 351,818
Less accumulated amortization ................ (225,118)
---------
$ 126,700
=========

Amortization for the years ended December 31, 2006 and 2005 was
approximately $28,000 and $27,000, respectively.

Estimated future amortization of deferred product costs are as follows:

2007 $ 20,214
2008 16,667
2009 11,746
2010 9,432
2010 9,064
thereafter 59,577
---------
$ 126,700
=========

7. ACQUISITION

On July 1, 2005, the Company acquired all the outstanding common stock
of Clinical Results, Inc. (CRI). As consideration, the Company issued 2,000,000
shares of common stock (fair value of $260,000). The acquisition was accounted
for using the purchase method of accounting. The results of operations are
included in the consolidated statements of operations since the date of
acquisition. Intangible assets which are comprised of customer lists,
formularies, product developments and employment contract for key employee of
$241,311 were recorded in this transaction and are being amortized over 3 to 10
years using the straight line method.

2006
----

Intangibles .................................. $ 241,311
Less accumulated amortization ................ (54,475)
---------
$ 186,836
=========

Post-acquisition amortization of the identifiable intangible assets
for the year ended December 31, 2006 was approximately $35,780. Estimated future
amortization of the identifiable intangible assets are as follows:

2007 $ 35,780
2008 27,446
2009 19,113
2010 19,113
2011 19,113
Thereafter 66,271
---------
$ 186,836
=========

8. ROYALTY AGREEMENTS

From 1976 through 1989, the Company and GPS entered into various
agreements, wherein the Company obtained the exclusive worldwide rights to
market products using Hydron polymers in cosmetic and oral health fields, the
two fields in which the Company has concentrated its research and development
efforts, and to utilize the Hydron polymer as a drug release mechanism in
topically applied, nonprescription pharmaceutical products. The Hydron polymer
is one of the underlying technologies in many of the Company's skin care
products. GPS has the exclusive worldwide license to market prescription drugs
and medical devices using Hydron polymers. Further, each has the right to
exploit products with Hydron polymers not in the other's exclusive fields.

Under the terms of the GPS Agreement, the Company and GPS are each
required to pay to the other a royalty of five percent (5%) of their respective
net sales of Hydron polymer products, except for sales of certain specified
non-prescription drug products, utilizing the Hydron polymer as an active
ingredient to third parties. Where the seller receives an up-front license fee,
royalty or similar payment the seller shall pay the other party a royalty of
twenty-five percent (25%) of such payments. GPS has assigned its rights under
the GPS Agreement to Valera Pharmaceuticals (formerly known as Hydro-Med
Sciences, Inc.) (Valera).

The Company and Valera were discussing possible ways to simplify the
GPS Agreement in 2004 but were unable to reach agreement. As a result, the
Company assigned its rights under the GPS Agreement to Hydron Royalty Partners,
LLLP, a newly created limited liability partnership with the Company as the
"General Partner." The partnership assumed the existing liability for prior
period royalties ($127,984) and will annually pay the first $30,000 of any
royalties due to Valera and, in return, will receive future royalties from
Valera.

An aggregate of $28,108 and $ 29,512 was accrued and unpaid as of
December 31, 2006 and 2005. For the years ended December 31, 2006 and 2005, the
Company recorded royalty expenses of approximately $19,000 and $36,000,
respectively. The Company has not received any royalty payments, or been advised
of any sales that would entitle the Company to royalty income.

9. ACCRUED LIABILITIES

At December 31, 2006, accrued liabilities consisted of the following:

2006
----

Dividends payable ............................ $ 83,163
Director fee payable ......................... 112,270
Professional fees ............................ 31,356
Other ........................................ 49,344
---------
$ 276,133
=========

10. INCOME TAXES

The Company accounts for income taxes under FASB Statement No. 109,
"Accounting for Income Taxes" (FASB 109). Deferred income tax assets and
liabilities are determined based upon differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Due to losses, the Company has not provided for current income tax
expense in either the years ended December 31, 2006, or 2005.

Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred income taxes are as follows:

2006 2005
----------- -----------

Net operating loss carryforwards $ 7,389,000 $ 7,741,000
Tax credit carry forwards ...... 168,000 180,000
Other .......................... 107,000 181,000
----------- -----------
Deferred tax assets ............ 7,664,000 8,102,000

Less valuation allowance ....... (7,664,000) (8,102,000)
----------- -----------
Total net deferred taxes ....... $ - $ -
=========== ===========

FASB 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that an $7,664,000 valuation allowance at December 31, 2006 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The valuation allowance decreased by $438,000 in 2006 and
decreased $684,000 in 2005. The decrease in 2006 was due to the expiration of
the 1991 net operating loss carryforward.

As of December 31, 2006, the Company had an unused net operating loss
carryforward of approximately $19,636,000 available for use on its future
corporate income tax returns. These net operating loss carryforwards expire in
December 2026. Pursuant to Sections 382 and 383 of the Internal Revenue Code,
annual use of any of the Company's net operation loss and credit carry forwards
may be limited if cumulative changes in ownership of more than 50% occur during
any three year period.

