UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


**FORM
      10-KSB**


[X]
              ANNUAL
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934For
                  the fiscal year ended:**June
                  30, 2006**[ 
                  ]
              TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACTFor
                  the transition period from _________ to ________Commission
                  file number:**000-49698**


**Axial
                Vector Engine Corp**.(Name
                of small business issuer in its charter)**Nevada**
            ******20-3362479**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)**One
                World Trade Center**
              **121
                S W Salmon Street Suite 1100, Portland, OR**
            **97204**(Address
                of principal executive offices)
            (Zip
                Code)Issuer’s
                telephone number:**(503)
                471-1348**Securities
                registered under Section 12(b) of the Exchange Act:Title
                of each class
            Name
                of each exchange on which registered**None**
            **Not
                Applicable**Securities
                registered under Section 12(g) of the Exchange Act:**Common
                Stock, par value $0.001**(Title
                of class)





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





Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B is
      not
      contained in this form, and no disclosure will be contained, to the best of
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB [  ]





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





State
      issuer’s revenue for its most recent fiscal year. **$0**





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the average bid and asked price of
      such
      common equity, as of a specified date within the past 60 days. **$33,956,038
      as of June 30, 2006**





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date. **35,004,257
      Common Shares as of June 30, 2006**





Transitional
      Small Business Disclosure Format (Check One): **Yes:
      __; No X**


***Table
          of Contents***













**TABLE
      OF CONTENTS**







**Page****PART
                I**Item
                1.
            Description
                of Business
            3Item
                2.
            Description
                of Property
            17Item
                3.
            Legal
                Proceedings
            17Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            20**PART
                II**Item
                5.
            Market
                for Common Equity and Related Stockholder Matters
            21Item
                6.
            Management’s
                Discussion and Analysis or Plan of
                Operation
            26Item
                7.
            Financial
                Statements
            31Item
                8.
            Changes
                In and Disagreements With Accountants on
                Accountingand Financial Disclosure
            32Item
                8A.
            Controls
                and Procedures
            32Item
                8B.
            Other
                Information
            33**PART
                III**Item
                9.
            Directors,
                Executive Officers, Promoters and Control Persons;
                ComplianceWith Section 16(a) of the Exchange Act
            34Item
                10.
            Executive
                Compensation
            38Item
                11.
            Security
                Ownership of Certain Beneficial Owners and
                Managementand Related Stockholder Matters
            39Item
                12.
            Certain
                Relationships and Related
                Transactions
            40Item
                13.
            Exhibits
            41Item
                14.
            Principal
                Accountant Fees and Services
            42





2
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          of Contents***


**** **PART
      I**


**Item
      1. Description of Business**





**Development
      of Our Engines**





We
      were
      incorporated in the state of Nevada on May 10, 2001. On June 30, 2003, we
      acquired the operating assets of Dyna−Cam Engine Corp. ("Dyna−Cam"). Dyna−Cam
      was a development stage company that possessed the intellectual property rights
      for a unique, axial cam−drive, free piston, and internal combustion engine
      (referred to as the “Dyna-Cam mechanical engine”). The Dyna-Cam mechanical
      engine has its roots in technology that was developed during the Second World
      War by Dr Karl Herrmann, who filed a series of six patents in 1941 followed
      two
      more patents in 1961 and 1962. By 1957, this novel engine had created
      considerable interest including being the first engine of such a design to
      obtain FAA certification for light experimental aircraft use. The lightweight
      nature of the engine, its greater horse-power and torque made it a natural
      for
      aviation and maritime applications. For a variety of reasons, however, the
      Dyna-Cam mechanical engine never became a commercial or financial success in
      spite of its many innovative and original designs. Dyna-Cam experienced a number
      of serious mechanical problems with the engine that were never satisfactorily
      resolved and, after exhausting financial resources attempting to commercialize
      it, Dyna-Cam eventually sold us the technology including patent rights, trade
      names and other assets.





We
      originally acquired the assets of Dyna−Cam with the intention to further
      develop, produce, and sell the Dyna-Cam mechanical engine primarily for aircraft
      and marine applications. When new management took over our company in June
      of
      2004, however, the issue arose as to whether we should spend further money
      on a
      technology that had gone nowhere in some sixty years. All significant patents
      had expired, which were mainly related to the sinusoid cam and roller bearing
      technology to convert linear motion (energy) from combustion into rotational
      motion (energy). To further complicate matters, in 2004, a dispute arose between
      our company, Dyna-Cam and its principals concerning our rights to the Dyna-Cam
      mechanical engine, which resulted in litigation and claims filed in the United
      States District Court, Central District of California. During this time, we
      abandoned our plans to utilize the engine as originally designed, and instead
      focused our attention on a digital engine with technologies that incorporated
      significantly enhanced performance characteristics and new design features.
      We
      were approached by the President of Tactronics, Inc., a military contracting
      firm, with a request to develop an engine that possessed two vital
      characteristics: (1) it must be a multi-fuel engine that does not need gasoline,
      and (2) it must be highly energy efficient and must consume no more than 0.26
      lb
      of fuel per horse-power per hour (Brake Specific Fuel Consumption). Other
      criteria such as high torque, high horsepower and lightweight design would
      all
      be advantageous features as well.





The
      President of Tactronics was convinced that the basic concept of the Dyna-Cam
      engine could be modernized, upgraded, re-engineered and converted into the
      much
      sought after multi-fuel engine for military needs. He was so convinced that
      his
      firm could carry out this “extreme make-over” that he was willing to take on the
      modernization program. Tactronics thereafter created a subsidiary known as
      Adaptive Propulsion Systems, LLC (“Adaptive”), and we entered into a joint
      venture agreement (“Agreement”) with Adaptive to develop the “Axial Vector
      digital


3
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          of Contents***


engine.”
      Under the terms of the Agreement, Adaptive agreed to utilize its expertise
      to
      develop the engine; however, we automatically acquired all rights to any
      patentable and proprietary technology as well as the know-how that emerges.
      The
      term of this agreement is 20 years unless revised by joint agreement of the
      parties. The Agreement further grants Adaptive the exclusive right to sell
      the
      Axial Vector digital engine to the United States military and all militaries
      of
      NATO countries. The Agreement was later amended to expand the exclusive right
      granted to Adaptive to include the military of the United Arab Emirates and
      the
      GCC. Adaptive will be obligated to pay us a royalty of 20% of the gross sales.
      Conversely, for all other militaries and all commercial non-military sales
      of
      internal combustion engines we make that utilize the Axial Vector design, we
      are
      obligated to pay Adaptive a royalty of 5% of gross sales.





**Our
      Engines**





***Dyna-Cam
      Mechanical Engine vs. Axial Vector Digital Engine***





A
      number
      of substantial improvements and changes took place in the evolutionary path
      from
      the “old” Dyna-Cam mechanical engine to the new Axial Vector digital engine. The
      engine has redesigned electronics, valve systems, ignition systems, body design,
      cooling system design, combustion system, and numerous other changes. These
      modifications were made to affect the efficiency of the engine and operating
      characteristics. Ultimately, our new “Axial Vector digital engine” does not rely
      upon any technology purchased from Dyna-Cam. Set forth below is a table that
      summarizes the major improvements and differences between our two basic engines.





**Dyna-Cam
                Mechanical Engine**
            **A****xial
                Vector Digital Engine**Gasoline
                Fueled
            Diesel,
                JP5, LP8, kerosene, bio-diesel, alcohol, propane, natural gasSpark
                plugs
            Compression
                ignitionCarburetor
            Fuel
                injectionIntake
                and exhaust valves open and close by overhead valve cam
                drive
            Intake
                & exhaust valves open and close by rotating cam and trunions - patent
                pendingNaturally
                aspirated
            TurbochargedDual
                ignition system with coil, distributor and rotor
            No
                ignition systemWater
                cooled
            Either
                air or water cooledNo
                electronic control
            Extensive
                electronic control systems, including:
              §Full
                Authority Digital Control (FADEC);
              §Engine
                Control Unit (ECU);
              §Satellite
                communication (SatCom) system;
              §Remote
                monitoring and diagnostics






4
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Burn
                efficiency 33%
            Burn
                efficiency 43.5%Brake
                Specific Fuel Consumption (BSFC): 0.43 lb/HPh
            Brake
                Specific Fuel Consumption (BSFC): 0.26 lb/HPhSingle
                piece crank shaft
            Two
                piece crank shaftNo
                special lubrication system
            Trombone
                oiling system for piston roller lubrication - patent
                pending12
                cylinders, 6 double ended pistons
            8
                cylinders, 4 double-ended pistons200
                HP
            352
                HP





The
      major
      difference between the two engines today is related to the fuel. One is
      gasoline, and the other is diesel. The other immediately apparent difference
      between the two engines is that one has essentially no electronic features,
      while the other is essentially digitally controlled through a sophisticated
      network of sensors and controllers.





***Axial
      Vector Digital Engine (The “Workhorse 7.1” Engine)***





We
      have a
      number of different prototypes in the design stage in the family of Axial Vector
      digital engines, but one is completed and in the testing phase. Adaptive has
      completed the development of the Axial Vector “Workhorse 7.1” engine for our
      prototypical 200 kW Axial Flux generator. The engine was started and produced
      power for the first time at a third-party Detroit automotive engineering firm
      on
      September 14, 2006. We anticipate commencing beta testing on our prototypical
      generator initially at the Adaptive facilities in approximately early November
      2006. Thereafter, we intend to conduct beta testing at three different global
      locations with varying climates and elevations commencing for a period of 4,000
      hours (5.5 months) to validate the 40,000-hour design of mean-time-between-major
      overhauls. We have planned for testing sites in Panama, New Zealand, and the
      United States. Negotiations are underway for the terms of operation of those
      beta test sites, and some sites have been secured as noted later in this
      document. The beta test sites will be used to test the engine’s power generation
      capabilities, performance and fuel usage, as well as to determine its cost
      and
      reliability.





**Applications
      for Our Axial Vector Digital Engine**





A
      prominent characteristic of our Axial Vector digital engine is that it is
      linearly scalable and thus easy to design and manufacture into different sizes,
      making it relatively easy to produce engines specifically tailored to a required
      application or industrial need. The primary application for our engine is to
      produce 7.5, 15, 25, 50, 100, 200 and 1000 kW generator sets or “GENSETS,” which
      are described more fully below. Intermediate kW capacities between 200 and
      1000
      are available in increments of 200 kW by “ganging” a plurality of GENSETs
      through a bus bar system. The engines to drive the generators will be 352,
      90
      and 25 HP.





With
      our
      Axial Vector digital engine design we plan to capitalize on two different means
      of vehicular propulsion. One is a standard throttle response engine with a
      mechanical drive shaft to transfer power the wheels. The second approach
      utilizes a constant speed engine generating electricity - such as we use in
      our
      GENSET - that produces electric power to turn “wheel motors”


5
 ***Table
          of Contents***


i.e.
      electric motors that are an integral part of each wheel rim. We refer to this
      approach as the “diesel-electric power train” system. The constant speed of the
      diesel engine running at its most efficient engery “sweet spot” produces the
      most efficient conversion of fuel to electricity. The electricity is distributed
      by cables to the electric wheel motors to propel the vehicle. Any excess
      electrical energy is stored in a bank of sophisticated high in-rush out-rush
      batteries for use when need such as going up hills or pulling away from a stop.
      The wheel motors would draw upon power from the batteries whenever demand
      exceeded energy supplied by the diesel “GENSET”. Likewise during periods of
      excess electrical energy production - such as going downhill - the excess energy
      produced by the vehicle moving downhill would be converted to electricity by
      reversing the faction of the electric wheel motors and the electricity produced
      in this mode would be stored in the battery until called upon to share a heavy
      power demand. Vehicles when braking can automatically convert the electric
      wheel
      motor to an electric brake by using the energy required to turn generator to
      slow down the vehicle and recapture power to the battery that would otherwise
      be
      lost in brake-pad friction and heat. The same principle of using
“generator-brakes” or “energy recovery units” to generate energy rather than
      creating friction and heat can be put to use in devises that lift and lower
      loads. Our constant speed engine with electrical cable eliminates the need
      for
      transmission and drive shafts. This in turn allows for a slick, aerodynamic
      underside with reduced drag and better fuel economy vehicle





**Re-Emergence
      of the Dyna-Cam Mechanical Engine**





On
      May
      16, 2006, we settled the lawsuit with Dyna-Cam and its principals and reaffirmed
      our right to the assets we purchased in 2003, including the original design
      to
      the Dyna-Cam mechanical engine. We did not pay anything to Dyna-Cam or its
      principals in connection with the settlement. The lawsuit involving Dyna-Cam
      should have no adverse consequences to our company going forward.





Due
      to
      this recent development, management has decided to upgrade and potentially
      market the Dyna-Cam mechanical engine. Based on the engineering and scientific
      understanding gained during the developmental work in the Axial Vector digital
      engine, the problems with the Dyna-Cam mechanical engine became increasingly
      evident. We decided in conjunction with Adaptive to revitalize the original
      Dyna-Cam mechanical engine for possible production. Improving the fuel injection
      system to provide a proper air-fuel ratio would solve many of the problems
      witnessed over the years such as overheating, vibration, and variable
      compression in the cylinders. A problem with lubrication has been identified
      and
      solved. With the resolution of these problems, the Dyna-Cam mechanical engine
      will enter into production since it has a very respectable weight to HP/torque
      ratio, though less so than our Axial Vector digital engine. The Dyna-Cam
      mechanical engine will have an interesting market niche where gasoline is not
      viewed as negative and where less electronic sophistication is not a concern
      or
      requirement. The Dyna-Cam mechanical engine is also linearly scalable. This
      will
      allow us to manufacture and meet any engine size that might be required by
      industry and consumer applications.





**Development
      of Our** **Electric
      Generator and Electric Motor**





Early
      in
      our relationship with Adaptive, we contemplated that Adaptive would focus on
      engine development for the broad needs of propulsion applications by addressing
      military, while we


6
 ***Table
          of Contents***


would
      concentrate on several models of generator sets, or “GENSETS.” We use the term
      GENSETS to describe all models and sizes of our integrated engines and our
      Axial
      Flux generators we intend to develop and manufacture. With that vision, we
      deliberately selected power generation for the first application of our engine.
      We could prove our technology without facing the barriers of entry that the
      automotive sector was likely to erect. Initially, we had conceived of
      integrating an existing generator into our engine. We soon realized, however,
      that the engine, generator, and control system would need to be fully integrated
      to give us a leg up in the market.





We
      had
      the good fortune of discovering Mr. Oyvin Haugan who had worked with companies
      such as Onan, Cummins, John Deere, and Caterpillar in connection with their
      generator divisions. Motivated by years of experience, Mr. Haugan developed
      ideas of how to improve generators that would use rare-earth permanent magnets,
      that would be “coreless” and would have an Axial Flux design that would not only
      act as a generator, but would also act as an electric motor. The term “Axial
      Flux” refers to a type of generator where the magnets are mounted on disks and
      the flux between them is parallel to the axis of the shaft. This is unlike
      conventional generators whose flux is radial across the air gap. Mr. Haugan
      soon
      joined us and was tasked with the design of a high efficiency generator to
      be
      fully integrated and harmonize with our engine and the electronic control system
      that integrates the engine function and the generator output.





With
      Mr.
      Haugan’s help, we soon developed a core patent of the generator motor
      application. The benefits of this axial flux generator/motor include a greater
      power density or more kilowatts per pound of generator. It is lighter in weight,
      smaller in size, and there is no current ‘in-rush’ on start-up because of the
      permanent magnates that are used in the generator unlike induction motors,
      which
      need electricity to generate a magnetic field in order to startup. The power
      factor is at or better than 0.98 in our system compared to the 0.75 to 0.92
      efficiencies of an induction motor.





We
      intend
      to build several models of generator sets (GENSETs) that utilize our Axial
      Vector digital engine, and eventually, our Dyna-Cam mechanical engine. We are
      seeking to develop a generator with a high power density Axial Flux design
      that
      has one-third of the volume and half the weight of the average generator. To
      further this endeavor, we entered into an agreement with Adaptive to assist
      us
      in the design, development, and manufacture of a family of seven GENSETS ranging
      from 7.5 kilowatt to 1 megawatt, contingent upon our ability to secure
      financing. On April 25, 2005, we completed a Financing Agreement in the amount
      of $4,000,000 with Alliance Capital Management to satisfy the contingency set
      forth in our agreement with Adaptive. There are no related party relationships
      with Alliance Capital Management. We paid Adaptive $3,171,000 to complete the
      development of the engines for the proposed GENSET product line.





Because
      we decided to develop and utilize the more efficient Axial Flux generator in
      our
      GENSET rather than conventional, off-the-shelf generators integrated into our
      GENSET, Adaptive required an additional sum for these upgraded features. Thus,
      on December 5, 2005, we entered into a subsequent agreement with Adaptive to
      pay
      them $668,160.00 in six monthly installments of $111,360.00. The first payment
      was due and paid in February 2006. We


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eventually
      paid our March 2006 payment, although not on time. The April 2006 payment was
      due and not yet paid in full as of June 30, 2006. We are working out an
      arrangement with Adaptive to remedy the failure to pay in the next installment.
      We have since modified this agreement and we are paying a minimum of $25,000.00
      per week. To date, we have paid $454,862.70 satisfying four of the six payments
      with the remaining balance, $213,297.30 to be paid as agreed. It is anticipated
      that there will be additional costs for off-site performance evaluation,
      operating costs and other data collection on the GENSET. This includes $400,000
      for the purchase of parts and equipment. The setup and decommissioning cost
      is
      $28,900, and monthly rental at the testing facility for the generator is $44,000
      per month for two months.





Under
      our
      Agreement, Adaptive can utilize its expertise to modify the power generator;
      however, we will have all rights to any patentable or proprietary technology
      that emerges. Adaptive will be obligated to pay us a royalty of 20% of the
      gross
      sales to the military licenses it currently holds. Conversely, for all
      commercial nonmilitary sales of power generator and /or GENSETS made utilizing
      our engine and generator design, we will pay Adaptive a royalty of 5% of gross
      sales. The payments to Adaptive are made in cash and made pursuant to a payment
      schedule. The term of this agreement with Adaptive is 20 years unless revised
      by
      joint agreement of the parties.