The reconciliation of income tax rates, computed at the U.S. federal
statutory tax rates, to income tax expense is as follows:

Year ended December 31,
2006 2005
---- ----

Tax at U.S. statutory rates .................... -34% -34%
State income taxes, net of federal tax benefit . -3% -4%
Permanent differences .......................... 6% 0%
Increase in valuation allowance ................ 31% 38%
---- ----
0% 0%
==== ====

11. LOAN PAYABLE

On June 14, 2005, the Company borrowed an aggregate of One Hundred
Fifty Thousand Dollars ($150,000) (collectively, the "Loans") from three
individual lenders (collectively, the "Lenders"), including individuals who are
(i) the Chairman of the Board and Interim President, and (ii) a second director
of the Company.

In connection with the Loans, the Company issued to each of the Lenders
a promissory note in the principal amount of Fifty Thousand Dollars ($50,000)
(individually, a "Note" and collectively, the "Notes") providing for (a)
quarterly payments of interest at ten percent (10%) per annum and (b) repayment
of principal in a balloon payment on the second anniversary of the date of the
Notes. Under the terms of the Notes, the Company may elect to pay quarterly
interest to the holders of the Notes in shares of common stock, $.01 par value,
of the Company (the "Common Stock"), in an amount calculated by dividing the
amount of interest due and payable by ten cents ($.10). The Notes also provide
that, in the event of a default by the Company under the Notes, the holders may
elect to receive payment of principal and accrued and unpaid interest in shares
of Common Stock, in an amount calculated by dividing the amount of principal and
accrued and unpaid interest payable by the "Average Market Price" for a share of
Common Stock. Under the terms of the Notes, "Average Market Price" means the
average closing sale price for a share of Common Stock measured over the last
ten trading days of the month preceding the interest payment date or, if no
trading in the Common Stock has occurred during such period, the average closing
sale price on the last date on which a share of Common Stock was sold in
over-the-counter trading in the Common Stock. In the event that no shares of
Common Stock have traded in the over-the-counter market for a period of six
months or more, the Average Market Price shall be the fair market price for a
share of Common Stock as determined in good faith by the Board of Directors of
the Company. In October 2005, the Company elected to pay the accrued interest
due on the Notes of $11,040 in stock of the Company and issued 44,000 shares at
$.25 to the Note holders. In January 2006, the Company elected to pay the
accrued interest due on the Notes of $13,230 in stock of the Company and issued
37,800 shares at $.35 to the Note holders. In March 2006, the Company elected to
pay the accrued interest due on the notes of $21,546 in stock of the Company and
issued 37,800 shares at $.57 to the Note holders. In July 2006, the Company
elected to pay the accrued interest due on the notes of $16,254 in stock of the
Company and issued 37,800 shares at $.43 to the Note holders. At December 31,
2006, the Company had accrued $15,120 of interest on the notes due to the Note
holders.

In addition, in connection with the Loans, each Lender received a
Common Stock Purchase Warrant (collectively, the "Warrants") entitling the
holder to purchase One Hundred Thousand (100,000) shares of Common Stock at an
exercise price of ten cents ($.10) per share for a five-year period. The
warrants were valued using the Black Scholes model at $24,000, which is being
amortized as interest expense over the life of the notes.

The Notes and the Warrants each provide that in the event that the
Company shall grant "piggy back" registration rights to any other party to cause
the Company's Common Stock or any security exercisable or exchangeable for, or
convertible into, shares of Common Stock to be included in a registration
statement filed by the Company for sale by any selling shareholder or by the
Company, the Company will grant the holders of the Notes and Warrants similar
registration rights.

Loans Payable consisted of the following at December 31, 2006:

2006
----

Loan Payable .................................. $ 150,000
Accrued interest .............................. 15,120
Less :Deferred financing costs ................ (2,262)
---------
$ 162,858
=========

12. STOCK OPTIONS AND WARRANTS

The number of shares of common stock reserved for issuance was
4,938,500 for December 31, 2006 and 5,099,000 for 2005. This includes 2,210,000
shares for the private placement subscription agreements completed November 14,
2003.

STOCK OPTION PLANS

THE 1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

The 1993 Non-Employee Director Stock Option Plan ("1993 Plan") was
adopted by the Board of Directors on December 22, 1993, approved by the
shareholders on July 19, 1994 and approved, as amended, by the shareholders on
December 17, 1997. The purpose of the 1993 Plan is to assist the Company in
attracting and retaining key directors who are responsible for continuing the
growth and success of the Company. No options were granted under the 1993 Plan
during the year ended December 31, 2006

1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

During 1997, the Company adopted the 1997 Non-Employee Director Stock
Option Plan. Such plan provides grants of stock options to non-employee
directors of the Company to purchase an aggregate of 100,000 shares of the
Company's common stock. Each non-employee director shall be granted an option to
purchase 2,000 shares of the Company's common stock on each May 1st throughout
the term of this plan at exercise prices equal to the average of the fair market
value of the Company's common stock during the ten business days preceding the
date of the grant. In addition, each non-employee director who sits on a
committee of the Board of Directors shall be granted an option to purchase 500
shares of the Company's common stock under the same pricing arrangements as
above. Subject to certain exceptions, no options granted under this plan shall
be exercisable until one year after the date of grant. During August 1999, the
Company agreed to increase the annual May 1st grant to the Board members from
2,000 to 20,000 shares of the Company`s common stock and committee members from
500 to 5,000. These options expire five years from the date of grant and all
outstanding options are exercisable at December 31, 2005. There are 100,000
options available for grant under this plan at December 31, 2006.

2003 STOCK PLAN

The Board of Directors had approved the issuance of 943,500 options in
prior periods subject to the adoption of a new stock plan at the November 15,
2004 shareholders' meeting. All of these options have been reflected as being
granted in 2004.

Options to purchase 74,500 shares were granted during the year ended
December 31, 2006, necessitating adjustments to the pro forma information
regarding net income and earnings per share as required by FASB Statement No.
123.

On January 25, 2005, the Board of Directors, by unanimous consent,
re-authorized the issuance of 743,500 stock options from the 2003 Stock Plan to
Directors and Officers of the Company. Since the original approval date was more
than 12 months before the shareholder adoption of the 2003 Stock Plan, the
options had to be re-authorized to include them under the plan.

Activity with respect to these plans is as follows:

Weighted
Number of Average
Options/ Price Exercise
Warrants Per Share Price
--------- -------------- --------

Outstanding at December 31, 2004 1,215,500 $0.13 TO $0.81 $0.37

Stock options granted ........ 687,000 0.28 0.28
Stock options expired ........ (670,500) 0.13 TO 0.52 0.30
---------
Outstanding at December 31, 2005 1,232,000 0.13 TO 0.81 $0.34
=========

Stock options granted ........ 74,500 .5225 TO .53 0.53
Stock options expired ........ (120,000) 0.281 TO .5225 0.32
---------
Outstanding at December 31, 2006 1,186,500 $0.13 TO $0.81 $0.38
=========

OTHER OPTIONS

The Company completed a non-brokered private placement of 1,750,000
Units at $.20 per Unit ($350,000), on December 10, 2002 to several accredited
investors. Each Unit is comprised of one share of common stock and one
three-year option to buy one additional common share at $.20.

On October 24, 2005, the Board of Directors adopted a resolution
authorizing the extension of the exercise period for certain options to purchase
common stock (the "Options") granted in connection with a private placement of
securities by the Company from December 9, 2005 to December 9, 2007 (the "New
Expiration Date") in consideration of the agreement of certain holders to
immediately exercise a portion of the Options and purchase the underlying common
stock. The shares underlying the original Options were registered by the Company
under the Securities Act of 1933, as amended (the "Securities Act"). The shares
of common stock underlying the Options totaled 1,750,000 shares or approximately
14.3% of the total outstanding shares of the Company.

Richard Banakus, the Chairman and interim President and a director, and
Ronald J. Saul, a director of the Company, together with his spouse, Antonette
G. Saul, are among the holders of the Options. Mr. Banakus assigned for nominal
consideration certain of his Options exercisable for 250,000 shares to Mr. Saul
and effective October 27, 2005 exercised Options representing an aggregate of
250,000 shares of common stock in consideration of the extension of the exercise
period to the New Expiration Date for Options representing an aggregate of
750,000 shares of common stock. Mr. Saul exercised an aggregate of 250,000
shares and had Options representing an aggregate of 125,000 extended to the New
Expiration Date. In 2006 Mr. Saul exercised the remaining 125,000 options. In
addition in 2005, certain other holders of Options exercised Options
representing an aggregate of 62,500 shares and had the exercise period for
Options representing an aggregate of 62,500 shares extended to the New
Expiration Date bringing the total number of shares represented by the new
Options (the "New Options") exercisable at any time prior to the New Expiration
Date to 812,500 or approximately 6.6% of the total outstanding shares.

Options/
Warrants
--------

Outstanding at December 31, 2005 ................. 937,500

Stock options granted (including extended options) -
Stock options exercised .......................... (125,000)
Stock options expired ............................ -
--------
Granted and outstanding at December 31,2006 ...... 812,500
========

The Company has agreements with several consultants who provide
financial, business and technical advice to the Company in connection with the
research, development, marketing and promotion of its products and other
matters. As part of their compensation, these consultants were granted warrants
and nonqualified stock options to purchase shares of the Company's common stock
at prices representing the fair market value of the shares at the date of grant.
Activity with respect to options and warrants granted to these consultants is
summarized below:

Number of Average
Options Price Exercise
Warrants Per Share Price
--------- -------------- --------

Outstanding at December 31, 2005 169,500 $0.22 to $0.66 $0.53

Stock options granted ........ -
---------
Outstanding at December 31, 2006 169,500 0.22 to 0.66 0.53
=========

OTHER WARRANTS

On November 14, 2003, the Company completed a non-brokered private
placement of 2,210,000 Units at $.50 per Unit ($1,105,000) to accredited
investors. Each Unit is comprised of one share of Common Stock and one five-year
warrant to buy one additional Common Share at $1.00. As of December 31, 2006,
all 2,210,000 warrants are outstanding.

In June 2005, in connection with the loan payable, each Lender received
a Common Stock Purchase Warrant entitling the holder to purchase One Hundred
Thousand (100,000) shares of Common Stock at an exercise price of ten cents
($.10) per share for a five-year period. The warrants were valued using the
Black Scholes model at $24,000, which will be amortized as interest expense over
the life of the notes.

For the year ended December 31, 2006, interest expense includes $14,268
representing the amortization of the debt discount.

Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, which also requires that the information be
determined as if the Company had accounted for its stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of the grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 2006 and 2005:

2006 2005
---- ----

Risk-free interest rate .............. 4.9% 4.3%
Expected life ........................ 5 years 5 years
Expected volatility .................. 146% 124%
Expected dividend yield .............. 0% 0%

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. As the Company's stock options have characteristics significantly
different than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.