**Applications
      for Our Generators and Motors**





The
      high
      efficiency, high-power density coreless Axial Flux generator opens the door
      to
      all forms of propulsion for land, air, water, rail, and off-road vehicles
      whether direct mechanical drive, or electrical drive or hybrid diesel-electric
      power train systems. The generator will be used in conjunction with the Axial
      Vector digital engine, such as the Workhorse 7.1, to create an efficient source
      of prime power, distributed power, standby power, and portable power.





The
      electric motor will be used in a wide variety of applications including high
      efficiency compressor motors for refrigerators and air conditioning systems.
      There is an estimated 500,000 electric motors sold annually in the USA. Our
      motors, with their high efficiency and small size, will be increasingly
      attractive and sought after for power consumption reductions mandated by the
      U.S. Department of Energy (DOE) in a wide range of applications including home
      appliances and electric motors. Reported studies by the DOE indicate that
      electric motors consume almost 60% of all the electrical power generated in
      the
      US. Electrical motors account for 75% of industrial consumption of electrical
      power. Refrigeration for homes and offices alone consumes nearly 10% of the
      world’s energy. Electric motors powering the HVAC (heating, ventilation and air
      conditioning) systems in commercial buildings account for approximately 50%
      of
      the building’s total electric costs.





The
      use
      of electric energy by electric motors and appliances are roughly similar around
      the world. In fact, there is an exploding power demand in countries such as
      India, China, and many other countries in Southeast Asia and Latin America.
      We
      see our high efficiency motor playing a growing and important role in meeting
      these growing demands for efficient motors. We also see a concurrent demand
      for
      increased power production (electrification) in many countries in which our
      GENSET will be able to meet the growing demand for prime power, distributed
      power, standby power, and portable power.


8
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China
      provides an excellent market opportunity for our motor and generator
      technologies. More than half of China’s electrical usage is to run electric
      motors. China presently produces more that 40 GW of motors annually, of which
      nearly 90 percent are 0.55 to 200 kW three-phase induction motors. As China's
      economy and electric power use continue to grow, motor sales can be expected
      to
      also increase. Motor systems in China are generally much less efficient than
      systems in the U.S. and other developed countries, and thus there are
      substantial opportunities for foreign firms to introduce efficient motor
      technologies into the Chinese market. The typical four-pole 10 hp motor, the
      efficiency at full load is only about 87 percent compared to our motors at
      ~98%.





Electricity
      prices are still quite low in China (a typical industrial customer pays $0.025
      to 0.05 per kWh), but in the economically prosperous coastal areas electricity
      prices are rising substantially (as local governments turn to private power
      suppliers in order to avert power shortages) and interest in saving electricity
      is rising. There is also government activity underway intended to develop
      markets for higher efficiency products, and the large multi-lateral development
      banks are actively working to finance energy efficiency projects along with
      their support of power development projects. The privatization of electric
      power
      and the removal of governmental subsidies mean a very strong interest in high
      efficiency systems such as ours. Since many Chinese enterprises have cash flow
      problems and do not pay their bills, we will need to develop a business model
      and/or seek out local partner(s) that will help address and mitigate these
      issues.





*Appliance
      Magazine* indicated in a recent article that global large appliance sales over the next
      four years will increase for washers by more than 7.5% (51.8 to 55.7 million
      units). In addition, refrigerators are expected to increase from 55 to 62.5
      million units, an increase of 13.6%. Sales of clothes dryers (10.3% growth),
      dishwashers (13% growth), vacuum cleaners (3% growth) and microwave ovens (6%
      growth) are also expected to grow by the percentages indicated. Year-to-date
      (YTD - July ’06) USA sales of refrigeration and air conditioning products
      reached 7.17 million and 14.2 million units respectively; YTD - July ’06 sales
      of home laundry (automatic washers and dries) reached 9.6 million units. These
      markets can all be serviced with our small motors. It is an immense and growing
      market.





**Product
      Testing and Validation**





***Initial
      Testing***





It
      should
      be noted at the onset that creating a GENSET is a massive effort. There are
      many
      interlocking and interdependent components whose functions must be perfectly
      orchestrated to produce the lowest priced power from a 40,000 hour mean time
      to
      major overhaul internal combustion technology. Testing an engine, its generator
      and the Generator Set (GENSET) and the sophisticated electronic systems for
      commercial applications is a serious and complex matter without shortcuts and
      should not be hurried. Delays and unexpected surprises are to be expected,
      and
      may affect the timeframes indicated for completion. We have already experienced
      some slippage in our optimistic time-line in the execution of the required
      testing. The delays have been caused by some minor modifications on our engine,
      delays in delivery of components by suppliers and some minor difficulties with
      some of the monitoring equipment that comes with


9
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the
      test
      cell. In spite of these obstacles, we hope to have fully functioning equipment
      at the Power Gen show in Orlando at the end of November 2006.





Our
      developmental testing can be broken into five sections, namely:




1.
            Subsystem
                testing


2.
            Engine
                Testing @ Independent Testing Lab


3.
            Generator
                Testing @ Independent Testing Lab


4.
            Generator
                Set Testing


5.
            Reliability
                and Homologation Testing





The
      main
      testing tasks for each section are identified as follows:





1.
            **Subsystem
                testing**consists of four main tests:


a)
            Injection
                system testing


b)
            Piston-roller
                / Cam interface


c)
            Generator
                coil resistance tests


d)
            Generator
                magnetic disk tests





2.
            **Engine
                Testing**at
                Independent Testing Lab


a) Overall
      Engine Operation (such as HP and torque over RPM range) b) Fuel
      System Evaluation c) Air
      System Evaluation d) Cylinder
      Blowby Measurements e) Oil
      Consumption f) Heat
      Rejection g) Friction
      Measurement h) Calibration
      Mapping i) Exhaust
      Emissions





3.
            **Generator
                Testing**at
                Independent Testing Lab


a) No
      load
      test b) Load
      test c) Speed
      -
      Load test d) Controls
      testing e) Additional
      tests to examine critical performance parameters and some critical mechanical
      parameters for
      the           magnets,
      axial clearance, coils and gauss generated. f) Detailed GENSET
      testing will further include:


i)
            Functionally
                check, define and develop the operational characteristics of the
                generator


ii)
            Overall
                heat rate vs. rpm and load


iii)
            Vibration
                spectra for the overall GENSET


iv)
            Voltage
                vs. rpm vs. load for the axial flux
                generator


v)
            Temperature
                of the magnet at full load


vi)
            Efficiency
                of rectifier vs. temperature vs.
                load


viii)
            Engine
                temperature at full power and varying
                rpm


ix)
            Vibration
                spectra for the engine vs. power


x)
            Exhaust
                temperature vs. power


xi)
            Cooling
                system thermostat setting and the resultant
                effects


xii)
            Noise
                spectra


xiii)
            Alignment
                design




10
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4.
            **GENSET
                Testing**at
                Independent Testing Lab


a)
            Overall
                GENSET operation


b)
            System
                calibration


c)
            Efficiency


d)
            Noise
                emissions


e)
            During
                the early marriage period, the Control Systems must be verified for
                perfect functioning, especially the rectifier, DC bus and inverter
                - the
                heart of the system


f)
            The
                load sharing synchronization and the transfer panel that the client
                operators must monitor and control - this is where interface with
                the
                client occurs.




**5.**
            **GENSET
                Reliability**


a)
            Durability
                tests - 3 GENSETS proposed to be tested for 4,000 hours; durability
                design
                is 40,000 hours between major
                overhauls


b)
            Beta
                tests - 4 proposed Beta sites


c)
            Homologation
                tests


d)
            Need
                a UL Certification on the Inverter - a document of some 100 pages.
                (UL
                2200 is for the “Stationary Engine Generator Assemblies” and not just for
                the inverter. Preponderance of safety concerns are however with the
                inverter system.)





6.
            **Commercial
                Production Begins**





**Comments
      on Engine Testing**





The
      above
      testing program needs to be carried out in a well appointed and certified third
      party facility. We have selected an Independent Testing Lab in Detroit for
      the
      engine. Adaptive is working as quickly as it can, but often has to stand in
      line
      to get what it needs, especially when competing against rush orders from one
      of
      the “Big Three.” The Independent Testing Lab engine test cell is equipped with a
      dynamometer and has the capacity to fully monitor and record all engine
      parameters and performance.





The
      test
      results are also valuable in obtaining UL and EPA certification. We are required
      to pass the EPA 2007 Tier 3 Emission Levels. EPA is only interested in emissions
      during the “useful” life of the engine, which EPA considers to be 8,000 hours.
      Beyond 8,000 hours, an engine does not need to demonstrate conformance to
      original qualification standards. (Our Workhorse Engines have been designed
      for
      40,000 miles between major overhauls.) We need to provide EPA with various
      documents such as test plans and protocols and have the plans reviewed and
      approved by the agency before executing the tests.


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**Comments
      on Generator Testing**





We
      have
      selected a second Independent Testing Lab for the coreless permanent magnet
      Generator (and Motor) testing program. Generator testing will be done in a
      cascading fashion in a sequential and increasing complexity to the level of
      a
      complete systems testing. The Independent Testing Lab will set up a test cell
      utilizing an electric dynamometer to drive a 100 kW generator. The generator
      will be hooked up to a resistive load bank capable of 10 kW load steps up to
      110
      kW. The Independent Testing Lab will then perform a series of development tests
      specified by Adaptive and by us to functionally check, define and develop the
      operational characteristics of the generator including heat transfer tests
      and
      lubrication requirements.





We
      are
      trying to bring to life a generator with novel configuration. We are also
      developing the systems that go with the generator - rectifier, DC bus, inverter,
      DSP controls to assure delivery of power through the inverter.  For standby
      units, we are also working on transfer panel needs and those devices need to
      be
      tested as well.  We expect all these tests will conclude in November 2006,
      assuming there are no problems along the way.  Additionally, we need to
      prove the 15KW generator/Battery system.  We plan to run those tests at the
      end prior to durability testing.





Durability
      testing is a must. We plan to run the generator 400 total hours (1% of our
      product life goal consistent with a prime Gen-set of 40,000 hours). The
      generator life depends on maintaining stable axial clearance, running within
      the
      winding temperature limit of 100 o C
      max,
      maintaining rectifier and inverter junction temperatures below 85 o C
      and all
      mechanical and chemical elements that can deteriorate with time such as:
      varnishes, paper, epoxy, vibration, magnetic disk assemblies, clearance between
      magnets and coils and plate excitation. Durability testing must be performed
      to
      assure that the design along with manufacturing process lends itself to
      long-term durability.





Certification
      testing of the generator can take place at two levels: Generator certification
      testing and GENSET certification testing.  Generator certification testing
      as a stand alone can be done at the Independent Testing Lab but would need
      to be
      coordinated with UL or CE.  The majority of certification testing is safety
      related - failure of parts, fire, EMI and the like that result in safe shutdown.
       The Independent Testing Lab report dealing with durability will be
      submitted to substantiate ISO requirement of design meeting the intent.  We
      would require running the total system for 200 kW GENSET certification.
 The system testing will only be in terms of control requirements and
      safety functions.





***Beta
      Testing***





Beta
      site
      testing allows us to test under “real world” conditions with prospective
      clients, licensees or JV partners. The beta test sites will be used to test
      the
      Axial Vector digital engine’s power generation capabilities, performance and
      fuel usage, as well as to determine its cost and reliability. It provides
      real-time data under various climatic conditions and industrial settings. This
      approach allows us to create product awareness and product credibility in
      various regions of the world and provides a site for prospective clients or
      licensees to see our products in operation.





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Our
      initial beta test site will be located in Panama, with an existing power
      generating company. On June 27, 2006, we executed a Beta Test Site Agreement
      with Termica del Noreste, S.A. (“Ternor”), and will test our Axial Flux
      generator at the Saboga Power Plant for a period of not less than 3 months
      under
      the supervision of a joint Work Group consisting of personnel from both Axial
      Vector and Ternor. Under the agreement, Ternor will be responsible for providing
      the fuel to run the generator, and in return, will have the benefit of the
      power
      generation at no additional cost. We have chosen this location for its tropical,
      coastal, remote, and rural settings, and believe the harsh humidity and heat
      there will prove an excellent test for our generator.





A
      second
      Beta site outside the United States is in New Zealand where dairy farmer and
      sheep farmers have immense market opportunities for sales of dairy products
      and
      protein in China. The limit on growth for the farmers is the availability and
      access to electrical power in remote regions of the country to increase their
      productivity through irrigation, refrigeration and other electricity requiring
      farm and produce activity. We intend to evaluate the combustion of various
      fuels
      such as diesel, bio-diesels, alcohol, animal fat, and methane. Not only is
      it a
      large initial market with interested parties, but success with New Zealand
      will
      open the access to other rural based economies around the world for
      electrification.





On
      July
      21, 2006, we entered into an agreement titled Beta Test site Agreement ith
      Dynamic Engines Limited, a New Zealand company (“DEL”). Under the agreement, DEL
      will provide its facility in New Zealand as a beta test site for our Axial
      Flux
      generator product. For a test period of least three months, DEL will operate
      one
      of our Axial Flux electrical power generators at its facility under the
      supervision of a joint Work Group consisting of personnel from both Axial Vector
      and DEL. During the testing period, DEL will be responsible for fueling the
      test
      generator and will receive the benefit of the electrical power generated.





In
      both
      beta testing sites described above, we will be responsible for delivering and
      installing the Axial Flux Generator and for the cost of removing the test
      generator and returning it to the lab for analysis. We will also be responsible
      for training personnel in basic operation of the Axial Flux Generator. Ternor
      and DEL will be required to obtain any necessary government permits or licenses
      for operation of the generator and will be responsible for routine maintenance
      during the testing period.





**Our
      Marketing Plan**





We
      do not
      plan to build factories to produce engines, generators, motors, or electronic
      control systems. Rather we plan to allow others to produce our products through
      partnerships or licensing agreements.





***Licenses***





Once
      the
      testing and beta trials are complete and the product is available for sale,
      Adaptive will provide all of the capital, manufacturing facilities and labor
      required to build military grade engines using our Axial Vector digital engine
      design. Initial manufacturing of our Axial Vector digital engine and Axial
      Flux
      Generator (GENSET), described below, is planned for no later than December
      2006.
      In the event that the Axial Vector digital engine proves suitable for military
      and


13
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commercial
      use, we plan over the next twelve months to license our engine for a wide
      variety of applications presently performed by the conventional internal
      combustion engine. Specifically, we intend to license the manufacturing rights
      to our technology for specific applications in defined geographical
      areas.





On
      September 10, 2005, we entered into a memorandum of understanding (“MOU”) with
      Kirloskar Oil Engines Limited (“KOEL”), an Indian based manufacturer and
      engineering company. We are working toward the execution of a definite agreement
      with KOEL where we would grant KOEL the exclusive right to utilize our
      technology for non−automotive applications including tractor engines, loader
      engines, fork lift truck engines, and other farm and forestry applications.
      The
      execution of a definitive agreement is contingent upon completion of the parties
      due diligence which was anticipated to be occur in January 2006. The parties
      have extended the anticipated closing date of a definitive agreement to July
      2006 in order to provide the senior managers from KOEL with an opportunity
      to
      conduct additional due diligence at beta test sites where further product
      testing will be ongoing. This date was extended by written agreement of the
      parties to allow further negotiations of the terms of the license. Pursuant
      to
      the terms of the MOU, KOEL placed $1,000,000 into a segregated account which
      it
      controls and we have granted them a right of first refusal with respect to
      the
      right to utilize our technology for non−automotive applications including
      tractor engines, loader engines, fork lift truck engines, and other farm and
      forestry applications should the parties fail to executive a definitive
      agreement. We have been in ongoing discussions with KOEL as to the terms of
      a
      license for manufacture and sales. KOEL recently visited with us in Detroit,
      Michigan and their representatives were able to see the Workhorse 7.1 at the
      independent testing lab. We expect further discussions with them as test results
      become available.





***Joint
      Venture Agreements***





**Wiser-AVEC** ******





On
      April
      3, 2006, we entered into an agreement titled Joint Venture Agreement with Wiser
      of Ras Al Khaimah, a United Arab Emirates entity (“Wiser”), pursuant to which we
      have agreed to form with Wiser a joint venture entity named Wiser AVEC Power
      Corporation (“Wiser-AVEC”) to carry out the operations of a joint venture. We
      own forty-nine percent and Wiser owns fifty-one percent of the capital stock
      of
      Wiser-AVEC. Under the Joint Venture Agreement, and as consideration for the
      respective shares of the capital stock of Wiser-AVEC, we provided cash
      contributions of 73,500 UAE Dirhams (approximately US$20,013 ) and Wiser
      provided cash contributions of 76,500 UAE Dirhams (approximately US$20,830
      to
      finance Wiser-AVEC’s operations. Distributions of profits will be made, subject
      to an appropriate amount held in retention for Wiser-AVEC, on the basis of
      51%
      to Wiser and 49% to us.





The
      purpose of Wiser-AVEC is to engage in the distribution of Axial Vector engines,
      Axial Flux Generators, and Axial Vector  engine
      hydraulic and pneumatic pumps for non-military commercial applications in the
      countries of the Gulf Cooperation Council. These countries include Saudi Arabia,
      Kuwait, Bahrain, Qatar, the United Arab Emirates, and the Sultanate of
      Oman.


14
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Subsequent
      to the reporting period, on September 22, 2006, we notified Wiser that they
      are
      in material breach of the Joint Venture Agreement and explained our intent
      to
      cancel the agreement. The breach consisted of failure to provide the funding
      and
      in failing to proceed with their obligations under the agreement. A resolution
      of this notice has not yet been reached.





**Emirates
      Advance Investment**





On
      January 3, 2006, we entered into a Memorandum of Understanding (“MOU”) with
      Emirates Advance Investment (“EAI”). The purpose of the MOU was to outline the
      understanding of the parties concerning the establishment of a joint venture
      between EAI and us. However, EAI did not meet the time requirements to sign
      the
      propo sed
      joint
      venture agreement. We therefore withdrew the joint venture offer and EAI
      agreed.





***Distribution
      Agreements***





On
      July
      13, 2006, we entered into an agreement titled Distribution Agreement with
      Dynamic Engines Limited, a New Zealand company ("DEL"), pursuant to which DEL
      has become the exclusive distributor of our GENSETS product in the country
      of
      New Zealand for a period of twenty years. In exchange for the exclusive
      distribution rights, DEL has agreed to pay a licensing fee of $1,000 and to
      contribute and transfer to us certain application development work that has
      enhanced the value of our intellectual property.