The weighted average remaining contractual life of all options
outstanding at December 31, 2006 was 1.72 years.

13. COMMITMENTS AND CONTINGENCIES

Lease
-----

The Company had leased office space under a non-cancelable lease
agreement, which expired in August 2005. Net rent expense under this lease was
approximately $30,800 in 2005.

The Company currently leases 35,000 square feet of office space under
three non-cancelable leases in St Petersburg, Florida which expire between April
and September 2008. Rent expense for the year ended December 31, 2006 was
approximately $91,371 under these new leases. The Company also leases equipment.
Equipment lease expense for the year ended December 31, 2006 was $22,648.

The leased property under capital leases as of December 31, 2006 had a
cost of $93,078, and accumulated depreciation of $21,054. Amortization of the
leased property is included in depreciation expense.

Future minimum lease payments for these leases at December 31 are as
follows:

YEAR ENDING CAPITAL OPERATING
December 31, LEASES LEASES
------------ ------ ------

2007 ................................ $ 31,951 $ 134,508
2008 ................................ 26,060 90,317
2009 ................................ - -

TOTAL MINIMUM LEASE OBLIGATION ................... 58,011 224,825
LESS: INTEREST ................................. (7,436) -
PRESENT VALUE OF TOTAL MINIMUM LEASE PAYMENTS .. 50,575 $ 224,825
=========
LESS: CURRENT PORTION .......................... (26,202)
--------
NON-CURRENT PORTION .......................... $ 24,373
========

Contingency
-----------

14. MANAGEMENT'S PLAN

The accompanying consolidated financial statements were prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of operations.

Following the closing of the Offering, Mr. Saul beneficially owns
4,489,540 shares of Common Stock, comprised of 2,514,540 shares held directly by
him and his immediate family members and 1,975,000 shares of Common Stock
issuable upon the exercise of options and common stock purchase warrants
(including the Warrants), representing beneficial ownership of 24.8% of the
Common Stock (Note 15).

The Company's working capital deficit was approximately ($670,000) at
December 31, 2006, including cash and cash equivalents of approximately $7,000.
Cash used by operating activities was $33,175 and cash used in investing
activities was $18,052 during the year ended December 31, 2006. This was offset
by proceeds from financing activities of $21,886.

The Company has does not have any material debt other than the loan
payable of $150,000 borrowed from three shareholders in May 2005 (see Note 11),
and two capital leases for equipment purchases of $56,551. The Company has a
substantial overdue trade accounts payables balances. Effective August 5, 2005,
the Company relocated its offices to St Petersburg, Fl. There are no capital
expenditures under construction and no long-term commitments other than royalty
payments under an agreement with Valera Pharmaceuticals, Inc. The Company does
not have any lines of credit. There are no purchase order commitments that
exceed 90 days.

Management's plan includes implementing one or more of the following
elements:

o Emphasize and expand the marketing and manufacturing of private
label products.

o Implement new direct sales and networking initiatives.

o Emphasize Catalog sales, including sales made over the Internet,
since these sales have higher profit margins.

o Evaluate the possibilities of increasing direct marketing and direct
response television exposure to build brand awareness and revenues.

o Team with third parties to build the advertising and promotion of
the Hydron(R) brand, as the Company does not have the financial
resources to sustain a national advertising campaign to support
distribution of its production into retail stores.

o Develop and market new product lines based on the Company's
proprietary technologies.

o Continue to reduce overhead and operating costs.

o Obtain an infusion of capital that will sustain the Company's
operation until the newly established licensing initiatives can
produce positive cash flow.

15. SUBSEQUENT EVENTS

In February 2007, the Company elected to pay the accrued interest due
on the notes as of December 31, 2006 of $15,120 in stock of the Company and
issued 37,800 shares at $.23 and 37,800 shares at $.17 to the noteholders.

Among the individuals purchasing Units in the Offering are (i) Richard
Banakus, the Chairman interim President and a director of the Company, who
purchased 350,000 Units, and (ii) Ronald J. Saul, a director of the Company who
with his spouse purchased 850,000 Units. Following the closings, Mr. Banakus

beneficially owns 4,309,040 shares of Common Stock, comprised of 2,484,040
shares held directly and 1,825,000 shares issuable upon the exercise of options
and common stock purchase warrants (including the Warrants), representing
beneficial ownership of 24.7% of the Common Stock, and Mr. Saul beneficially
owns 3,482,540 shares of Common Stock, comprised of 2,007,540 shares held
directly by him and his immediate family members and 1,475,000 shares of Common
Stock issuable upon the exercise of options and common stock purchase warrants
(including the Warrants), representing beneficial ownership of 20.4% of the
Common Stock.

The Company used the proceeds of the Offering to pay current
obligations of the Company, including payments made to its landlord for
outstanding rent.

Following the closings, Mr. Saul beneficially owns 4,489,540 shares of
Common Stock, comprised of 2,514,540 shares held directly by him and his
immediate family members and 1,975,000 shares of Common Stock issuable upon the
exercise of options and common stock purchase warrants (including the Warrants),
representing beneficial ownership of 24.8% of the Common Stock.

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

None.

ITEM 8A. CONTROLS AND PROCEDURES

As of the end of this period, the Company carried out an evaluation,
under the supervision and with the participation of management, including its
Chief Executive Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(e). Based upon that evaluation, the Chief Executive Officer concluded
that the Company had material weaknesses associated with insufficient personnel
resources with appropriate accounting experience and lack of controls relating
to inventory valuation and segregation of inventory. Management is currently
seeking personnel resources with appropriate accounting experience, as well as
implementing a perpetual inventory system which should mitigate these material
weaknesses in 2007.

Disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e)) are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management to allow timely decisions regarding required
disclosure.

The Certifying Officer has also indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.

Our management, including the Certifying Officer, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

ITEM 8B. OTHER INFORMATION

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

Listed below are the directors and executive officers of the Company as
of December 31, 2006:

Name Position
---- --------
Richard Banakus Director, Chairman of the Board
Karen Gray Director
Ronald J. Saul Director
David Pollock Director, Chief Executive Officer
Douglas Reitz, D.C Executive Vice President

Business Experience

Richard Banakus, age 60, has served as Chairman, interim President and
a director of the Company since June 1995 and as Interim President of the
Company since September 19, 1997. From April 1991 to the present, Mr. Banakus
has been a private investor with interests in a number of privately and publicly
held companies. From July 1988 through March 1991, he was managing partner of
Banyan Securities, Larkspur, California, a securities brokerage firm that he
founded.

Karen Gray, age 48, has served as a director of the Company since
December 1997 and was a consultant to the Company on marketing and
communications matters from November 1996 to December 1999. Ms. Gray has over 17
years of management experience in marketing communications in various capacities
with various companies. From 1993 to November 1996, Ms. Gray served as Vice
President, Corporate Communications, of the Company. From June 1992 to November
1993, Ms. Gray served as President of MarCom Associates, Inc., a marketing
communications company that she founded.

Ronald J. Saul, age 59, has served as a director of the company since
January 2003. From September 1992 to the present, Mr. Saul has been a financial
consultant. From October 1985 through August 1992, Mr. Saul was the Treasurer
and Vice President of National Intergroup, a multi company holding company. From
November 1970 to September 1985, Mr. Saul held various accounting and financial
positions with National Intergroup Inc. and its predessor company, National
Steel Corporation.

David Pollock age 42, has served as a director of the Company and as
CEO of the Company from July 1, 2005 to present. Mr. Pollock is responsible for
developing a number of innovative products, including some of the early glycolic
and alpha hydroxy acid products, the first mass market Vitamin C line, one of
the best selling acne systems in the mass market, plus products for such brands
as SkinCeuticals, Bliss, Shaklee, Ted Gibson, Vogue International, DermaFresh,
Keri Lotion, CaliforniaBeauty, Desert Essence and more.

Mr. Pollock's experience in formulating is augmented by his product
marketing background as the former Vice President of Product Development for the
Home Shopping Network and his senior management position with the Fuller Brush
company. Mr. Pollock has been a keynote speaker at various national conferences,
written a number of articles for various consumer and trade publications, been a
contributing writer to a text book on delivery systems for chemists, currently
serves on the Scientific Advisory Committee for CTFA(Cosmetic Toiletries &
Fragrance Association) and has served on the board for FCPMA (Florida Cosmetic
Pharmaceutical Manufacturers Association).

Dr. Douglas Reitz, Executive Vice President from July 1, 2005 to
present. Dr. Reitz has been involved in researching and clinical testing of a
number of pain relief, anti-inflammatory, acne, anti-aging/collagen building and
breakthrough delivery system technologies. Dr. Reitz brings his knowledge and
expertise to the Company, overseeing research and clinical trials. His
undergraduate study was in biochemical engineering and then went on to get his
medical degree. He was in private practice for 20 years

DIRECTOR AND OFFICER RESIGNATIONS

Mr. Joshua Rochlin resigned from the Board of Directors of Hydron
Technologies, Inc. effective March 31, 2005 due to his increased commitments at
Marc Ecko Enterprises. In addition, William A. Lauby resigned his position as
Chief Financial Officer effective March 30, 2005 in order to pursue other career
possibilities and to be closer to his family. Effective August 5, 2005, Terrence
S. McGrath, the Company's Chief Operating Officer, resigned in order to pursue
other career opportunities. Mr. McGrath's responsibilities were assumed by Mr.
Pollock, Hydron's Chief Executive Officer.

CORPORATE GOVERNANCE

Audit Committee

The Audit Committee of the Board of Directors, comprised of Ronald Saul
reviewed and discussed the audited financial statements with management. The
audit committee has discussed with the independent auditors the matters required
to be discussed by the statement on Auditing Standards No. 61 as amended (AICPA,
Professional Standards, vol. 1, AU section 380), as adopted by the Public
Company Accounting Oversight Board in Rule 3600T. The audit committee has
received the written disclosures and the letter from the independent accountants
required by Independence Standards Board Standard No. 1 (Independence Standards
Board Standard No. 1, Independence Discussions with Audit Committees), as
adopted by the Public Company Accounting Oversight Board in Rule 3600T, and has
discussed with the independent accountant the independent accountant's
independence.

Based on this review and discussion, the audit committee recommended to
the Board of Directors that the audited financial statements be included in the
Company's annual report on Form 10-KSB for the fiscal year ended December 31,
2006 and filed and the Securities and Exchange Commission.