The
      Agreement is renewable upon consent of the parties for additional terms of
      twenty years. Under the Agreement, DEL has the first right to negotiate for
      and
      purchase exclusive distribution rights for our other products and to negotiate
      for and purchase exclusive distribution rights to the additional territories
      of
      Australia, the Cook Islands, Tonga, Samoa Niue, and Fiji. In the event that
      DEL
      declines or is unable to meet the terms offered by us for these additional
      product and/or territorial distribution rights, we will be entitled to offer
      those rights to other parties.





In
      order
      to maintain its rights under the Agreement, DEL must annually purchase a minimum
      number of GENSETS to be determined and periodically reviewed by both parties.
      The Agreement requires us to exert reasonable efforts to supply DEL's
      requirements for the GENSETS. Under the Agreement, DEL is obligated to promote
      our products through product shows, advertising, a website presence, and
      showroom and/or product demonstration sites. DEL will be responsible for
      obtaining all licenses and permits necessary to sell our products in New
      Zealand.





**Impairment
      of Assets**





On
      August
      24, 2004, the company entered into an Assignment Agreement with International
      Equity Partners, S.A. (“IEP”). Under the Assignment Agreement, the company
      issued 25 million shares to IEP in exchange for an assignment from IEP of the
      contractual right to acquire a proprietary secured video conference software
      known as the “Transporter” software from Transporter, Inc. The terms of the
      purchase from Transporter, Inc. called for the company to issue one million
      shares to the owners of Transporter, Inc., Craig Della Penna and Daniel


15
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Werner,
      and to pay Transporter $1 million over the course of two years. The one million
      shares called for under the Transporter purchase agreement were issued to Della
      Penna and Werner on September 9, 2004. Subsequently, the company discovered
      that, unbeknownst to either the company or IEP, Mr. Della Penna and Mr. Werner
      had thoroughly misrepresented the Transporter software’s capabilities and degree
      of developmental maturity during the negotiations and discussions leading up
      to
      the purchase agreement and that the company would, in all likelihood, be unable
      to profitably develop the software. The company sued Transporter, Della Penna,
      and Werner for rescission of the purchase agreement and for a return of the
      1
      million shares issued to these individuals. The company reached a settlement
      with the duly-appointed bankruptcy trustee for Transporter, Inc. under which
      the
      purchase agreement was rescinded, ownership the Transporter software was
      returned to the bankruptcy estate of Transporter, and the company was released
      from further responsibility under the purchase contract. This agreement was
      approved by the bankruptcy court and became effective on May 22, 2006.





The
      company continues to pursue litigation against Della Penna and Werner seeking
      a
      return of the 1 million shares received by these individuals under the
      Transporter purchase agreement. On the advice of litigation counsel, special
      independent counsel, and a Special Litigation Committee duly appointed by the
      board of directors, the company has determined not to pursue the return of
      the
      shares issued to IEP under the terms of the Assignment Agreement.





**Competition**





There
      is
      significant competition in the engine and generator manufacturing industry.
      Our
      management in unaware of any current engine and generator manufactures that
      incorporate the axial vector design into its engines or generators.





**Patents
      and Intellectual Property**





Trademarks





We
      currently have trademark applications pending with the United States Patent
      and
      Trademark Office and the Canadian Intellectual Property Office for protection
      of
      the mark “AV” and “AVE.”





Patents





We
      have
      filed patents on the technologies underlying our Axial Vector digital engine.
      Additionally, certain design patents have been registered in jurisdictions
      outside of the United States and the ongoing work of our patent attorneys
      involves protection of proprietary inventions and the patent ability thereof.
      We
      have ten patents that have either been filed or are in the process of being
      filed. We hold two issued patents and have various patent applications pending
      which cover one or more aspects of the current version of the axial vector
      engine or predecessor models.





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**Existing
      and Probable Governmental Regulation**




We
      are
      not subject to any significant or material federal or state government
      regulation in connection with the research, development, and licensing of
      engines that use the Axial Vector design.





**Compliance
      with Environmental Laws**





We
      did
      not incur any costs in connection with the compliance with any federal, state,
      or local environmental laws.





**Employees**





We
      currently have 4 full-time employees in addition to our officers. Our employees
      are not represented by labor unions or collective bargaining agreements.





During
      the fiscal year, we have entered into a number of consulting agreements to
      assist management with investor communications and public relations, engineering
      consulting in connection with our technology, knowledge in the power generation
      industry, general management and other services. We believe that consulting
      relationships are invaluable to our company’s progress. We acquire these needed
      services in exchange for cash, stock and warrants in our company.





**Item
      2. Description of Property**




Currently,
      we do not own any real estate. We are leasing our executive offices at One
      World
      Trade Center, 121 S.W. Salmon Street, Portland, OR 97204. We pay monthly base
      rent for this property in the amount of $320. We have additional space at 1607
      NE 41 st Ave.
      Portland, OR 97232 where we pay monthly rent for this property in the amount
      of
      $950. In November 2006, we plan to consolidate and move to our new
      offices.





**Item
      3. Legal Proceedings**





Other
      than as set forth below, there have been no material developments in the ongoing
      legal proceedings previously reported in which we are a party.




*Axial
      Vector Engine Corporation vs. Patricia Wilks and Dennis
      Palmer*




Axial
      Vector Engine Corporation vs. Patricia Wilks and Dennis Palmer was filed in
      United States District Court, Central District of California, Case No. CV04-8790
      (CBM). This is an action brought by Axial Vector Engine against Patricia Wilks
      and Dennis Palmer (the “Defendants”) to restrain Defendants from using the name
      of Dyna Cam, which we purchased from them, and to shut down their website,
      among
      other relief requested.





On
      May
      16, 2006, we entered into a Confidential Settlement Agreement and Mutual Release
      (the “Settlement Agreement”) with the Defendants. The Settlement Agreement
      provides for a mutual


17
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reconciliation
      of all disputes between the parties and the end of litigation. Under the
      Settlement Agreement, the Defendants acknowledged and agreed that on or about
      June 30, 2003 we acquired all right, title, assets, and interest to Dyna-Cam
      Engine Corporation, including related web sites and domain names (i.e.,
      www.dynacam.com). Defendants also agreed that they would cease and desist from
      sending out emails concerning us and those acting on its behalf. Further under
      the Settlement Agreement, the parties agreed to permanently maintain a November
      17, 2005 preliminary injunction restraining Defendants from:





1.
      displaying, controlling, and/or operating the website or any other domain
      containing the words "dyna-cam," dynacam," "Dyna-Cam," "Dynacam";


2.
      exhibiting any display, product, and advertisement bearing the mark Dyna-Cam,
      "Dyna-Cam Engine," or "Dyna-Cam Engine Corporation"; and


3.
      making, using, selling, marketing, and offering for sale, and conducting
      business certain products using the name(s) and mark(s) containing the words
      "dyna-cam," dynacam," "Dyna-Cam," "Dynacam."





In
      addition, the parties entered into a mutual release of claims, agreed to
      extinguish the pending litigation, bear their respective fees and costs, and
      provide for liquidated damages in the event of a breach of the Settlement
      Agreement.





On
      June
      12, 2006, the Court signed a stipulation among the parties to convert the
      November 17, 2005 preliminary injunction into a permanent injunction.
      Thereafter, on June 22, 2006, the Court signed a stipulation among the parties
      to dismiss the action. This matter was handled by Cathy Pham, Wellman &
Warren, 24411 Ridge Route, Suite 200, Laguna Hills, CA 92653, telephone
      949-580-3737, fax 949-580-3738.




*Richard
      Powers, Raymond B Wedel, Jr. and Alan Cohen vs. Trans Max Technologies, Inc.,
      Aero Marine Engine, Inc., Tactronics, Permatune Electronics, Inc., and Bogner
      Industries, Inc.*




Richard
      Powers, Raymond B Wedel, Jr. and Alan Cohen vs. Trans Max Technologies, Inc.,
      Aero Marine Engine, Inc., Tactronics, Permatune Electronics, Inc., and Bogner
      Industries, Inc. was filed in the Supreme Court of the State of New York, Index
      No. 05-10880. This action was filed by three former alleged employees seeking
      unpaid wages and future wages. This case is currently in discovery mode, where
      we are seeking proof from the Plaintiffs as to their employment and any
      employment agreements. As of June 30, 2006, this action is still pending in
      the
      New York Superior Court. This action has been stayed by the bankruptcy
      proceeding of a co-defendant. This matter is being handled by Michael T.
      Colvecchio, Lewis Johs Avallone Aviles & Kaufman, 425 Broad Hollow Road,
      Melville, NY 11747, telephone 631-755-0101, fax 631-755-0117.




*Aero
      Marine Engine, Inc. vs. Transporter, Inc. Craig Della Penna and Daniel H.
      Warner*




Aero
      Marine Engine, Inc. vs. Transporter, Inc. Craig Della Penna and Daniel H. Warner
      was filed in United States District Court, District of Nevada, Case No.
      CV-S-05-0664-RCJ-LRL. We filed this action against Transporter, Inc. and its
      principals, Daniel Werner and Craig Della Penna. The suit seeks to rescind
      an
      August 2004 agreement under which we acquired the exclusive rights to certain
      video conference technology owned by Transporter, Inc. We contend that Mr.
      Della


18
 ***Table
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Penna
      and
      Mr. Werner intentionally misrepresented the status and capabilities of the
      technology being acquired under the agreement. Shortly after the suit was filed,
      Mr. Della Penna and Mr. Werner placed Transporter into chapter 7 bankruptcy
      proceedings in the U.S. Bankruptcy Court for the District of Oregon, Case No.
      05-36661-elp7.





On
      or
      about January 15, 2006, we and Michael A. Grassmueck, the duly-appointed chapter
      7 trustee for Transporter, entered into an agreement entitled “Agreement For
      Compromise and Settlement of Dispute and Assignment of Claims and Causes of
      Action” (hereinafter, the “Transporter Agreement”). Pursuant to the Transporter
      Agreement, the purchase agreement between us and Transporter has been rescinded
      by mutual consent between Transporter and Axial Vector. In addition, the
      Transporter Agreement provides that all claims and causes of action that
      Transporter and Transporter’s bankruptcy estate may have against Della Penna and
      Werner are assigned, transferred, and set over to Axial Vector.





Following
      bankruptcy court approval of the Transporter Agreement and the district court’s
      denial of Della Penna and Werner’s motion to dismiss the district court action,
      we filed our First Amended Complaint against Della Penna and Werner on July
      24,
      2006. Among other things, the First Amended Complaint seeks damages from Della
      Penna and Werner in the amount of $3 million and cancellation and/or return
      to
      our company of certain stock issued to Della Penna and Werner under the
      rescinded purchase agreement with Transporter. On August 14, 2006, Della Penna
      and Werner filed their Answer to our First Amended Complaint together with
      various counterclaims against us and a purported derivative complaint against
      the our company’s current and former officers and directors. Management believes
      that the derivative complaint and the counterclaims lack merit and will present
      a motion to dismiss them in the immediate future. Discovery in the case remains
      open and is continuing at this time.





We
      intend
      to vigorously defend Della Penna and Werner’s counterclaims and purported
      derivative claims and to continue to aggressively pursue the cancellation or
      return of their stock in our company. The counterclaims seek damages in excess
      of $77 million plus $100 million in punitive damages. Due to the early stage
      of
      the proceedings, we are unable to determine the likelihood of an adverse result
      or to quantify the risk to our company to any reasonable degree of certainty.
      This matter is being handled by John J. Laxague (Joe) at Cane Clark, LLP, 3273
      E. Warm Springs, Rd., Las Vegas, NV 89120, telephone 702-312-6255, fax
      702-944-7100.




*Focus
      Partners vs. Axial Vector Engine Corporations*




Focus
      Partners vs. Axial Vector Engine Corporations was filed on May 2, 2005 in the
      Supreme Court of the State of New York, County of New York, Index No. 601897/05.
      This matter was brought by a trade creditor, pursuant to an agreement that
      we
      entered into. This matter was settled through a third party purchasing the
      stock
      from Focus Partners for the sum of $45,000.00, resulting in a dismissal of
      the
      action and no monies paid nor further stock issued by Axial Vector to the
      Plaintiff. This matter was handled by Michael T. Colvecchio, Lewis Johs Avallone
      Aviles & Kaufman, 425 Broad Hollow Road, Melville, NY 11747, telephone
      631-755-0101, fax 631-755-0117.


19
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          of Contents***




*In
      the High Court of New Zealand, Auckland Registry, Matter of Section 37AC of
      the
      Securities Act 1978 in the Matter of Carol Ann Fagan and Robin Christopher
      Fagan
      and Charles Hamish McDonald; Robert James Franklin and Carolyn Jane Franklin
      and
      Cornwall Trustees Limited; Kevin Douglas Franklin and Janene Margaret Franklin
      and Robert James Franklin; Probitas Limited; Robin John Briggs and Rosemary
      Patricia Briggs; Graham John Briggs and Christopher James Briggs; Paul Younger
      and Jean Engebrikt Anne Younger; and Michael Paul Younger and Cindy May Younger
      and KCA Trustees Limited.*




On
      April
      20, 2005, following an equity offering that we conducted in New Zealand, we
      were
      contacted by the New Zealand securities authorities. We were informed that
      registration might be necessary in connection with our offering unless the
      investors were considered “accredited” under New Zealand law. When we
      investigated the matter, we learned that investors needed to validate their
      shares with the High Court of New Zealand to retain their stock. Otherwise,
      we
      were required to return proceeds acquired from the investors in the offering.





In
      order
      to resolve the matter, eight applicants filed in the High Court of New Zealand
      Auckland Registry, CIV-2005-404-7394 to validate their shares. (One shareholder
      requested a return of his subscription funds, and we did so with interest as
      advised by New Zealand securities counsel.) The eight applicants sought relief
      orders, under s 37AC(1)(a) and (b) of the Securities Act 1978, against the
      application of s 37 of that Act to certain allotments of securities in our
      company. Section 37 prohibits, and makes invalid, the allotment of a security
      where the security had been offered to the public and, at the time of the
      subscription for the security, there was no registered prospectus relating
      to
      the security. There were concerns that certain securities in our company had
      been allotted to New Zealand investors without a registered prospectus, in
      breach of s 37.





Under
      s
      37AC of the Act various persons, including the purchasers of the securities,
      can
      apply for relief orders against the application of s 37. The effect of a relief
      order is, essentially, to validate an allotment that s 37 would otherwise make
      invalid.





The
      eight
      applicants were purchasers of our shares who decided, upon becoming aware of
      the
      concerns that s 37 might have been breached in relation to the allotments made
      to them, to apply for relief orders. The application was made on December 22,
      2005. Under s 37AC it is mandatory for the court to grant relief orders when
      such orders are sought by the purchasers of the securities. Accordingly, the
      court granted the relief orders on March 6, 2006 without giving substantive
      reasons, other than that it was "satisfied that it is appropriate to do so."
      In
      granting the orders, the court did not consider (it being unnecessary to do
      so)
      whether in fact there had been a breach of s 37 of the Securities Act.





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





No
      matters have been submitted to our security holders for a vote, through the
      solicitation of proxies or otherwise, during the fourth quarter of the fiscal
      year ended June 30, 2006.





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**PART
      II**





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





**Market
      Information**





Our
      common stock is currently quoted on the OTC Bulletin Board (“OTCBB”), which is
      sponsored by the NASD. The OTCBB is a network of security dealers who buy and
      sell stock. The dealers are connected by a computer network that provides
      information on current "bids" and "asks", as well as volume information. Our
      shares are quoted on the OTCBB under the symbol “AXVC.”





The
      following table sets forth the range of high and low bid quotations for our
      common stock for each of the periods indicated as reported by the OTCBB. These
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commission and may not necessarily represent actual transactions.





Fiscal
                Year Ending June 30, 2006Quarter
                Ended
            
            High
                $
            
            Low
                $June
                30, 2006
            
            3.75
            
            2.1March
                31, 2006
            
            4.99
            
            2.65December
                31, 2005
            
            3.9
            
            2.9September
                30, 2005
            
            5
            
            2.3Fiscal
                Year Ended June 30, 2005Quarter
                Ended
            
            High
                $
            
            Low
                $June
                30, 2005
            
            6.62
            
            1.80March
                31, 2005
            
            2.35
            
            0.65December
                31, 2004
            
            5.00
            
            0.60September
                30, 2004
            
            6.25
            
            0.11





**Holders
      of Our Common Stock**





As
      of
      June 30, 2006, we had approximately two hundred and twenty-five (225) holders
      of
      record of our common stock. Several other stockholders hold shares in street
      name.





**Dividends**





There
      are
      no restrictions in our articles of incorporation or bylaws that
      restrict us from
      declaring dividends. The Nevada Revised Statutes, however, do prohibit us from
      declaring dividends where, after giving effect to the distribution of the
      dividend:





1.
            We
                would not be able to pay our debts as they become due in the usual
                course
                of business; or





2.
            Our
                total assets would be less than the sum of our total liabilities,
                plus the
                amount that would be needed to satisfy the rights of shareholders
                who have
                preferential rights superior to those receiving the
                distribution.






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**Recent
      Sales of Unregistered Securities**





The
      information set forth below relates to our issuances of securities without
      registration under the Securities Act during the fiscal year ended June 30,
      2006.





On
      April
      25, 2005, we completed a Financing Agreement in the amount of $4,000,000 with
      Alliance Capital Management. Under the terms of this agreement, we will receive
      $400,000 dollars each month for ten months commencing in May of 2005. The
      monthly payments are convertible in common stock and the amount of shares issued
      is determined based on 75% of the previous ten day trading average of the
      company prior to the issuance. Pursuant to the terms of the Financing Agreement
      described above, we issued the following shares of common stock to Alliance
      Capital Management: (a) 149,254 shares on July 28, 2005; (b) 201,005 shares
      on
      August 9, 2005; (c) 189,983 shares on September 7, 2005; (d) 286,792 shares
      of
      common stock on October 20, 2005; (e) 159,363 shares of common stock on November
      16, 2005; (f) 254,777 shares of common stock on December 21, 2005; (g) 65,200
      shares of common stock on February 13, 2006; and (h) 373,724 shares of common
      stock on June 15, 2006. Related to Financing Agreement, Alliance Capital
      Management received, as additional consideration, one (1) warrant to purchase
      two million shares of common stock at a fixed rate of $4.00 per share for a
      period of two years. These issuances are exempt pursuant to Regulation S of
      the
      Securities Act. The purchaser represented to us that he was a non-US person
      as
      defined in Regulation S. We did not engage in a distribution of this offering
      in
      the United States. The purchaser represented his intention to acquire the
      securities for investment only and not with a view toward distribution. We
      requested that our stock transfer agent affix the appropriate restrictive legend
      to the stock certificate issued in accordance with Regulation S. The investor
      was given adequate access to sufficient information about us to make an informed
      investment decision. These securities were not sold through an underwriter
      and
      accordingly, there were no underwriting discounts or commissions involved.
      No
      registration rights were granted to the purchaser.