Audit Committee Financial Expert

The Company's Board of Directors has determined that the Company's
audit committee does have a financial expert serving on the audit committee.
Ronald Saul is the financial expert serving on the audit committee.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

The Company's officers, directors and beneficial owners of more than
10% of any class of its equity securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934 ("Reporting Persons") are required under the
Act to file reports of beneficial ownership and changes in beneficial ownership
of the Company's equity securities with the Securities and Exchange Commission.
Copies of those reports must also be furnished to the Company. Based solely on a
review of the copies of reports furnished to the Company pursuant to the
Exchange Act, the Company believes that during the year ended December 31, 20056
all filing requirements applicable to Reporting Persons were complied with
except as follows.

Karen Gray, a director of the Company, David Pollock, a director and
CEO of the Company, and Douglas Reitz, an Executive Vice President of the
Company failed to timely file Forms 3 (Initial Statement of Beneficial Ownership
of Securities). Ms. Gray has advised the Company that she intends to file a Form
3 as promptly as practicable. Mr. Pollock filed a Form 3 on February 27, 2006;
and Mr. Reitz filed a Form 3 on February 27, 2006.

Messrs. Pollock's and Reitz's Form 3s disclose the beneficial ownership
on the required date of filing of shares of common stock of the Company issued
in consideration of the acquisition by the Company of their shares of CRI and
the grant of options to acquire shares of common stock pursuant to their
respective employment agreements.

In addition, Ms Gray failed to timely file Forms 4 to report the
following transactions:

DATE OF
TRANSACTION TRANSACTION DESCRIPTIONS ADDITIONAL INFORMATION
----------- ------------------------ ----------------------

12/17/97 Grant of options to acquire 2,000 Options expired on 12/16/02
shares of common stock

5/01/99 Grant of options to acquire 2,000 Options expired on 4/30/05
shares of common stock

8/16/99 Grant of options to acquire 2,000 Options expired on 8/15/04
shares of common stock

5/01/00 Grant of options to acquire 2,000 Options expired on 4/30/05
shares of common stock

4/01/01 Grant of options to acquire 18,000 Exercised on 3/29/06 and
shares of common stock 10,0000 shares of underlying
shares of common stock sold
on 7/12/06

5/01/01 Grant of options to acquire 20,000 Options will expire on
shares of common stock 4/30/07

5/01/03 Grant of options to acquire 20,000 Options will expire on
shares of common stock 4/30/08

5/01/04 Grant of options to acquire 20,000 Options will expire on
shares of common stock 4/30/09

5/01/05 Grant of options to acquire 20,000 Options will expire on
shares of common stock 4/30/10

5/01/06 Grant of options to acquire 20,000 Options will expire on
shares of common stock 4/30/11

Ms. Gray filed a Form 4 on April 4, 2007 to report previous grants of
options, net of expired options. The Company made the grants of stock options to
her in consideration for her service on the Company's Board of Directors. The
exercise price for the options received under each grant was the fair market
value of a share of common stock on the date of grant.

CODE OF ETHICS

As of the date of this report, the Company has not adopted a Code of
Ethics applicable to its principal executive officer, principal financial
officer, principal accounting officer or controller or persons performing
similar functions.

Although the Company recognizes the desirability of a Code of Ethics,
it does not believe that the development of a comprehensive Code is necessary or
a desirable use of the Company's limited financial resources, particularly given
the simple administrative structure and limited number of management personnel
of the Company. The Company intends to develop and adopt a suitable Code of
Ethics when its financial condition and management structure warrants.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information about compensation
paid, earned or accrued for services by (i) our principal executive officer and
(ii) our two most highly compensated executive officers, other than the
principal executive officer, who served as executive officers at December 31,
2006, who earned in excess of $100,000 ("Named Executive Officers"). In
accordance with the transition rules implementing the new executive compensation
disclosure requirements set forth in Securities Act Release No. 8732 (Aug. 29,
2006), we are disclosing in this Summary Compensation table only information
concerning our fiscal year ended December 31, 2006.

Stock Option All Other
Name and Principal Position Year Salary Award (1) Compensation Total
--------------------------- ---- -------- ------------ ------------ --------

David Pollock 2006 $106,000 - - $106,000
Chief Executive Officer (2)

Dr. Douglas Reitz, 2006 $106,000 - - $106,000
Executive Vice President

(1) Based upon the aggregate grant date fair value calculation in accordance
with the Financial Accounting Standards Board ("FASB") Statement of
Accounting Standard ("FAS") No. 123R, Share Based Payments. Our policy and
assumptions made in valuation of share-based payments are contained in Note
12 to our December 31, 2006 financial statements.

(2) Mr. Pollock serves as our principal executive officer and has held such
position since July 1, 2005.

EMPLOYMENT AGREEMENTS

The Company has employment agreement with David Pollock, Chief
Executive Officer of the Company, and Dr. Douglas Reitz, Executive Vice
President of the Company. Each employment agreement expires on June 30, 2008 and
each provides for an annual salary of $106,000.

OPTION GRANTS

During 2006, pursuant to the Company's 2003 Stock Plan, the Named
Executive Officers, were granted options to purchase shares of the common stock
of the Company exercisable at the fair market value on the date of grant. During
2006, no Named Executive Officer received a grant of options under the 2003
Option plan.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table sets forth certain information concerning
outstanding stock awards held by the Named Executive Officers as of December 31,
2006.

Number of Securities Number of Securities
Underlying Options Underlying Options Option Option
Name (#) Exercisable (#) Unexercisable Price Expiration Date
----------------- -------------------- -------------------- ------ ---------------

David Pollock - 400,000 (1) $.281 September 5, 2010

Dr. Douglas Reitz 66,666 133,334 (2) $.281 September 5, 2010

(1) Based on the Company reaching outlined performance goals. 200,000 shares
vest automatically when the Company reaches $3,000,000 in revenues within a
period of no more than four consecutive quarters, and 200,000 shares vest
when the Company generates a pre-tax earnings goal of $1,000,000 in a period
of no more than four consecutive quarters.

(2) Vest over three equal annual installments beginning on the anniversary date
of the option grant.

2003 STOCK PLAN

This 2003 Plan is designed to consolidate and replace two Stock Option
Plans, which have expired; the 1993 Stock Option Plan and the 1997 Non-Employee
Director Stock Option Plan. The purpose of the 2003 Plan is to assist the
Company in attracting, retaining, and motivating key employees, officers,
directors, and consultants by offering selected individuals an opportunity to
acquire a proprietary interest in the success of the Company.

DIRECTOR COMPENSATION

The following table sets forth compensation paid, earned or accrued for
service as a director in our fiscal year ended December 31, 2006.

Fees Earned or
Name Paid in Cash Option Awards (1) Total
--------------- -------------- ----------------- -------

Richard Banakus $14,976 $ 9,648 $24,624
Karen Gray $ 5,000 $ 9,648 $14,648
Ronald J. Saul $ 5,000 $12,060 $17,060

(1) Based upon the aggregate grant date fair value calculation in accordance
with FAS No. 123R, Share Based Payments. Our policy and assumptions made in
valuation of share-based payments are contained in Note 12 to our December
31, 2006 financial statements.

FEES

Employees of the Company who also serve as directors are not entitled
to any additional compensation for such service, except for Mr. Richard Banakus.
Because of his status as Interim President, Mr. Banakus is treated as a
non-employee director. The Company does not have a written employment agreement
with Mr. Banakus.

Non-employee directors, including for this purpose Mr. Banakus, each
receive an annual fee of $5,000 for serving on the Board of Directors. Such fees
have not been paid but are accrued quarterly. As of December 31, 2006, unpaid
directors' fees total approximately $112,270.

OPTION GRANTS

In addition, pursuant to the terms of the Company's 2003 Stock Plan, in
2006, the Company granted each director options to purchase 20,000 shares of
common stock having an exercise price equal to the fair market value of the
Company's common stock on the date of grant, and awarded additional options for
the purchase of 5,000 shares of common stock having an exercise price equal to
the fair market value of the Company's common stock on the date of grant to
directors serving on a committee of the Board of Directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth information as of December 31, 2006
regarding (i) the share ownership of the Company by each person who is known to
the Company to be the record or beneficial owner of more than five percent (5%)
of the Common Stock, (ii) the share ownership of each director of the Company,
(iii) the share ownership of the Chief Executive Officer of the Company and each
other most highly paid executive officer of the Company who earned in excess of
$100,000 during the year ended December 31, 2006, and (iv) the share ownership
of all directors and executive officers of the Company, as a group (five
persons).

Name and Address of Amount and Nature of Approximate
Beneficial Owner Beneficial Ownership Percent of Class
------------------------------- -------------------- ----------------

Richard Banakus 3,583,840(1) 26.13%
4400 34th Street North, Suite F
St. Petersburg, FL 33714

Karen Gray 111,000(2) 1.0%
4400 34th Street North, Suite F
St. Petersburg, FL 33714

Ronald J. Saul 1,757,340(3) 13.66%
4400 34th Street North, Suite F
St. Petersburg, FL 33714

David Pollock 1,400,000(4) 11.08%
4400 34th Street North, Suite F
St. Petersburg, FL 33714

Dr. Douglas Reitz 1,200,000(5) 9.65%
4400 34th Street North, Suite F
St. Petersburg, FL 33714

All directors and executive
officers as a group (5 persons) 8,052,180(6) 53.63%

(1) Consists of 2,108,840 shares held directly and 1,475,000 shares issuable
upon exercise of options and warrants.
(2) Consists of 11,000 shares held directly and 100,000 shares issuable upon
exercise of options.
(3) Consists of 1,132,340 shares held directly and 625,000 shares issuable upon
exercise of options.
(4) Consists of 1,000,000 shares held directly and 400,000 shares issuable upon
exercise of options and warrants.
(5) Consists of 1,000,000 shares held directly and 200,000 shares issuable upon
exercise of options and warrants.
(6) Consists of 5,265,180 shares held directly and 2,800,000 shares issuable
upon exercise of options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

No applicable transactions.