On
      July
      22, 2005, we entered into a Management Consulting Agreement (the “MCA”) with
      Twilight Bay L.L.C. (“Twilight Bay”) whereby Twilight Bay agreed to provide
      administrative and marketing consulting services, including, but not limited
      to
      a positioning statement, corporate profile, public relations, and logos and
      designs in exchange for the issuance of 1,465,000 shares of our common stock.
      These shares were issued pursuant to Section 4(2) of the Securities Act. We
      did
      not engage in any general solicitation or advertising. We issued the stock
      certificates and affixed the appropriate legends to the restricted stock.
      Subsequent to the reporting period on November 1, 2005, the parties agreed
      to
      terminate the MCA and the shares issued to Twilight Bay were returned for
      cancellation.





On
      October 20, 2005, we entered into a business consulting agreement (“consulting
      agreement”) with a consultant. Pursuant to the terms of the consulting
      agreement, we agreed to issue 10,000 shares of our common stock each month
      for
      twelve (12) months commencing in November 2005. Under the terms of the
      consulting agreement, we also issued warrants to purchase 105,000 shares of
      our
      common stock vesting one-twelfth per month from the date of the consulting
      agreement


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until
      fully vested. All vested warrants are exercisable for a period of two (2) years
      from the expiration or termination date of the consulting agreement. The
      exercise price of the warrants is as follows: 35,000 of the warrants are
      exercisable at the exercise price of $4.00 per share, 35,000 of the warrants
      are
      exercisable at the exercise price of $4.50 per share, and 35,000 of the warrants
      are exercisable at the exercise price of $5.00 per share. All shares and
      warrants were issued pursuant to Section 4(2) of the Securities Act. We did
      not
      engage in any general solicitation or advertising. We issued the stock
      certificates and affixed the appropriate legends to the restricted stock. In
      satisfaction of an amended consulting agreement we later entered into, we issued
      10,000 shares of restricted common stock to PC Consulting and another 15,000
      to
      Richard Wexler for services rendered. We further agreed to terminated consulting
      services and revised the issuance of warrants to purchase 35,001 shares of
      our
      common stock as follows: 11,667 of the warrants are exercisable at the exercise
      price of $4.00 per share, 11667 of the warrants are exercisable at the exercise
      price of $4.50 per share, and 11,667 of the warrants are exercisable at the
      exercise price of $5.00 per share. These shares were issued pursuant to Section
      4(2) of the Securities Act of 1933. We did not engage in any general
      solicitation or advertising. We issued the stock certificates and affixed the
      appropriate legends to the restricted stock.





Pursuant
      to the terms of a consulting agreement entered into on November 9, 2005, and
      subsequent addendum, we issued 300,000 shares of our common stock to a
      consultant for services rendered. We also issued warrants to purchase 250,000
      shares of common stock, exercisable over a two year period at $4.00 per share.
      These shares were issued pursuant to Section 4(2) of the Securities Act. We
      did
      not engage in any general solicitation or advertising. We issued the stock
      certificates and affixed the appropriate legends to the restricted
      stock.





On
      January 3, 2006, we entered into an Agreement with The Research Works, LLC
      (“RW”). Under the Agreement, RW agreed to provide certain equity research
      services including the preparation of an equity research report. The term of
      the
      agreement was one year in duration commencing from the date of the first RW
      equity research report on our company. We agreed to pay RW a fee of 35,000
      shares of our common stock. However, these services were never rendered; thus,
      the shares were cancelled on March 30, 2006.





On
      January 10, 2006, our company and Premier Funding and Financial Services
      (“Premier”) entered into a Mutual Release Agreement. The Agreement releases each
      party from all obligations under an Agreement dated March 28, 2005. We agreed
      to
      issue 25,000 shares of common stock, 12,500 warrants at $1.75 per share, 12,500
      warrants at $2.00 per share, 12,500 warrants at $2.25 per share, and 12,500
      warrants at $2.50 per share.





On
      January 15, 2006, we opened a private equity offering and sold 574,589 shares
      our common stock at $2.00 per share, for an aggregate of $1,149,178 in proceeds.
      These securities were issued pursuant to Rule 506 of Regulation D. We did not
      engage in any general solicitation or advertising.





On
      January 25, 2006, we issued 10,000 shares of common stock to Mammoth Corporation
      to secure performance of the Second Rider to the Security Agreement dated
      December 5, 2005 involving our company, International Equity Partners and
      Mammoth Corporation.


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On
      January 27, 2006, we issued 10,000 shares of common stock to Oyvin Haugan
      pursuant to his signing bonus and to satisfy conditions of his Employment
      Agreement dated October 23, 2005.





On
      February 3, 2006 and April 28, 2006, we issued 472,340 shares of common stock
      to
      International Equity Partners for consideration for the assignment of claims
      against Robert Fyn and the release of claims against our company brought by
      certain private lenders in New Zealand. International Equity Partners issued
      out
      of its own stock to satisfy a New Zealand court order to compensate these
      private lenders.





On
      March
      14, 2006, we agreed to accept the proposal of Samuel J. Higgins to convert
      $975,000.00 of the debt owed to International Equity Partners by our company
      for
      319,672 shares of restricted common stock at the closing market price on March
      14, 2006 of $3.05 per share. Mr. Higgins is an officer and director of our
      Company and wholly owns International Equity Partners.





On
      March
      26, 2006, we granted a warrant to Wiser Financial Services to purchase 500,000
      shares of our common stock through March 26, 2009, at a price of $5.00 per
      share. The warrant is non−dilutable and will be adjusted to reflect any increase
      in the number of our issued and outstanding shares of common stock. The warrant
      also entitles Wiser Financial Services to participate in any secondary
      registration of our common stock upon exercise.





On
      June
      30, 2006, having received an affidavit of loss from Mr. Samuel J. Higgins,
      we
      placed a “stop transfer” on two certificates amounting to 2,000,000 shares of
      common stock issued to International Equity Partners. After a waiting period,
      on
      July 7, 2006, we reissued the same amount of common shares under new
      certificates to IEP.





From
      August 31, 2005 through June 8, 2006, we issued options to purchase 550,000
      shares of our common stock under our Stock Option Plan, exercisable at prices
      ranging from $2.03 to $3.00 per share to employees and consultants in exchange
      for services rendered. These securities were issued pursuant to Section 4(2)
      of
      the Securities Act of 1933. We did not engage in any general solicitation or
      advertising.







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**Securities
      Authorized for Issuance under Equity Compensation Plans**





The
      following table provides information about our compensation plans under which
      shares of common stock may be issued upon the exercise of options as of June
      30,
      2006.





**Equity
      Compensation Plans as of June 30, 2005**


A
            B
            C**Plan
                Category**
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            **Weighted-average
                exercise price of outstanding options, warrants and
                right**
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (A))**Equity
                compensation plans approved by security holders
            550,000
            $2.20
            3,494,874Equity
                compensation plans not approved by security holders(1)
            1,905,000
            $4.24
            --Total
            2,455,000
            $3.78
            3,494,874


(1) The equity compensation plans that were adopted without the approval of
      the
      security holders relate to outstanding warrants. During the fiscal year, we
      issued warrants to five consultants to purchase an aggregate of 1,905,000 shares
      of common in consideration for services rendered.





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





**Forward-Looking
      Statements**




Historical
      results and trends should not be taken as indicative of future operations.
      Management’s statements contained in this report that are not historical facts
      are forward-looking statements within the meaning of Section 27A of the
      Securities Act of 1933, as amended, and Section 21E of the Securities and
      Exchange Act of 1934 (the “Exchange Act”), as amended. Actual results may differ
      materially from those included in the forward-looking statements. The Company
      intends such forward-looking statements to be covered by the safe-harbor
      provisions for forward-looking statements contained in the Private Securities
      Litigation Reform Act of 1995, and is including this statement for purposes
      of
      complying with those safe-harbor provisions. Forward-looking statements, which
      are based on certain assumptions and describe future plans, strategies and
      expectations of the Company, are generally identifiable by use of the
      words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,”
“prospects,” or similar expressions. The Company’s ability to predict results or
      the actual effect of future plans or strategies is inherently uncertain. Factors
      which could have a material adverse affect on the operations and future
      prospects of the Company on a consolidated basis include, but are not limited
      to: changes in economic conditions, legislative/regulatory changes, availability
      of capital, interest rates, competition, significant restructuring activities
      in
      calendar 2004 and thereafter, and generally accepted accounting principles.
      These risks and uncertainties should be considered in evaluating forward-looking
      statements and undue reliance should not be placed on such statements. Further
      information concerning the Company and its business, including additional
      factors that could materially affect the Company’s financial results, is
      included herein and in the Company’s other filings with the SEC.





**Summary
      of Product Research and Development**





We
      incurred research and development expenditures in the amount of approximately
      $2,582,408 for the fiscal year ended June 30, 2006, compared to $795,331 for
      the
      fiscal year ended June 30, 2005. These expenditures were paid to Adaptive to
      conduct research and development for a family of generators that utilize our
      Axial Vector engine.





The
      generator will be developed in varying kilowatt outputs for different markets.
      We will continue development of our GENSET, which involves the marrying of
      one
      or more of the generators to the engine. Research and development will continue
      on both of our engine types, the Axial Vector digital engine and the Dyna-Cam
      mechanical engine. Our generator will also work as a motor for various
      applications and we will continue to develop it for use in different
      applications both as a stand alone motor or in conjunction with our digital
      engine.





**Purchase
      and Sale of Plant or Significant Equipment**




To
      date,
      Adaptive has performed all of our research, testing, and product development.
      If
      we are successful in developing products for military and commercial use, we
      intend to license the manufacturing rights. As a result, we do not anticipate
      any purchase or sale of and equipment over the next twelve
      months.


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**Changes
      in Number of Employees**





As
      previously stated, our research, product development, and testing is primarily
      being conducted by Adaptive. During the reporting period, we retained a senior
      engineer to assist with the generator development and power production.
      Subsequent to the reporting period, we retained a consultant to assist us with
      the upcoming beta testing. We anticipate that we will hire additional full-time
      employees to assist our operations once the testing and development of our
      generators and engines are completed and they are ready for manufacture and
      sale.





**Results
      of Operations for the Twelve Months Ended June 30, 2006 and 2005**


We
        did
        not earn any revenue during the twelve months ended June 30, 2006 or 2005
        and
        have not earned any revenue since our inception. We do not anticipate earning
        any revenue until we have completed testing and development of our engines
        and
        generators and commenced the manufacturing of these products for military
        and
        commercial use.
  We
        incurred operating expenses in the amount of $12,554,787 for the twelve months
        ended June 30, 2006, compared to operating expenses of $22,427,667 for the
        twelve months ended June 30, 2005. Our operating expenses for the twelve
        month
        period ended June 30, 2006 were primarily attributable to professional and
        consulting fees in the amount of 4,670,444, officer's compensation of $3,383,274
        and research and development of $2,582,408. Our operating expenses for the
        twelve month period ended June 30, 2005 were primarily attributable to
        professional and consulting fees in the amount of $9,286,784, officer's
        compensation of $6,755,625 as well as impairment of goodwill and intangibles
        in
        the amount of $3,000,000.
  We
        have
        incurred a net loss of $14,360,145 for the twelve months ended June 30, 2006,
        compared to $22,427,667 for the twelve months ended June 30, 2005.
  **Liquidity
        and Capital Resources**





As
      of
      June 30, 2006, we had total current assets of $75,917 and total assets in the
      amount of $355,017. Our total current liabilities as of June 30, 2006 were
      $11,773,781. As a result, on June 30, 2006, we had working capital deficit
      of
      $11,697,864.




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On
      April
      25, 2005, we entered into a Standby Equity Distribution Agreement with Alliance
      Capital Management. Under the agreement, we may issue and sell to Alliance
      Capital Management common stock for a total purchase price of up to $4.0
      million. We have received all $4,000,000.00 under this agreement in exchange
      for
      1,680,098 shares of our common stock, and have used these funds under our
      agreement with Adaptive and to fund operating expenses.





In
      addition, on January 27, 2006, we entered into a loan agreement with Twilight
      Bay, LLC (“Twilight”) to borrow $250,000.00 at 24% interest per annum,
      compounded monthly, and to sign the Demand Note dated January 27, 2006. Under
      this agreement, we have received $125,000 on January 27, 2006 and an additional
      $125,000 on January 30, 2006. These monies have been exhausted on operating
      expenses of our company.





Finally,
      on March 26, 2006, we entered into a “Bond Finance Agreement” with Wiser
      Financial Services, of Dubai, United Arab Emirates, to provide us with up to
      $5
      million in bond financing, to be drawn down by us on demand, with repayment
      due
      March 26, 2008. Any amounts drawn down will bear interest at a rate of 10.25%
      per annum. The agreement further granted a warrant to Wiser Financial Services
      to purchase 500,000 shares of our common stock through March 26, 2009, at a
      price of $5.00 per share. Wiser of Ras Al Khaimah and Wiser Financial Services
      are related entities. In light of the former’s defaults under the Joint Venture
      Agreement, we do not intend on drawing any monies from the bond financing at
      this time.





We
      recently raised $1,149,178 in the sale of our common stock. Although we have
      not
      exhausted these funds, we do not believe this money will carry us through the
      next 12 months. Therefore, we will need additional financing in order to sustain
      our business operations including development and testing of our engines and
      generators. There can be no assurance that any new capital would be available
      or
      that adequate funds for our operations, whether from our revenues, financial
      markets, or other arrangements will be available when needed or on terms
      satisfactory to us. Our failure to obtain adequate additional financing will
      require us to delay, curtail or scale back some or all of our research and
      development programs, sales, marketing efforts and possible future manufacturing
      operations.





***Cash
      Flows from Operating Activities***





Net
      cash
      used in operating activities was $(8,514,285) for the fiscal year ended June
      30,
      2006.





In
      the
      next twelve months, we hope to develop a cash flow stream from licensing our
      Axial Vector engine and GENSET for a wide variety of applications. We are
      currently still in the testing phase, however, and have yet to produce any
      successful manufactured products. Our plan is to commence manufacturing at
      Adaptive’s facilities in December 2006.





***Cash
      Flows from Investing Activities***





Net
      cash
      used in investing activities amounted to $(200,057) for the fiscal year ended
      June 30, 2006. The net cash used in investing activities during the fiscal
      year
      ended June 30, 2006 was attributable to amounts paid to acquire
      patents.


28
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***Cash
      Flows from Financing Activities***





Cash
      used
      in financing activities for the fiscal year ended June 30, 2006 amounted to
      $8,760,229, attributable to proceeds from sales of unregistered securities
      of
      $2,848,402, proceeds from the Standby Equity Distribution Agreement of
      $3,250,000 and advances from the majority shareholder of $1,220,234.





**Off
      Balance Sheet Arrangements**





As
      of
      June 30, 2006, there were no off balance sheet arrangements.





**Going
      Concern**




We
      incurred net losses for the nine and three months ended June 30, 2006 and 2005
      and for the period December 30, 2002 to June 30, 2006. We are currently in
      the
      development stage, and there is no guarantee whether we will be able to generate
      enough revenue and/or raise capital to support current operations and generate
      anticipated sales. This raises substantial doubt about our ability to continue
      as a going concern. Management believes that our capital requirements will
      depend on many factors including the success of our product development efforts.
      The financial statements do not include any adjustments that might result from
      the outcome of these uncertainties.





**Critical
      Accounting Policies**





In
      December 2001, the SEC requested that all registrants list their most “critical
      accounting policies” in the Management Discussion and Analysis. The SEC
      indicated that a “critical accounting policy” is one which is both important to
      the portrayal of a company’s financial condition and results, and requires
      management’s most difficult, subjective or complex judgments, often as a result
      of the need to make estimates about the effect of matters that are inherently
      uncertain. We believe that the following accounting policies fit this
      definition.





Employee
      stock awards under the Company’s compensation plans are accounted for in
      accordance with Statement of Financial Accounting Standards No. 123, “ *Accounting
      for Share-Based Compensation”* (“SFAS
      123”), and related interpretations. Stock-based awards to non-employees are
      accounted for under the provisions of SFAS 123 and has adopted the enhanced
      disclosure provisions .





Effective
      for the reporting periods after December 15, 2005, Companies are required to
      account for issuance of share-based payments in accordance with Statement of
      Financial Standard No. 123r  , *"Share-based
      Payments"* This
      statement requires companies to value issuance of common stock, stock options
      and stock warrants at 'fair value' upon the completion of services rendered.
      For
      public companies, this fair value is arrived at by using an 'econometric model'
      to take into consideration variability of stock price, tax-free interest rate
      and time-value of money. Common stock issued for compensation or services are
      valued at the publicly disclosed price at the date of valuation. Compensation
      expense, Attorney expense, Advertising and Promotion expense have been
      retroactively adjusted to reflect this valuation principle for twelve months
      ended June 30, 2005. In accordance with Standard of Financial Accounting
      Standards No. 154, the financial statements
      for year ended June 30, 2005 were retroactively restated to reflect this change
      in accounting principle.




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**Recently
      Issued Accounting Pronouncements**





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments, an amendment of FASB Statements No. 133 and 140.” SFAS
      No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No.
      D1,
“Application of Statement 133 to Beneficial Interests in Securitized Financial
      Assets,” and permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation, clarifies which interest-only strips and principal-only strips
      are
      not subject to the requirements of SFAS No. 133, establishes a requirement
      to
      evaluate interests in securitized financial assets to identify interests that
      are freestanding derivatives or that are hybrid financial instruments that
      contain an embedded derivative requiring bifurcation, clarifies that
      concentrations of credit risk in the form of subordination are not embedded
      derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying
      special-purpose entity from holding a derivative financial instrument that
      pertains to a beneficial interest other than another derivative financial
      instrument. SFAS No. 155 is effective for all financial instruments acquired
      or
      issued after the beginning of the first fiscal year that begins after September
      15, 2006. We are currently evaluating the effect the adoption of SFAS No. 155
      will have on our financial position or results of operations.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets, an amendment of FASB Statement No. 140.” SFAS No. 156 requires an entity
      to recognize a servicing asset or liability each time it undertakes an
      obligation to service a financial asset by entering into a servicing contract
      under a transfer of the servicer’s financial assets that meets the requirements
      for sale accounting, a transfer of the servicer’s financial assets to a
      qualified special-purpose entity in a guaranteed mortgage securitization in
      which the transferor retains all of the resulting securities and classifies
      them
      as either available-for-sale or trading securities in accordance with SFAS
      No.
      115, “Accounting for Certain Investments in Debt and Equity Securities” and an
      acquisition or assumption of an obligation to service a financial asset that
      does not relate to financial assets of the servicer or its consolidated
      affiliates. Additionally, SFAS No. 156 requires all separately recognized
      servicing assets and servicing liabilities to be initially measured at fair
      value, permits an entity to choose either the use of an amortization or fair
      value method for subsequent measurements, permits at initial adoption a one-time
      reclassification of available-for-sale securities to trading securities by
      entities with recognized servicing rights and requires separate presentation
      of
      servicing assets and liabilities subsequently measured at fair value and
      additional disclosures for all separately recognized servicing assets and
      liabilities. SFAS No. 156 is effective for transactions entered into after
      the
      beginning of the first fiscal year that begins after September 15, 2006. We
      are
      currently evaluating the effect the adoption of SFAS No. 156 will have on our
      financial position or results of operations.


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**Item
      7. Financial Statements**





Index
      to
      Financial Statements:




**Audited
                Financial Statements:**F-1
            Report
                of Independent Registered Public Accounting Firm;F-2
            Consolidated
                Balance Sheet as of June 30, 2006 and June 30, 2005
                (Restated);F-3
            Consolidated
                Statements of Operations for the years ended June 30, 2006 and June
                30,
                2005 (Restated), including Cumulative Totals since inception (December
                30,
                2002) through June 30, 2006;F-4
            Consolidated
                Statement of Stockholders’ Equity for the years ended June 30, 2006 and
                June 30, 2005 (Restated);F-5
            Consolidated
                Statements of Cash Flows for the years ended June 30, 2006 and June
                30,
                2005 (Restated), including Cumulative Totals since inception (December
                30,
                2002) through June 30, 2006;F-6
            Consolidated
                Notes to Financial Statements;






31
 ***Table
          of Contents***


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 Board
        of
        Directors and Stockholders
 Axial
        Vector Engine Corporation
 Portland,
        OR 97204
 
 We
        have
        audited the accompanying consolidated balance sheets of Axial Vector Engine
        Corporation and Subsidiary as of June 30, 2006 and June 30, 2005 and the
        related
        consolidated statements of operations, stockholders’ deficit, and cash flows for
        the years then ended and the period December 30, 2002 (Inception) through
        June
        30, 2006. 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 audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements. An audit also includes
        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 audits provide a reasonable basis for our
        opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Axial Vector Engine
        Corporation and Subsidiary as of June 30, 2006 and 2005, and the results
        of its
        operations, and cash flows for the years then ended, and the period December
        20,
        2002 (Inception) through June 30, 2006, 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. As discussed in Note 1 to the
        consolidated financial statements, the Company has sustained operating losses
        and capital deficits that raise substantial doubt about its ability to continue
        as a going concern. Management’s operating and financing plans in regards to
        these matters are also discussed in Note 1. The consolidated financial
        statements do not include any adjustments that might result from the outcome
        of
        these uncertainties.
 
 As
        discussed in Note 2 to the financial statements, the accompanying financial
        statements have been restated for the year ended June 30, 2005.
 
 
 /s/ 
        Bagell, Josephs, Levine & Company, L.L.C.
 Bagell,
        Josephs, Levine & Company, L.L.C.
 
 Gibbsboro,
        New Jersey
 October
        13, 2006






F
          -
          1
 ***Table
          of Contents***




**AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
        BALANCE SHEETS**
 **JUNE
        30, 2006 AND 2005 (Restated)**
 
 **ASSETS****2006**
              
              
              **2005
                  (Restated)**
                **Note
                  2**Current
                  Assets:Cash
                  and cash equivalents
              
              $
              53,247
              
              $
              7,360Deposit
              
              
              22,670
              
              
              22,670Prepaid
                  Expenses
              
              
              -
              
              
              22,331Total
                  Current assets
              
              
              75,917
              
              
              52,361Property
                  and equipment, net (Note 5)
              
              
              35,776
              
              
              21,142Due
                  from Shareholder (Note 13)
              
              
              -
              
              
              28,597Intangible
                  assets- Patents, net (Note 6)
              
              
              243,324
              
              
              63,750**TOTAL
                  ASSETS**
              
              $
              355,017
              
              $
              165,850**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****LIABILITIES**Current
                  Liabilities:Accounts
                  payable and accrued expenses
              
              $
              1,490,822
              
              $
              106,868Payroll
                  Tax Liabilities
              
              
              24,275
              
              
              -Current
                  portion of note payable (Note 6)
              
              
              1,245,000
              
              
              995,000Contingent
                  Share-based payment (Note 7)
              
              
              -
              
              
              -Liability
                  for stock to be issued (Note 8)
              
              
              125,400
              
              
              84,500Share-based
                  Fee Liability- Warrants(Note 9)
              
              
              564,218
              
              
              247,750Share-based
                  Fee Liability- Options (Note 10)
              
              
              2,604,820
              
              
              3,180,708Share-based
                  Compensation Liability- Options (Note 11)
              
              
              5,340,610
              
              
              7,543,490Accrued
                  Interest shareholder loan (Note 13)
              
              
              77,297
              
              
              24,549Due
                  to related company (Note 12)
              
              
              301,339
              
              
              311,339Total
                  Current liabilities
              
              
              11,773,781
              
              
              12,494,204Due
                  to Shareholder (Note 13)
              
              
              1,191,637
              
              
              -**Total
                  Liabilities**
              
              
              12,965,418
              
              
              12,494,204**STOCKHOLDERS'
                  DEFICIT**Preferred
                  stock, $.001 Par Value; 100,000,000 shares authorizedno
                  shares issued and outstanding
              
              
              -
              
              
              -Common
                  stock, $.001 Par Value; 100,000,000 shares authorized35,004,257
                  and 32,162,762 shares issued and outstanding(Note 14)
              
              
              35,004
              
              
              32,626Additional
                  paid-in capital
              
              
              21,560,460
              
              
              16,381,923Prepaid
                  Share-based Fees (Note 15)
              
              
              (2,544,348
              )
              
              (3,061,850
              )Prepaid
                  Share-based Compensation (Note 15)
              
              
              (515,375
              )
              
              (1,166,374
              )Beneficial
                  Reduction of Share-based Liability (Note 16)
              
              
              7,728,682
              
              
              -Deficit
                  accumulated during the development stage
              
              
              (38,874,824
              )
              
              (24,514,679
              )**Total
                  Stockholders' Deficit**
              
              
              (12,610,401
              )
              
              (12,328,354
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIT**
              
              $
              355,017
              
              $
              165,850
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F
            -
            2
 ***Table
            of Contents***
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **FOR
        THE YEARS ENDED JUNE 30, 2006 AND 2005 (Restated)**
 **(WITH
        CUMULATIVE TOTALS SINCE INCEPTION**
 
 **2006**
              
              **2005
                  (Restated) Note 2**
              
              **Cumulative
                  Totals**
                **December
                  30, 2002 through**
                **June
                  30, 2006****OPERATING
                  REVENUES**Sales
              
              $
              -
              
              $
              -
              
              $
              -**COST
                  OF SALES**
              
              
              -
              
              
              -
              
              
              -**GROSS
                  PROFIT**
              
              
              -
              
              
              -
              
              
              -**OPERATING
                  EXPENSES**Accounting
                  and Auditing
              
              
              94,409
              
              
              29,232
              
              
              123,641Administration
              
              
              101,388
              
              
              133,564
              
              
              268,288Advertising
                  and Promotion (See Note 17)
              
              
              2,850,429
              
              
              5,706,533
              
              
              7,376,275Beneficial
                  Share-based Fee (Note 18)
              
              
              557,088
              
              
              1,452,400
              
              
              2,009,488Board
                  Compensation (See Note 19)
              
              
              348,750
              
              
              923,490
              
              
              1,272,240Depreciation
                  (See Note 5)
              
              
              5,920
              
              
              1,854
              
              
              41,075Legal
                  Fees (See Note 20)
              
              
              1,820,015
              
              
              3,580,251
              
              
              5,345,343Insurance
              
              
              44,293
              
              
              2,573
              
              
              46,866Interest
              
              
              105,154
              
              
              7,809
              
              
              130,093Office
                  Expense
              
              
              65,147
              
              
              37,612
              
              
              218,203Officer's
                  Compensation (Note 21)
              
              
              3,383,274
              
              
              6,755,625
              
              
              10,571,868Payroll
                  Taxes
              
              
              50,683
              
              
              -
              
              
              50,683Rent
              
              
              36,570
              
              
              1,393
              
              
              80,745Research
                  and Development (Note 22)
              
              
              2,582,408
              
              
              795,331
              
              
              4,949,569Salaries
                  and Wages-Administration
              
              
              392,547
              
              
              -
              
              
              392,547Salaries
                  and Wages-Engineering
              
              
              116,712
              
              
              -
              
              
              116,712Impairment
                  of intangible asset (Note 25)
              
              
              -
              
              
              3,000,000
              
              
              3,701,347**Total
                  Operating Expenses**
              
              
              12,554,787
              
              
              22,427,667
              
              
              36,694,983**NET
                  LOSS BEFORE OTHER INCOME (EXPENSE)**
              
              
              (12,554,787
              )
              
              (22,427,667
              )
              
              (36,694,983
              )**OTHER
                  INCOME (EXPENSE)**Bank
                  Interest
              
              
              71
              
              
              
              
              
              71Write
                  off Worthless Inventory (Note 23)
              
              
              -
              
              
              -
              
              
              (266,519
              )Lawsuit
                  Settlements (Note 24)
              
              
              (1,805,429
              )
              
              -
              
              
              (1,805,429
              )Impairment
                  of property and equipment
              
              
              -
              
              
              -
              
              
              (107,964
              )**Total
                  Other Income (Expenses)**
              
              
              (1,805,358
              )
              
              -
              
              
              (2,179,841
              )**NET
                  LOSS BEFORE PROVISION FOR INCOME TAXES**
              
              
              (14,360,145
              )
              
              (22,427,667
              )
              
              (38,874,824
              )Provision
                  for income taxes (See Note 26)
              
              
              -
              
              
              -
              
              
              -**NET
                  LOSS APPLICABLE TO COMMON SHARES**
              
              $
              (14,360,145
              )
              $
              (22,427,667
              )
              $
              (38,874,824
              )**WEIGHTED
                  AVERAGE NUMBER OF****COMMON
                  SHARES OUTSTANDING-Fully Diluted (See Note 4)**
              
              
              37,671,510
              
              
              20,608,237**NET
                  LOSS PER SHARE -BASIC (See Note 4)**
              
              
              (.42
              )
              
              (1.30
              )**NET
                  LOSS PER FULLY DILUTED SHARES (See Note 4 )**
              
              $
              (.38
              )
              $
              (1.09
              )
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F
            -
            3
 ***Table
            of Contents***
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**
 **FOR
        THE YEARS ENDED JUNE 30, 2006 AND 2005 (Restated)**
 
 **Description**
              
              **Prepaid****Shares
                  &****Beneficial**
                **Reduction
                  Common**
              
              **Additional**
                **Paid-In
                  Capital**
              
              **Deficit**
                **Accumulated**
                **During
                  the**
                **Development**
                **Stage**
              
              **Total
                  Stockholders Equity**Balance,
                  June 30, 2004
              
              $
              -
              
              $
              541
              
              $
              1,237,966
              
              $
              (2,087,012
              )
              $
              (848,505
              )Issuance
                  of Shares-Due from Shareholder
              
              
              -
              
              
              464
              
              
              1,274,920
              
              
              
              
              
              1,275,384Issuance
                  of Shares for Compensation
              
              
              (1,166,374
              )
              
              600
              
              
              1,301,400
              
              
              
              
              
              135,626Issuance
                  of shares for services
              
              
              (3,061,851
              )
              
              2,975
              
              
              7,541,640
              
              
              -
              
              
              4,482,764Issuance
                  of shares for legal fees
              
              
              -
              
              
              250
              
              
              1,039,980
              
              
              
              
              
              1,040,230Issuance
                  of shares for intellectual property
              
              
              -
              
              
              26,000
              
              
              2,974,000
              
              
              -
              
              
              3,000,000Issuance
                  of shares for cash
              
              
              -
              
              
              1,384
              
              
              553,142
              
              
              
              
              
              554,526Issuance
                  of shares from exercise of options
              
              
              -
              
              
              39
              
              
              59,249
              
              
              
              
              
              59,288Issuance
                  of shares for cash under Standby Equity Distribution Agreement
              
              
              
              
              
              374
              
              
              399,626
              
              
              
              
              
              400,000Net
                  loss for the year ended June 30, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              (22,427,667
              )
              
              (22,427,667
              )Balance,
                  June 30, 2005-restated
              
              
              (4,228,225
              )
              
              32,627
              
              
              16,381,923
              
              
              (24,514,679
              )
              
              (12,328,354
              )Issuance
                  of shares for services-net
              
              
              1,168,501
              
              
              349
              
              
              804,042
              
              
              -
              
              
              1,972,892Cancellation
                  of shares for services
              
              
              -
              
              
              (1,465
              )
              
              (4,686,535
              )
              
              -
              
              
              (4,688,000
              )Exercise
                  of Stock Options
              
              
              -
              
              
              202
              
              
              185,491
              
              
              
              
              
              185,693Shares
                  issued for shareholder loan conversion to equity
              
              
              -
              
              
              320
              
              
              974,680
              
              
              
              
              
              975,000Shares
                  issued for lawsuit settlement
              
              
              -
              
              
              472
              
              
              1,804,956
              
              
              
              
              
              1,805,428Beneficial
                  Reduction in option value outstanding
              
              
              7,728,683
              
              
              -
              
              
              -
              
              
              
              
              
              7,728,683Issuance
                  of stock for cash
              
              
              -
              
              
              2,499
              
              
              6,095,903
              
              
              -
              
              
              6,098,402Net
                  loss for the year ended June 30, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              (14,360,145
              )
              
              (14,360,145
              )Balance,
                  June 30, 2006
              
              
              4,668,959
              
              $
              35,004
              
              $
              21,560,460
              
              $
              (38,874,824
              )
              $
              (12,610,401
              )
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F
            -
            4
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOW**
 **FOR
        THE YEARS ENDED JUNE 30, 2006 AND 2005 (Restated)**
 **(WITH
        CUMULATIVE TOTALS SINCE INCEPTION)**
 **2006**
              
              **2005**
                **(Restated)
                  See Note 2**
              
              **Cumulative
                  Totals**
                **December
                  30, 2002 through**
                **June
                  30, 2006****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  (Loss)
              
              $
              (14,360,145
              )
              $
              (22,427,667
              )
              $
              (38,874,824
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activitiesCommon
                  stock issued for services
              
              
              1,053,456
              
              
              7,519,965
              
              
              6,661,669Options
                  issued for services
              
              
              920,800
              
              
              3,310,000
              
              
              4,230,800Options
                  issued as compensation
              
              
              304,020
              
              
              7,543,490
              
              
              7,847,510Warrants
                  issued for services
              
              
              316,718
              
              
              247,500
              
              
              564,218Depreciation
                  and amortization
              
              
              5,920
              
              
              1,854
              
              
              46,614Shares
                  issued for Lawsuit settlements
              
              
              1,805,428
              
              
              -
              
              
              1,805,428Impairment
                  of property and equipment
              
              
              
              
              
              
              
              
              107,964Impairment
                  of goodwill and intangibles
              
              
              
              
              
              3,000,000
              
              
              3,701,347Write-off
                  of inventory
              
              
              -
              
              
              
              
              
              266,519**Changes
                  in assets and liabilities**(Increase)
                  decrease inprepaid
                  expenses and other current assets
              
              
              23,556
              
              
              (22,330
              )
              
              23,556Increase
                  (decrease) inaccounts
                  payable and accrued expenses
              
              
              1,415,962
              
              
              74,457
              
              
              1,415,962Total
                  adjustments
              
              
              5,845,860
              
              
              21,674,936
              
              
              26,671,587**Net
                  cash (used in) operating activities**
              
              
              (8,514,285
              )
              
              (752,731
              )
              
              (12,203,237
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Bank
                  Interest
              
              
              71
              
              
              
              
              
              71Acquisition
                  of intangible assets
              
              
              (179,574
              )
              
              (63,750
              )
              
              (243,324
              )Acquisitions
                  of fixed assets
              
              
              (20,554
              )
              
              (22,996
              )
              
              (82,390
              )**Net
                  cash (used in) investing activities**
              
              
              (200,057
              )
              
              (86,746
              )
              
              (326,643
              )**CASH
                  FLOWS FROM FINANCING ACTIVITES**Proceeds
                  from the sale of stock
              
              
              2,848,402
              
              
              554,526
              
              
              4,487,770Proceeds
                  from Standby Equity Distribution Agreement
              
              
              3,250,000
              
              
              750,000
              
              
              4,000,000Liability
                  for stock to be issued
              
              
              40,900
              
              
              84,500
              
              
              125,400Conversion
                  of Shareholder Debt to Equity
              
              
              975,000
              
              
              -
              
              
              975,000Proceeds
                  from Note Payable
              
              
              250,000
              
              
              995,000
              
              
              1,245,000Advances
                  from shareholders
              
              
              1,220,234
              
              
              -
              
              
              2,787,114Payments
                  on shareholder loan
              
              
              -
              
              
              (1,593,477
              )
              
              (1,593,477
              )Advances
                  (Payments to) related company-net
              
              
              (10,000
              )
              
              (3,000
              )
              
              311,339Exercise
                  of Stock Options
              
              
              185,693
              
              
              59,288
              
              
              244,981**Net
                  cash provided by financing activities**
              
              
              8,760,229
              
              
              846,837
              
              
              12,583,127**NET
                  INCREASE IN****CASH
                  AND CASH EQUIVALENTS**
              
              
              45,887
              
              
              7,360
              
              
              53,247**CASH
                  AND CASH EQUIVALENTS -****BEGINNING
                  OF YEAR**
              
              
              7,360
              
              
              -
              
              
              -**CASH
                  AND CASH EQUIVALENTS - END OF YEAR**
              
              $
              53,247
              
              $
              7,360
              
              $
              53,247
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F
            -
            5
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        1-** **GOING
        CONCERN UNCERTAINTY**
  As
        shown
        in the accompanying financial statements, as is typical of companies going
        through the development stage, the Company incurred net losses for the twelve
        months ended June 30, 2006 and 2005 and for the period December 30, 2002
        to June
        30, 2006.
 