ITEM 13. EXHIBITS

The following documents are filed as a part of this report or are incorporated
by reference to previous filings, if so indicated:

3.1 Restated Certificate of Incorporation of Dento-Med Industries, Inc.
("Dento-Med"), as filed with the Secretary of State of New York on
March 4, 1981.(1)

3.2 Certificate of Amendment of the Certificate of Incorporation of
Dento-Med as filed with the Secretary of State of New York on September
7, 1984.(2)

3.3 By-laws of the Company, as amended March 17, 1988.(3)

3.4 Certificate of Change of Dento-Med as filed with the Secretary of State
of New York on July 14, 1988.(2)

3.5 Certificate of Amendment of the Restated Certificate of Incorporation
of Dento-Med, as filed with the Secretary of State of New York on
November 14, 1988.(4)

3.6 Certificate of Amendment of the Restated Certificate of Incorporation
of Dento-Med, as filed with the Secretary of State of New York on July
30, 1993.(5)

3.7 Certificate of Amendment of the Restated Certificate of Incorporation
of Hydron Technologies, Inc., as filed with the Secretary of State of
New York on April 10, 2002.(2)

4.1 Non-Qualified Stock Option Plan.(6)

4.2 Registration Rights Agreement dated July 11, 2002, by and between
Hydron Technologies, Inc. and Life International Products, Inc.(2)

4.3 Warrant Agreement dated November 14, 2003 between Hydron Technologies,
Inc. and the parties named therein.(2)

10.1 Subscription Agreement dated November 22, 2002 between Hydron
Technologies, Inc. and the subscribers named therein.(2)

10.2 Subscription Agreement dated September 31, 2003 between Hydron
Technologies, Inc. and the subscribers named therein.(2)

10.3 Agreement dated July 11, 2002 between Hydron Technologies, Inc. and
Life International Products, Inc.(2)

10.4 1997 Nonemployee Director Stock Option Plan.(7)

10.5 Bridge Loan Term Sheet for Interim Loans Between Hydron Technologies,
Inc and Members of the Board of Directors.(2)

10.6 2003 Stock Plan(8)

10.7 Note dated June 14, 2005 in the principal amount of $50,000 payable to
payable to Richard Banakus (9)

10.8 Note dated June 14, 2005 in the principal amount of $50,000 payable to
Ronald J. Saul and Antonette G. Saul, jointly (9)

10.9 Note dated June 14, 2005 in the principal amount of $50,000 payable to
Regis Synan (9)

10.10 Common Stock Purchase Warrant dated June 14, 2005 in favor of Richard
Banakus (9)

10.11 Common Stock Purchase Warrant dated June 14, 2005 in favor of Ronald J.
Saul and Antonette G. Saul, jointly (9)

10.12 Common Stock Purchase Warrant dated June 14, 2005 in favor of Regis
Synan (9)

10.13 Purchase and Sale Agreement by and among Clinical Results, Inc., David
Pollock and Douglas Reitz and Hydron Technologies, Inc., dated July 1,
2005 (10)

10.14 Employment Agreement for David Pollock (10)

10.15 Employment Agreement for Richard Douglas Reitz (10)

10.16 Form of Assignment (11)

16. Letter from Daszkal Bolton LLP dated December 4, 2006 to the Securities
and Exchange Commission (12)

23.1 Consent of Independent Registered Public Accounting Firm- Daszkal
Bolton LLP (filed herewith)

23.2 Consent of Independent Registered Public Accounting Firm - Sherb & Co.
LLP (filed herewith)

31.1 Certification of Chief Executive Officer, Principal Financial and
Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 and Item 307 of Regulation S-K (filed herewith)

32.1 Certification of Chief Executive Officer, Principal Financial and
Accounting Officer Pursuant to 18 U.S.C., Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)

99. Press Release dated July 6, 2005 incorporated by reference to Form 8-K
filed on July 8, 2005.

(1) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1985.

(2) Incorporated by reference to the Company's report on Form S-3 filed
February 11, 2004.

(3) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1987.

(4) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1988.

(5) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1993.

(6) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1986.

(7) Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A for the year ended December 31, 1996.

(8) Incorporated by reference to the Company's Definitive Proxy Statement for
the year ended December 31, 2003.

(9) Incorporated by reference to Form 8-K filed June 20, 2005

(10) Incorporated by reference to Form 8-K filed July 8, 2005

(11) Incorporated by reference to Form 8-K filed November 2, 2005

(12) Incorporated by reference to Form 8-K filed December 5, 2006

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table sets forth the aggregate fees billed by the
Company's principal accountants,

2006 2005
---- ----

Sherb & Co., LLP -Audit fees 2006 Audit .... $30,000 $ -
Daszkal Bolton LLP - Audit fees ............ - 51,200
Daszkal Bolton LLP3/31, 6/30,9/30 10Q's .... 15,000 -
Tax fees (Tax compliance and planning) ..... 8,453 11,181
------- -------
$53,453 $62,381
======= =======

Under the procedures of the Company's audit committee, prior to
engagement of the Company's auditors to provide audit services and non-audit
services, the audit committee considers whether the provisions of such services
would be compatible with maintaining the independence of the Company's principal
accountants, and has determined that the provision of such services is
compatible with such accountants' independence.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HYDRON TECHNOLOGIES, INC.

/s/ David Pollock
-----------------
David Pollock
Chief Executive Officer
Principal Financial and Accounting Officer

DATED: APRIL 2, 2007

EXHIBIT INDEX INDEX #

Consent of Independent Registered Public Accounting Firm- 23.1
Daszkal Bolton LLP

Consent of Independent Registered Public Accounting Firm - 23.2
Sherb & Co. LLP

Certification of Chief Executive Officer, Principal Financial and
Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 and Item 307 of Regulation S-K 31.1

Certification of Chief Executive Officer, Principal Financial and
Accounting Officer Pursuant to 18 U.S.C., Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.1