 *The
        Company is currently in the development stage, and there is no guarantee
        whether
        the Company will be able to generate enough revenue and/or raise capital
        to
        support current operations and generate anticipated sales* .
 
 This
        raises substantial doubt about the Company’s ability to continue as a going
        concern. Management believes that the Company’s capital requirements will depend
        on many factors including the success of the Company’s product development
        efforts. The financial statements do not include any adjustments that might
        result from the outcome of these uncertainties.
 
 **NOTE
        2-** **BASIS
        OF PRESENTATION AND RESTATEMENT**
  The consolidated
        financial statements include the accounts of the Company and
        its wholly
        owned subsidiary Dyna-Cam, Aero Marine Engine Corp. All significant
        inter-company accounts
        and transactions are eliminated.
 
 These consolidated
        audited financial statements reflect all adjustments, including normal recurring
        adjustments which, in the opinion of management, are necessary to present
        fairly
        the operations and cash flows for the periods presented. In addition, the
        consolidated financial statements for the year ended June 30, 2005 have been
        restated to reflect the following changes in accounting principles and changes
        due to corrections of errors.
 
 RESTATEMENT
        TO REFLECT CHANGE IN ACCOUNTING PRINCIPLE
 
 Effective
        for the reporting periods after December 15, 2005, Companies are required
        to
        account for issuance of share-based payments in accordance with Statement
        of
        Financial Standard No. 123. This statement requires companies to value issuance
        of common stock, stock options and stock warrants at 'fair value' upon the
        completion of services rendered. For public companies, this fair value is
        arrived at by using an 'econometric model' to take into consideration
        variability of stock price, tax-free interest rate and time-value of money.
        Common stock issued for compensation or services are valued at the publicly
        disclosed price at the date of valuation. Compensation expense, Attorney
        expense, Advertising and Promotion expense have been retroactively adjusted
        to
        reflect this valuation principle for twelve months ended June 30, 2005. In
        accordance with Standard of Financial Accounting Standards No. 154 the following
        changes are disclosed below:
 
 Income
        Statement for the year ended June 30, 2005:
 
 As
                  Originally
              
              As
              
              Effect 
                  ofReported
              
              Adjusted
              
              ChangeSales
              
              $
              -
              
              $
              -
              
              $
              -Cost
                  of Goods Sold
              
              
              -
              
              
              -
              
              
              -Compensation
              
              
              1,113,495
              
              
              7,679,115
              
              
              (6,565,620
              )Professional
                  and Consulting
              
              
              4,863,366
              
              
              3,609,483
              
              
              1,253,883Advertising
                  and promotions
              
              
              164,185
              
              
              5,706,433
              
              
              (5,542,248
              )Rent
              
              
              1,393
              
              
              1,393
              
              
              -Impairment
                  of intangible
              
              
              3,862,500
              
              
              3,000,000
              
              
              862,500Research
                  and Development
              
              
              759,330
              
              
              795,331
              
              
              (36,001
              )General
                  and Administrative
              
              
              697,171
              
              
              1,634,058
              
              
              (936,887
              )Depreciation
              
              
              1,854
              
              
              1,854
              
              
              -Total
                  Expenses
              
              
              11,463,294
              
              
              22,427,667
              
              
              (10,964,373
              )Interest
                  Income
              
              
              7,678
              
              
              -
              
              
              (7,678
              )Net
                  Income (Loss)
              
              $
              (11,455,616
              )
              $
              (22,427,667
              )
              $
              (10,972,051
              )Per
                  Share BasicPer
                  Share Fully Diluted
   F
            -
            6
 ***Table
            of Contents***
 **AXIAL
          VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
          AERO MARINE ENGINE, INC.)**
 **(A
          DEVELOPMENT STAGE COMPANY)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
          30, 2006 AND 2005**
 **NOTE
        2-** **BASIS
        OF PRESENTATION AND RESTATEMENT(CONTINUED)**


**Balance
        Sheet**
 **June
        30, 2005**
 
 As
                  Originally
              
              As
              
              Effect
                  ofReported
              
              Adjusted
              
              Change**Assets**Cash
              
              $
              7,360
              
              $
              7,360
              
              $
              -Deposit
              
              
              22,670
              
              
              22,670
              
              
              -Prepaid
                  expenses
              
              
              22,330
              
              
              22,330
              
              
              -Total
                  Current assets
              
              
              52,360
              
              
              52,360
              
              
              -Property
                  and Equipment-net
              
              
              21,142
              
              
              21,142
              
              
              -Due
                  from Shareholder
              
              
              -
              
              
              28,598
              
              
              (28,598
              )Intangible
                  assets-net
              
              
              63,750
              
              
              63,750
              
              
              -Total
                  Assets
              
              $
              137,252
              
              $
              165,850
              
              $
              (28,598
              )**Liabilities
                  and Stockholders' Deficit**Accounts
                  Payable
              
              $
              131,417
              
              $
              106,868
              
              $
              24,549Current
                  portion of note payable
              
              
              1,495,000
              
              
              995,000
              
              
              500,000Contingent
                  share based payment
              
              
              1,500,000
              
              
              -
              
              
              1,500,000Liability
                  for Stock to be issued
              
              
              749,949
              
              
              84,500
              
              
              665,449Share-based
                  Fee Liabilities
              
              
              -
              
              
              10,971,948
              
              
              (10,971,948
              )Accrued
                  Interest shareholder
              
              
              -
              
              
              24,549
              
              
              (24,549
              )Due
                  to related company
              
              
              311,339
              
              
              311,339
              
              
              -Total
                  Current liabilities
              
              
              4,187,705
              
              
              12,494,204
              
              
              (8,306,499
              )Due
                  to Shareholder
              
              
              1,246,787
              
              
              -
              
              
              1,246,787Total
                  Liabilities
              
              
              5,434,492
              
              
              12,494,204
              
              
              (7,059,712
              )Stockholders
                  DeficitPrepaid
                  Sharebased fee
              
              
              -
              
              
              (3,061,850
              )
              
              3,061,850Prepaid
                  Sharebased Compens.
              
              
              -
              
              
              (1,166,374
              )
              
              1,166,374Common
                  Stock
              
              
              32,162
              
              
              32,626
              
              
              (464
              )Additional
                  Paid-In Capital
              
              
              11,558,126
              
              
              16,381,923
              
              
              (4,823,797
              )Accumulated
                  Deficit
              
              
              (16,887,528
              )
              
              (24,514,679
              )
              
              7,627,151Total
                  Stockholders' Deficit
              
              
              (5,297,240
              )
              
              (12,328,354
              )
              
              7,031,114Total
                  Liabilities and Stockholders'Deficit
              
              $
              137,252
              
              $
              165,850
              
              $
              (28,598
              )
 
  F
            -
            7
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
  NOTE
          3-               
ORGANIZATION
   
 Company's
          voting stock. For financial accounting purposes, the acquisition was a
          reverse
          acquisition of the Company by Aero, under the purchase method of accounting,
          and
          was treated as a recapitalization with Aero as the acquirer. Accordingly,
          the
          historical financial statements have been restated after giving effect
          to the
          May 30, 2003, acquisition of the Company. The financial statements have
          been
          prepared to give retroactive effect to December 30, 2002, the date of inception
          of Aero, of the reverse acquisition completed on May 30, 2003, and represent
          the
          operations of Aero. Consistent with reverse acquisition accounting: (i)
          all of
          Aero's assets, liabilities, and accumulated deficit, are reflected at their
          combined historical cost (as the accounting acquirer) and (ii) the preexisting
          outstanding shares of the Company (the accounting acquiree) are reflected
          at
          their net asset value as if issued on May 30, 2003.
 
 Additionally,
        on June 30, 2003, the Company
        acquiredthe operating assets of Dyna-Cam Engine Corp. ("Dyna-Cam").
        Dyna-Cam was a development stage enterprise developing a unique, axial
        cam-drive, free piston, internal combustion engine. Dyna-Cam intended to
        produce
        and sell the engine primarily for aircraft and marine applications. Dyna-Cam
        had
        not generated significant revenues at the time of the Company's acquisition.
 
 The
        Company, under its new management, has raised over $9,600,000 in cash to
        affect
        the development of the Axial Vector Engine “E” (Electronic). Management believes
        that significant capital is required to adequately develop the Axial Vector
        Engine “E” engine and begin operations. For the twelve months ended June 30,
        2006, shareholders of the Company have advanced a net of $1,515,926 to assist
        in
        funding the operations.
 
 The
        Company will require additional capital. Although the current majority
        stockholders of the Company, as well as an affiliate, have made verbal
        commitments with no guarantees to continue to fund the development and sales
        and
        marketing efforts of the Company, if alternate financing cannot be obtained.
        There can be no assurance that any new capital would be available to the
        Company
        or that adequate funds for the Company's operations, whether from the Company's
        revenues, financial markets, or other arrangements will be available when
        needed
        or on terms
   
 F
            -
            8
 ***Table
            of Contents***
 
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        3-** **ORGANIZATION** **(CONTINUED)**
 
 satisfactory
        to the Company. The failure of the Company to obtain adequate additional
        financing will require the Company to delay, curtail or scale back some or
        all
        of its research and development programs, sales, marketing efforts and
        manufacturing operations.
 
 On
        May
        19, 2005, the Company announced that it had changed its name to Axial Vector
        Engine Corporation (“Axial”). Management believes the new name will more
        accurately describe the Company’s mission. The Company’s stock symbol changed to
        AXVC.
 
 **NOTE
        4-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Use
        of Estimates**
 
 The
        preparation of consolidated financial statements in conformity with
        accounting principles generally accepted in the United States of America
        requires management to make estimates and assumptions that affect the amounts
        reported in the financial statements and accompanying notes. Actual results
        could differ from those estimates.
 
 **Cash
        and Cash Equivalents**
 
 Cash
        and
        cash equivalents consists principally of currency on hand, demand deposits
        at
        commercial banks, and liquid investment funds having an original maturity
        of
        three months or less at the time of purchase.
 
 **Concentration
        of Credit Risk**
 
 Financial
        instruments that potentially subject the Company to credit risk consist of
        cash
        equivalents and accounts receivable.
 
 The
        Company’s policy is to review the amount of credit exposure to any one financial
        institution and place investments with financial institutions evaluated as
        being
        credit worthy. In the ordinary course of business, the Company has bank deposits
        that may exceed federally insured limits. As of June 30, 2006, the Company
        was
        not in excess of the $100,000 insured limit.
  F
            -
            9
 ***Table
            of Contents***
 
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        4-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** ****
 **(CONTINUED**
 
 **Property
        and Equipment**
 
 Property
        and equipment is stated at cost. Depreciation is computed using the
        straight-line method over the estimated useful lives of the assets, three
        to
        seven years. Reviews are regularly performed to determine whether facts and
        circumstances exist that indicate the carrying amount of assets may not be
        recoverable or the useful life is shorter than originally estimated. The
        Company
        assesses the recoverability of its property and equipment by comparing the
        projected undiscounted net cash flows associated with the related asset or
        group
        of assets over their remaining lives against their respective carrying amounts.
        Impairment, if any, is based on the excess of the carrying amount over the
        fair
        value of those assets.
 
 If
        assets
        are determined to be recoverable, but the useful lives are shorter than
        originally estimated, the net book value of the assets is depreciated over
        the
        newly determined remaining useful lives. When equipment is retired or otherwise
        disposed of, the cost and related accumulated depreciation are removed from
        the
        accounts and the resulting gain or loss is included in operations.
   F
            -
            10
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        4-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** ****
 **(CONTINUED)**
 
 **Reclassifications**
 
 Certain
        amounts for the twelve months ended June 30, 2005 have been reclassified
        to
        conform to the presentation of the June 30, 2006 amounts. The reclassifications
        have no effect on net loss for the twelve months ended June 30, 2005.
 
 **Income
        Taxes**
 
 The
        Company has adopted the provisions of Statement of Financial Accounting
        Standards (“SFAS”) No. 109, Accounting for Income Taxes. The Statement requires
        an asset and liability approach for financial accounting and reporting of
        income
        taxes, and the recognition of deferred tax assets and liabilities for the
        temporary differences between the financial reporting bases and tax bases
        of the
        Company’s assets and liabilities at enacted tax rates expected to be in effect
        when such amounts are realized or settled.
 
 **Advertising
        and Promotion Expense**
 
 The
        Company’s policy is to expense the costs of advertising and marketing as they
        are incurred. In accordance with SFAS 123r, Consulting fees paid with Common
        Shares or Derivatives such as Options or Warrants are expensed when requisite
        services have been performed and valued using an econometric model. Advertising
        expense for the years ending June 30, 2006 and 2005 was $2,850,429 and
        $5,706,533 respectively.
 
 **Research
        and Development**
 
 Research
        and development costs are expensed as incurred.
 
 **Intangible
        Assets**
 
 During
        the twelve months ended June 30, 2006, the Company incurred costs of $179,574
        in
        applying and registering of patents. These patents are currently pending.
        Due to
        the nature of the patents, the Company anticipates receiving confirmation
        on
        their applications in an expedited fashion.
 
  F
            -
            11
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        4-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** ****
 **(CONTINUED)**
 
 **Start-up
        Costs**
 
 In
        accordance with the American Institute of Certified Public Accountants Statement
        of Position 98-5, *“* *Reporting
        on the costs of Start-up Activities”* ,
        the
        Company expenses all costs incurred in connection with the start-up and
        organization of the Company.
 
 **Share-Based
        Compensation**
 
 Employee
        stock awards under the Company’s compensation plans are accounted for in
        accordance with Statement of Financial Accounting Standards No. 123, “ *Accounting
        for Share-Based Compensation”* (“SFAS
        123”), and related interpretations. Stock-based awards to non-employees are
        accounted for under the provisions of SFAS 123 and has adopted the enhanced
        disclosure provisions .
  **(Loss)
        Per Share of Common Stock**
 
 Historical
        net income (loss) per common share is computed using the weighted average
        number
        of common shares outstanding. Diluted earnings per share (EPS) include
        additional dilution from common stock equivalents, such as stock issuable
        pursuant to the exercise of stock options and warrants. Common stock equivalents
        are not included in the computation of diluted earnings per share when the
        Company reports a loss because to do so would be antidilutive for the periods
        presented.
  F
            -
            12
 ***Table
            of Contents***
 
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        4-****SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES****(CONTINUED**
 
 **(Loss)
        Per Share of Common Stock** **(Continued)**
 
 The
        following is a reconciliation of the computation for basic and diluted EPS:
 
 **June
                  30,****2006**
              
              **2005**
                **(Restated)**Net (Loss)
              
              $
              (14,360,145
              )
              $
              (22,427,667
              )Weighted-average
                  common sharesoutstanding
                  (Basic)
              
              
              33,583,510
              
              
              17,293,298Weighted-average
                  common stockequivalents:Stock
                  warrants
              
              
              500,000
              
              
              75,000Stock
                  options
              
              
              3,588,000
              
              
              3,239,939Weighted-average
                  common sharesoutstanding
                  (Diluted)
              
              
              37,671,510
              
              
              20,608,237
 
 **Fair
        Value of Financial Instruments**
 
 The
        carrying amount reported in the balance sheets for cash and cash equivalents
        and
        liability for stock to be issued approximate fair value because of the immediate
        or short-term maturity of these financial instruments.
 
  F
            -
            13
 ***Table
            of Contents***
 
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        4-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** **(CONTINUED)**
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory
        Costs.” SFAS No. 151 requires abnormal amounts of inventory costs related
        to idle facility, freight handling and wasted material expenses to be recognized
        as current period charges. Additionally, SFAS No. 151 requires that
        allocation of fixed production overheads to the costs of conversion be based
        on
        the normal capacity of the production facilities. The standard is effective
        for
        fiscal years beginning after June 15, 2005. The adoption of SFAS
        No. 151 did not have a material impact on the Company’s financial position
        or results of operations.
 
 In
        December 2004, FASB issued Statement of Financial Accounting Standards No.
        153,
        Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting
        for Non-monetary Transactions (" SFAS 153"). This statement amends APB Opinion
        29 to eliminate the exception for non-monetary exchanges of similar productive
        assets and replaces it with a general exception for exchanges of non-monetary
        assets that do not have commercial substance. Under SFAS 153, if a non-monetary
        exchange of similar productive assets meets a commercial-substance criterion
        and
        fair value is determinable, the transaction must be accounted for at fair
        value
        resulting in recognition of any gain or loss. SFAS 153 is effective for
        non-monetary transactions in fiscal periods that begin after June 15, 2005.
        The
        Company does not anticipate that the implementation of this standard will
        have a
        material impact on its financial position, results of operations or cash
        flows.
  F
            -
            14
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        4-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** **(CONTINUED)**
 
 **Recently
        Issued Accounting Pronouncements** **(Continued)**
 
 In
        May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
        Corrections.” SFAS No. 154 replaces Accounting Principles Board (“APB”)
        Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
        Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires
        retrospective application to prior periods’ financial statements of a voluntary
        change in accounting principle unless it is impracticable. APB No. 20
        previously required that most voluntary changes in accounting principle be
        recognized by including the cumulative effect of changing to the new accounting
        principle in net income in the period of the change. SFAS No. 154 is
        effective for accounting changes and corrections of errors made in fiscal
        years
        beginning after December 15, 2005.
 
 In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
        Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and
        140.” SFAS No. 155 resolves issues addressed in SFAS No. 133
        Implementation Issue No. D1, “Application of Statement 133 to Beneficial
        Interests in Securitized Financial Assets,” and permits fair value remeasurement
        for any hybrid financial instrument that contains an embedded derivative
        that
        otherwise would require bifurcation, clarifies which interest-only strips
        and
        principal-only strips are not subject to the requirements of SFAS No. 133,
        establishes a requirement to evaluate interests in securitized financial
        assets
        to identify interests that are freestanding derivatives or that are hybrid
        financial instruments that contain an embedded derivative requiring bifurcation,
        clarifies that concentrations of credit risk in the form of subordination
        are
        not embedded derivatives and amends SFAS No. 140 to eliminate the
        prohibition on a qualifying special-purpose entity from holding a derivative
        financial instrument that pertains to a beneficial interest other than another
        derivative financial instrument. SFAS No. 155 is effective for all
        financial instruments acquired or issued after the beginning of the first
        fiscal
        year that begins after September 15, 2006. The Company is currently
        evaluating the effect the adoption of SFAS No. 155 will have on its
        financial position or results of operations.
  F
            -
            15
 ***Table
            of Contents***
 
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        4** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** **(CONTINUED)**
 
 **Recently
        Issued Accounting Pronouncements** **(Continued)**
 
 In
        March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
        Financial Assets, an amendment of FASB Statement No. 140.” SFAS
        No. 156 requires an entity to recognize a servicing asset or liability each
        time it undertakes an obligation to service a financial asset by entering
        into a
        servicing contract under a transfer of the servicer’s financial assets that
        meets the requirements for sale accounting, a transfer of the servicer’s
        financial assets to a qualified special-purpose entity in a guaranteed mortgage
        securitization in which the transferor retains all of the resulting securities
        and classifies them as either available-for-sale or trading securities in
        accordance with SFAS No. 115, “Accounting for Certain Investments in Debt
        and Equity Securities” and an acquisition or assumption of an obligation to
        service a financial asset that does not relate to financial assets of the
        servicer or its consolidated affiliates. Additionally, SFAS No. 156
        requires all separately recognized servicing assets and servicing liabilities
        to
        be initially measured at fair value, permits an entity to choose either the
        use
        of an amortization or fair value method for subsequent measurements, permits
        at
        initial adoption a one-time reclassification of available-for-sale securities
        to
        trading securities by entities with recognized servicing rights and requires
        separate presentation of servicing assets and liabilities subsequently measured
        at fair value and additional disclosures for all separately recognized servicing
        assets and liabilities. SFAS No. 156 is effective for transactions entered
        into after the beginning of the first fiscal year that begins after
        September 15, 2006. The Company is currently evaluating the effect the
        adoption of SFAS No. 156 will have on its financial position or results of
        operations.
  F
            -
            16
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        5-****PROPERTY
        AND EQUIPMENT**
 
 Property
        and equipment consist of the following at June 30, 2006 and 2005. 
 2005
                
                2006Computer
                
                $
                26,572
                
                $
                7,000Equipment
                    and machinery
                
                
                13,274
                
                
                13,273Office
                    equipment
                
                
                5,786
                
                
                2,72345,632
                
                
                22,996Less:
                    accumulated depreciation
                
                
                (9,856
                )
                
                (1,854
                )$
                35,776
                
                $
                21,142
 
 Depreciation
          expense for the twelve months ended June 30, 2006 and 2005 was $5,920 and
          $1,854.
 **NOTE
        6-** **CURRENT
        PORTION OF NOTES PAYABLE**
  $250,000
        Note payable to Twilight Bay, LLC commencing January 2006 for working
        capital needs.
        The note is due in one year and carries a stated interest rate of two percent.
 
 $995,000
        Note payable to Transporter Inc. commencing August 2004 for the purchase
        of
        exclusive rights to certain video-conferencing technology. Original amount
        of
        Note was $1,000,000. The Company is currently in litigation with Transporter
        Inc. regarding the technology for which the note was issued. The Company
        has
        defaulted on this note and this note is due in full. See Note 11 regarding
        the
        litigation of this matter.
 
 **NOTE
        7-** **CONTINGENT
        SHARE-BASED PAYMENT**
  In
        addition to the Note Payable above, the Transporter Inc., purchase in August
        2004, consisted of
        the
        issuance by the Company of  1,000,000
        shares to the former shareholders of Transporter, Inc.
        These shares are guaranteed to have a value of $2.00 per share for a period
        of 2
        years. Because
        market share value is above $2.00 per share, There is no value placed for
        this
        contingent liability
        as of the reporting dates June 30, 2006 and 2005, but is disclosed for reporting
        purposes only.
  F
            -
            17
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 
 **NOTE
        8-** **LIABILITY
        FOR STOCK TO BE ISSUED**
 
 The
        Company has entered into consulting contracts where the fees paid to the
        vendor
        are paid with Company common shares. An expense is recorded when the requisite
        service has been provided by the consultant in accordance with the consulting
        agreement. The expense is valued at fair market value of the services provided.
        At June 30, 2006 and 2005 services were provided and earned but yet to received
        share payment by the company.
 
 Shares
                  to be issued
              
              Market
                  ValueJune
                  30, 2005
              
              
              25,000
              
              $
              84,500June
                  30, 2006
              
              
              35,000
              
              $
              125,400
  **NOTE
        9-** **SHARED-BASED
        FEE LIABILITY- WARRANTS**
 
 The
        company has entered into consulting contracts where the consideration paid
        to
        the vendor is with options which are a common stock equivalent. Warrants
        provide
        the holder with the right to buy shares of Company stock at a set price
        (exercise price) within a set period of time.
 
 In
        accordance with SFAS 123r, the Company has recognized an expense when the
        requisite service has been performed by the vendor. Any unexercised warrants
        are
        recorded as a liability and revalued using an econometric model at each
        reporting period.
 
 Unexercised
              
              
              
              Value
                  at
              
              Value
                  atWarrant
                  #
              
              #Shares
              
              Exercise
                  Price
              
              Until
              
              June
                  30, 2006
              
              June
                  30, 200516-19
              
              
              50,000
              
              
              1.75-2.50
              
              
              3/2010
              
              $
              111,250
              
              $
              247,75012-14
              
              
              35,001
              
              
              3.00-5.00
              
              
              10/2007
              
              $
              52,968
              
              $
              -15
              
              
              250,000
              
              
              4.00
              
              
              11/2007
              
              $
              400,000
              
              $
              -Total
              
              
              
              
              
              
              
              
              
              
              $
              564,218
              
              $
              247,750
 
  F
            -
            18
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        10-** **SHARED-BASED
        FEE LIABILITY- OPTIONS**
 
 The
        company has entered into consulting contracts where the consideration paid
        to
        the vendor is with options which are a common stock equivalent. Options provide
        the holder with the right to buy shares of Company stock at a set price
        (exercise price) within a set period of time.
 
 In
        accordance with SFAS 123r, the Company has recognized an expense when the
        requisite service has been performed by the vendor. Any unexercised options
        are
        recorded as a liability and revalued using an econometric model at each
        reporting period.
 
 Unexercised
              
              
              
              Unexercised#Shares
              
              Value
              
              #Shares
              
              ValueOption
              
              
              
              
              
              June
                  30,
              
              June
                  30
              
              June
                  30
              
              June
                  30#
              
              Price
              
              Until
              
              2006
              
              2006
              
              2005
              
              20056
              
              
              1.52
              
              
              4/2010
              
              
              762,000
              
              $
              1,684,020
              
              
              960,939
              
              $
              3,180,7088
              
              
              3.00
              
              
              5/2011
              
              
              10,000
              
              
              22,300
              
              
              -
              
              
              -12
              
              
              2.63
              
              
              4/2011
              
              
              50,000
              
              
              111,000
              
              
              -
              
              
              -13
              
              
              2.03
              
              
              6/2011
              
              
              350,000
              
              
              787,500
              
              
              -
              
              
              -Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              2,604,820
              
              $
              3,180,708
 
 **NOTE
        11-** **SHARED-BASED
        COMPENSATION LIABILITY- OPTIONS**
 
 The
        company has entered into compensation contracts where the consideration paid
        to
        the employee is with options which are a common stock equivalent. Options
        provide the holder with the right to buy shares of Company stock at a set
        price
        (exercise price) within a set period of time.
 
 In
        accordance with SFAS 123r, the Company has recognized an expense when the
        requisite service has been performed by the employee. Any unexercised options
        are recorded as a liability and revalued using an econometric model at each
        reporting period.
 
 Unexercised
              
              
              
              
              
              Value
                  at
              
              Value
                  atTitle
              
              Option#
              
              #Shares
              
              Price
              
              Until
              
              June
                  30, 2006
              
              June
                  30, 2005Board
              
              
              1-3
              
              
              279,000
              
              
              .50
              
              
              12/09
              
              $
              616,590
              
              $
              923,490Sec/Treas
              
              
              4
              
              
              1,000,000
              
              
              1.52
              
              
              4/10
              
              $
              2,210,000
              
              $
              3,310,000CEO
              
              
              5
              
              
              1,000,000
              
              
              1.52
              
              
              4/10
              
              $
              2,210,000
              
              $
              3,310,000Admin
              
              
              7,8-11
              
              
              140,000
              
              
              2.15-2.63
              
              
              8/10
              
              $
              304,020
              
              $
              -Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              5,340,610
              
              $
              7,543,490
   F
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            19
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        12-** **DUE
        TO RELATED COMPANY**
 
 Transmax,
        Inc., a related party, whose ownership is also a director and officer of
        the
        Company, provided office space to the Company at no charge, and funded payroll,
        moving and other general expenses during the year ended June 30, 2003. As
        of
        June 30, 2006, the Company incurred and accrued $314,339, in liabilities
        to this
        entity. The advances and funding are based on verbal commitments with no
        guarantees of future advances or funding. A payment for $10,000 payment was
        made
        for the twelve months ended June 30, 2006 and the Company made payments of
        $3,000 during the three months ended June 30, 2005.
 
 **NOTE
        13-** **DUE
        TO SHAREHOLDERS**
 
 Certain
        shareholders of the Company have advanced funds to the Company to cover cash
        flow deficiencies. These advances have no stated repayment terms and bear
        interest at 5% with interest payable annually.
 
 On
        March
        14, 2006, we agreed to accept the proposal of Samuel J. Higgins to convert
        $975,000.00 of the debt owed to International Equity Partners by our company
        for
        319,672 shares of restricted common stock at the closing market price on
        March
        14, 2006 of $3.05 per share. Mr. Higgins is an officer and director of our
        Company and wholly owns International Equity Partners.
 
 **NOTE
        14-** **COMMON STOCK**
 
 The
        Company has 100,000,000 shares of common stock authorized, par value $.001.
        As
        of June 30, 2006, the Company has 35,004,257 shares of common stock issued
        and
        outstanding.
 
 The
        Company issued 37,994,923 shares of its common stock in connection with the
        acquisition of Aero Marine Engine Corp. Under reverse acquisition accounting,
        these shares are reflected as issued on the date of inception and valued
        at the
        book value of the net assets of as of the date of the transaction.
 
 Aero
        was
        incorporated in contemplation of the reverse acquisition of the Company as
        well
        as the Dyna-Cam acquisition. A total of 38,994,923 common shares were issued
        in
        the reverse merger transaction. However, 1,000,000 of those shares were
        designated for the Dyna-Cam acquisition. (See Subsequent Event Footnote.)
        The
        Company raised $1,218,598 as part of its initial capitalization. This capital
        was raised among four individuals in contemplation of their receiving the
        37,994,923 shares of the Company's common stock in connection with the
        acquisition of Aero Marine Engine Corp. The value of the 1,000,000 shares
        issued
        in connection with the Dyna-Cam purchase was determined to be $0.032 per
  F
            -
            20
 ***Table
            of Contents***
 
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        14-** **COMMON
        STOCK  (** **CONTINUED)**
 
 share,
        which is the price per share paid by the investors that acquired the 37,994,923
        shares for cash.
 
 In
        connection with the reverse acquisition transaction with Aero, the Company's
        two
        controlling shareholders at that time cancelled 9,337,860 shares of common
        stock
        held by them. Upon completion of this cancellation, the Company had 11,000,000
        shares of common stock remaining outstanding prior to the reverse acquisition
        transaction.
 
 On
        July
        30, 2004 with an effective date of August 9, 2004 the Board of Directors
        adopted
        a resolution authorizing and approving a 100 to 1 reverse stock split and
        the
        new trading symbol of the company is AOME.
 
 On
        August
        24, 2004 International Equity Partners, SA purchased Transporter, Inc., a
        company developing video conferencing software allowing the creation of virtual
        private networks that are PC based, have no need to use servers or special
        equipment, and operate on any broadband connection. The purchase price was
        $3,000,000, $100,000 of which is payable within 60 days of the date of the
        Exclusive Purchase Agreement with the balance payable in intervals over 24
        months. In addition, the former stockholders of Transporter, Inc. are to
        be
        issued 1,000,000 shares of the common stock of the Company. At
        the
        end of a two-year period the shares are guaranteed to be worth at least $2.00
        per share, and, if worth less, additional shares of stock will then be issued
        to
        make up the difference.
 
 On
        August
        24, 2004 the Company acquired through an assignment by International Equity
        Partners, SA, a related party, all rights, title, and interest in the aforesaid
        Exclusive Purchase Agreement in exchange for 25,000,000 shares of common
        stock
        of the Registrant.
   F
            -
            21
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        14-** **COMMON
        STOCK** **(CONTINUED)**
 
 On
        August
        25, 2004, the Company entered into a Consulting Fee Agreement with Carlyle
        Financial Consulting Group, which will continue to provide consulting services
        for all of the Company’s businesses and will also continue to coordinate
        prospective acquisitions in European countries and the Arabian Gulf. The
        consulting fee was negotiated for 1,400,000 shares of common stock, which
        the
        Company has registered with the Securities and Exchange Commission on Form
        S-8
        Registration Statement under the Securities Act of 1933.
 
 On
        September 9, 2004, the Company issued 200,000 shares of common stock of the
        Company in exchange for legal and professional services rendered and to be
        rendered.
 
 On
        November 11, 2004 the Company issued 463,776 shares of common stock of the
        Company in exchange for financial services. The services were never rendered
        and
        the shares were subsequently canceled. These transactions have been
        retroactively restated back to the nine months ended June 30, 2005 to reflect
        the cancellation.
 
 On
        January 3, 2005 the Company issued 100,000 shares of common stock with a
        par
        value of $.001 for $300 cash.
 
 On
        April
        6, 2005 the Company issued 50,000 shares of common stock of the Company in
        exchange for consulting services rendered.
 
 On
        April
        20, 2005, the Company completed an offering of 1,800,000 units at a price
        of
        $0.50 per unit. Each unit consists of one share of common stock par value
        $.001
        and one warrant to purchase one share of common stock, exercisable for two
        years
        closing of the offering. The total amount the Company received was $900,000.
        As
        of June 30, 2006, 1,594,790 shares have been issued.
 
 On
        April
        17, 2005, the Company issued 1,465,000 shares of common stock of the Company
        in
        exchange for a management-consulting contract. The contract is for a period
        of
        five years and is estimated to be worth $35,000 a year, totaling $175,000.
  F
            -
            22
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        14-** **COMMON
        STOCK** **(CONTINUED)**
 
 On
        April
        15, 2005, the Company issued 600,000 shares of common stock of the Company
        as
        compensation.
 
 On
        April
        15, 2005, the Company issued 20,000 shares of common stock of the Company
        as
        part of a previous agreement for consulting services rendered.
 
 For
        the
        twelve months ended June 30, 2005, the Company issued 39,061 shares of common
        stock for exercise of share-based options for legal services.
 
 During
        the year, the Company canceled 860,000 of founder shares, which had been
        restated back to the period ended June 30, 2003.
 
 Total
        shares Issued July 1, 2004 to June 30, 2005: 32,085,181. Total common shares
        outstanding at June 30, 2005: 32,162,762.
 
 In
        August
        of 2005, the Company issued 1,465,000 shares of common stock in exchange
        for
        financial services. The services were never rendered and the shares were
        subsequently cancelled.
 
 In
        November of 2005 the Company issued 170,000 shares of common stock of the
        Company in exchange for consulting services rendered.
 
 In
        the
        three months ended June 30, 2006 the Company issued 30,000 shares of common
        stock and 50,000 warrants for consulting services valued at $97,820 and $150,000
        respectively. The Company also issued 35,000 shares for services then later
        canceled them due to lack of performance.
 
 In
        the
        same period the Company issued 319,672 and 10,000 shares of common stock
        in
        satisfaction of debt to a related company, valued at $975,000 and $40,890
        respectively.
 
 Also
        in
        the three months ended June 30, 2006 the Company issued 230,940 shares in
        satisfaction of debts to private lenders valued at $888,109 (see note 13).
 
 The
        Company also issued 134,570 shares of its common stock for cash.
  F
            -
            23
 ***Table
            of Contents***
 
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        14-** **COMMON
        STOCK** **(CONTINUED)**
 
 For
        the
        twelve months ended June 30, 2006, the Company issued 201,939 shares of common
        stock through the exercise of options. The options carry strike prices of
        $.5 to
        $3.00.
 
 For
        the
        twelve months ended June 30, 2006, the Company issued 1,897,944 shares of
        common
        stock as part of their Standby Equity Agreement.
 
 Total
        shares Issued July 1, 2005 to June 30, 2006: 2,377,719. Total common shares
        outstanding at June 30, 2006: 35,004,257.
 
 The
        Company, at June 30, 2006, has 100,000,000 shares of preferred stock authorized
        and no shares issued and outstanding.
 
 **NOTE
        15-** **PREPAID
        SHARE-BASED FEES AND COMPENSATION** ****
 
 The
        Company has paid consultants and employees with common shares and equivalents
        for services. An expense is recorded when requisite services are performed
        and
        valued at fair market value. Common share equivalents such as warrants and
        options are valued using an econometric model. At June 30, 2006 and 2005,
        the
        Company has paid consultants and employees in advance of the earning of fees
        and
        compensation. The Company has elected to record this advance payment with
        common
        shares and equivalents as an offset to stockholder's equity.
 
  F
            -
            24
 ***Table
            of Contents***
 
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
  
 **NOTE
        16-** **BENEFICIAL
        REDUCTION OF SHARE-BASED LIABILITIES**
 
 In
        accordance with SFAS 123r, the Company revalues unexercised common share
        equivalents such as warrants and options issued for payments to consultants
        and
        employees. These unexercised common share equivalents are carried as liabilities
        until exercised and recorded as common share issuance and additional paid-in
        capital. Decreases in this liability due to the revaluation of common share
        equivalents are recorded as a beneficial reduction of share-based liabilities.
        The Company has elected to classify this account as stockholder's
        equity.
 
 **NOTE
        17-** **ADVERTISING
        AND PROMOTION** ****
 
 The
        Company has paid consultants with common shares and equivalents for services.
        An
        expense is recorded when requisite services are performed and valued at fair
        market value. Common share equivalents such as warrants and options are valued
        using an econometric model.  For
        the
        years ending June 30, 2006 and 2005, the following amounts were paid for
        advertising and promotion.
 
 June
                  30
              
              June
                  302006
              
              2005Cash
                  and accrued expense
              
              $
              761,015
              
              $
              936,262Common
                  Shares
              
              
              985,196
              
              
              4,522,521Options
              
              
              787,500
              
              
              -Warrants
              
              
              316,718
              
              
              247,750Total
              
              $
              2,850,429
              
              $
              5,706,533
 
 **NOTE
        18-** **BENEFICIAL
        SHARE-BASED FEE EXPENSE**
 
 The
        Company records a beneficial share-based fee expense when the market value
        as
        calculated in accordance with SFAS 123r of share-based awards to vendors
        are
        over and above the stated fair value of the services provided.
 
 
  F
            -
            25
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        19-** **BOARD
        COMPENSATION**
 
 On
        December 9, 2004, the Company compensated board members with options with
        an
        exercise price of $ .50 per share good for five years. No options have been
        exercised to date. In  accordance
        with SFAS 123r this share-based compensation is retroactively expensed in
        the
        year issued and valued with an econometric model. Options to purchase 279,000
        shares were valued at $3.31 per share at the date of issue.
 
 **NOTE
        20-** **LEGAL FEES** ****
 
 The
        Company has paid legal professionals with common shares and equivalents for
        services. An expense is recorded when requisite services are performed and
        valued at fair market value. Common share equivalents such as warrants and
        options are valued using an econometric model. For the years ending June
        30,
        2006 and 2005, the following amounts were paid for legal fees.
 
 June
                  30
              
              June
                  302006
              
              2005Cash
                  and accrued expense
              
              $
              1,820,015
              
              $
              211,251Common
                  Shares
              
              
              -
              
              
              59,000Options
              
              
              -
              
              
              3,310,000Total
              
              $
              1,820,015
              
              $
              3,580,251
 
  F
            -
            26
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        21-** **OFFICERS
        COMPENSATION** ****
 
 In
        addition to regular monthly salary payments, the Company has paid officers
        with
        common shares and equivalents for employment services. An expense is recorded
        when requisite services are performed and valued at fair market value. Common
        share equivalents such as warrants and options are valued using an econometric
        model. For the years ending June 30, 2006 and 2005, the following amounts
        were
        paid for officer's compensation.
 
 June
                  30
              
              June
                  302006
              
              2005CEO,
                  Ray BrouzesSalary
              
              $
              142,102
              
              $
              -Common
                  Shares
              
              
              651,000
              
              
              135,625Options
              
              
              1,270,000
              
              
              3,310,000Total
              
              $
              2,063,102
              
              $
              3,445,625Secretary/Treasurer,
                  Samuel HigginsSalary
              
              $
              37,172
              
              $
              -Options
              
              
              1,270,000
              
              
              3,310,000Total
              
              $
              1,307,172
              
              $
              3,310,000CFO,
                  Benjamin LangfordSalary
              
              $
              13,000
              
              $
              -Total
              
              $
              13,000
              
              $
              -Total
                  Officer's Compensation
              
              $
              3,383,274
              
              $
              6,755,625
 
 **NOTE
        22-** **RESEARCH
        AND DEVELOPMENT**
 
 On
        August
        2004, the Company entered into a contract with Adaptive Propulsion Systems,
        Inc.
        a subsidiary of Tactronics, Inc. to assist in the engineering, manufacture
        and
        marketing of the digital axial vector cam engine technology. In January,
        2005
        the Company entered into an additional contract with Adaptive to provide
        similar
        assistance in developing multiple electricity generator technologies that
        coordinate with the digital engine technology. The agreements provide no
        guarantees to either party relief or refund if the technologies developed
        prove
        unviable. No common shares or equivalents have been paid in connection with
        research and development. The Company has elected to expense research and
        development expense when it is incurred.
  F
            -
            27
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        23-** **WRITE
        OFF OF WORTHLESS INVENTORY**
 
 Prior
        to
        July 1, 2004, the Company deemed the inventory connected with the Aero Marine
        Engine was deemed worthless in the amount of $266,519.
 
 **NOTE
        24-** **LAWSUIT
        SETTLEMENTS**
 
 On
        February 3, 2006 and April 28, 2006, we issued 472,340 shares of common stock
        to
        International Equity Partners for consideration for the assignment of claims
        against Robert Fyn and the release of claims against our company brought
        by
        certain private lenders in New Zealand. International Equity Partners issued
        out
        of its own stock to satisfy a New Zealand court order to compensate these
        private lenders. Share-based payments were valued at market value ranging
        from
        $3.80 to $3.85 per share.
 
 **NOTE
        25-** **IMPAIRMENT
        OF INTANGIBLE ASSET**
 
 In
        connection with the purchase by the Company of the rights to Transporter,
        Inc.
        assets from IEP, a related party, it was deemed by management during the
        year
        ending June 30, 2005, that the Transporter, Inc. video technology was unviable
        and deemed worthless. Therefore, impairment expense of the full purchase
        price
        of $3,000,000 was recognized.
 
 **NOTE
        26-** **PROVISION
        FOR INCOME TAXES**
 
 Deferred
        income taxes will be determined using the liability method for the temporary
        differences between the financial reporting basis and income tax basis of
        the
        Company’s assets and liabilities. Deferred income taxes will be measured based
        on the tax rates expected to be in effect when the temporary differences
        are
        included in the Company’s tax return. Deferred tax assets and liabilities are
        recognized based on anticipated future tax consequences attributable to
        differences between financial statement carrying amounts of assets and
        liabilities and their respective tax bases.
 
 At
        June
        30, 2006, deferred tax assets consist of the following:
 
 2006Deferred
                  tax assets
              
              $
              2,095,906Less:
                  valuation allowance
              
              
              (2,095,906
              )Net
                  deferred assets
              
              $
              -0-
 
 At
        June
        30, 2006, the Company had federal net operating loss carry forwards in the
        approximate amounts of $8,383,622 available to offset future taxable income
        through 2026. The Company established valuation allowances equal to the full
        amount of the deferred tax assets due to the uncertainty of the utilization
        of
        the operating losses in future periods.
  F
            -
            28
 ***Table
            of Contents***
 **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        27-**  **RELATED
        PARTY DISCLOSURE**
  On
        August
        24, 2004, the company entered into an Assignment Agreement with International Partners,
        S.A. (“IEP”).  Under the Assignment Agreement, the company issued 25
        million shares to
        IEP in
        exchange for an assignment from IEP of the contractual right to acquire
        a proprietary secured  video
        conference software known as the “Transporter” software from Transporter,
        Inc. The
        terms
        of the  purchase
        from Transporter, Inc. called for the company to issue one
        million shares
        to
        the owners of Transporter, Inc., Craig Della Penna and Daniel Werner, and
        to
        pay Transporter
        $1 million over the course of two years.  The one million shares called for
        under the Transporter
        purchase agreement were issued to Della Penna and Werner on September 9,
        2004.
  Subsequently,
        the company discovered that, unbeknownst to either the company or IEP, Mr. Della
        Penna and Mr. Werner had thoroughly misrepresented the Transporter software’s capabilities
        and degree of developmental maturity during the negotiations
        and discussions leading
        up to the purchase agreement and that the company would, in all likelihood,
        be unable
        to
        profitably develop the software.  The company sued Transporter, Della
        Penna, and
        Werner for rescission of the purchase agreement and for a return of the 1
        million shares issued
        to
        these individuals.  The company reached a settlement with the
        duly-appointed bankruptcy
        trustee for Transporter, Inc. under which the purchase agreement was rescinded, ownership
        the Transporter software was returned to the bankruptcy estate of Transporter,
        and the company
        was released from further responsibility under the purchase contract.  This
        agreement was
        approved by the bankruptcy court and became effective on May 22, 2006.
 
 **NOTE
        28-** **COMMITMENTS
        AND CONTINGENCIES**
 
 On
        August
        24, 2004 the Company entered into a Joint Venture Agreement with Adaptive
        Propulsion Systems, LLC (“Adaptive”), a wholly owned subsidiary of Tactronics.
        Adaptive will provide 100% of the capital and labor to build military grade
        engines based on the Registrant’s Dyna-Cam engine design. Adaptive will pay the
        Company a 20% gross royalty on all orders of the engines sold to the United
        States Government. The Company will have the rest of the world military market
        and all civilian commercial applications, and the Company will pay a five
        (5%)
        percent royalty on such orders to Adaptive. For the twelve months ended June
        30,
        2006 the Company has research and development costs of approximately
        $2,582,408.
  F
            -
            29
 ***Table
            of Contents***
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **June
        30, 2006 AND 2005**
 
 **NOTE
        28-** **COMMITEMENTS
        AND CONTINGENCIES** **(CONTINUED)**
 
 In
        May
        2005, the Company filed suit against Transporter, Inc and its principals,
        David
        Werner and Craig Della Penna. The suit seeks to rescind the August 2004
        agreement under which the Company acquired the exclusive rights to certain
        video-conferencing technology. The Company contends that the principals
        intentionally misrepresented the status and capabilities of the technology
        that
        was acquired under the original agreement. The case is pending litigation.
        The
        Company has determined that the technology is worthless, and thus has impaired
        the asset in its entirety as of June 30, 2006.
 
 In
        October 2005, the Company entered into a business consulting agreement with
        Wexler Kronen Capital Associates. Wexler is to provide consulting and
        promotional services for a period of 12 months. The payment for these services
        is $7,000 per month, 10,000 shares of restricted stock and 3 warrants. Each
        warrant is exercisable for 35,000 shares at various exercise prices. One
        for
        $4.00, the second for $4.50 and the third for $5.00. The warrants expire
        October
        2007.
 
 In
        November 2005, the Company entered into a business consulting agreement with
        Redwood Consultants L.L.C. Redwood is to provide consulting services for
        a
        period of 12 months to the Company. As part of this agreement, the Company
        issued 75,000 restricted shares with an additional 25,000 shares to be issued
        February 27, 2006 and 100,000 shares issued on May 22, 2006.  All
        200,000 were issued at commencement of the agreement and have been recorded
        as a
        prepaid asset on a prorata basis. In addition, the company has granted warrants
        to purchase 250,000 shares at $4.00 per share which expire November 2007.
 
 In
        January 2006, the Company entered into a business consulting agreement with
        John
        F. Walter. Walter is to provide consulting services for a period of 12 months
        to
        the Company in exchange for monthly payments of $10,000. The contract is
        renewable annually.
  F
            -
            30
 ***Table
            of Contents***
  **Item
        8.   Changes In and Disagreements with Accountants
        on Accounting and Financial**


**Disclosure**





No
      events
      occurred requiring disclosure under Item 304(b) of Regulation S-B.





**Item
      8A. Controls and Procedures**





We
      maintain disclosure controls and procedures designed to ensure that information
      required to be disclosed in reports filed under the Securities Exchange Act
      of
      1934, as amended, is recorded, processed, summarized, accumulated and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding required
      disclosure.





Based
      upon their evaluation as of the end of the period covered by this report, our
      Chief Executive Officer and Chief Financial Officer concluded that, our
      disclosure controls and procedures are not effective to ensure that information
      required to be included in our periodic SEC filings is recorded, processed,
      summarized, and reported within the time periods specified in the SEC rules
      and
      forms.





A
      material weakness is a significant deficiency or a combination of significant
      deficiencies that result in a more than remote likelihood than a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected.





Bagell,
      Josephs, Levine and Company, LLC, our independent registered public accounting
      firm, has advised our management and the board of directors that it had
      identified the following material weaknesses in our internal
      controls:





A
      material weakness exists as of June 30, 2006, with regard to insufficient
      personnel in the accounting and financial reporting function due to the size
      of
      our company which prevents the ability to employ sufficient resources to have
      adequate segregation of duties within the internal control system. This material
      weakness affects management's ability to effectively review and analyze elements
      of the financial statement closing process and prepare consolidated financial
      statements in accordance with U.S. GAAP.





In
      addition, a material weakness exists as of June 30, 2006, in controls over
      closing procedures due to a number of adjustments made at the end of the year
      period. There were deficiencies in the analysis and reconciliation of general
      ledger accounts which were indicative of a material weakness in controls over
      closing procedures, including the (a) recognition of expenses in appropriate
      periods, and (b) the accounting and reporting of capital
      transactions.





In
      order
      to remediate this material weakness in our internal control over financial
      reporting, management is in the process of designing and implementing and
      continuing to enhance controls to aid in the correct preparation, review,
      presentation and disclosures of our Consolidated Financial Statements. We are
      continuing to monitor, evaluate and test the operating effectiveness of these
      controls.


32
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Other
      than indicated above, there were no changes in our internal control over
      financial reporting that occurred during the last fiscal year that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.





**Limitations
      on the Effectiveness of Controls**





Because
      of its inherent limitations, internal control over financial reporting will
      not
      provide absolute assurance that it will prevent or detect all errors and all
      fraud. A control system, no matter how well designed and operated, can provide
      only reasonable, not absolute, assurance that the control system’s objectives
      will be met. 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. 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. The design of any system of controls is based in part
      upon certain assumptions about the likelihood of future events, and there can
      be
      no assurance that any design will succeed in achieving its stated goals under
      all potential future conditions. Over time, controls may need to change because
      of changes in conditions or deterioration in the degree of compliance with
      associated policies or procedures.





**Item
      8B. Other information**





**None.**





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          of Contents***


**PART
      III**





**Item
      9.   Directors, Executive Officers, Promoters and
      Control Persons; Compliance with Section 16(a)**


**of the Exchange Act**





The
      following information sets forth the names of our current directors and
      executive officers, their ages and their present positions with the Company.





**Name**
            **Age**
            **Position(s)
                and Office(s) Held**Dr.
                Raymond Brouzes
            64
            Chief
                Executive Officer, Chief Financial Officer, and DirectorSamuel
                J. Higgins
            51
            Secretary,
                Treasurer, and DirectorBenjamin
                Langford
            57
            Director





Set
      forth
      below is a brief description of the background and business experience of each
      of our current executive officers and directors.





**Dr.
      Raymond Brouzes** is our
      president, chief executive officer and has been one of our directors since
      January 2005. Dr. Brouzes was invited in 1996 by the National Science and
      Technology Board of Singapore to create an environmental institute that would
      be
      one of the ten institutes funded by the government to spearhead that nation’s
      highly successful knowledge based economy. His appointment was based on a number
      of factors including his successful Canadian experience as Director General
      of
      the Technology Development Branch of Environment Canada; as Corporate Director
      for Environmental Affairs with Alcan Aluminium for 10 years and as a senior
      partner in a venture capital fund. In 2001 following his five year appointment
      in Singapore, Dr. Brouzes accepted the Presidency of Ultrasound Fluid
      Technologies, L.L.C. a Texas based start-up firm specializing in ultrasound
      for
      cost-effective separation (desalination) of salt from seawater to produce
      potable water. From May 2004 to August 2005, Dr. Brouzes served as President
      at
      Trans Max Industries, Inc., a reporting company that specializes in water
      production technology and intelligent plasma ignition management
      systems.





**Samuel
      Higgins** has been
      one of our Directors since January 2005. Since 1995, Mr. Higgins has served
      as
      Senior Managing Director of IEP, International Equity Partners, a private equity
      firm with offices in Mexico, India and the United Arab Emirates. Mr. Higgins
      also is a director of Trans Max Technologies, Inc. and Magellan Industries,
      Inc., both reporting companies.





**Benjamin
      Langford** is one
      of our Directors.  Benjamin Langford was formerly our President and
      resigned from this position on January 6, 2005. Mr. Langford was employed from
      1999 to 2000 at Jefferson Smurfit Corporation in their Oregon City Division
      in
      the Production Department.  In 2000 until present, Mr. Langford has been
      President and sole owner of Langford Unlimited, as a business
      consultant.




34
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          of Contents***


**Directors**





Our
      bylaws authorize no less than one (1) and no more than twelve (12) directors.
      We
      currently have three Directors.





**Term
      of Office**





Our
      Directors are appointed for a one-year term to hold office until the next annual
      general meeting of our shareholders or until removed from office in accordance
      with our bylaws. Our officers are appointed by our board of directors and hold
      office until removed by the board.





**Family
      Relationships**





Other
      than the relationship set forth below, there are no family relationships between
      or among the directors, executive officers or persons nominated or chosen by
      the
      Company to become directors or executive officers.





Benjamin
      Langford is the brother-in-law of Samuel Higgins.





**Director
      or Officer Involvement in Certain Legal Proceedings**





To
      the
      best of our knowledge, during the past five years, except as provided below,
      none of the following occurred with respect to a present or former director
      or
      executive officer of the Company: (1) any bankruptcy petition filed by or
      against any business of which such person was a general partner or executive
      officer either at the time of the bankruptcy or within two years prior to that
      time; (2) any conviction in a criminal proceeding or being subject to a pending
      criminal proceeding (excluding traffic violations and other minor offenses);
      (3)
      being subject to any order, judgment or decree, not subsequently reversed,
      suspended or vacated, of any court of any competent jurisdiction, permanently
      or
      temporarily enjoining, barring, suspending or otherwise limiting his involvement
      in any type of business, securities or banking activities; and (4) being found
      by a court of competent jurisdiction (in a civil action), the Securities and
      Exchange Commission or the Commodities Futures Trading Commission to have
      violated a federal or state securities or commodities law, and the judgment
      has
      not been reversed, suspended or vacated.





On
      September 8, 2005, Trans Max Technologies, Inc. (“Trans Max”), also a reporting
      company, filed a voluntary petition for relief under Chapter 11 of the United
      States Bankruptcy Code in the United States Bankruptcy Court for the District
      of
      Nevada, Case No. BK-S-05-19263. Mr. Samuel J. Higgins, our officer and director,
      is the sole officer and director of Trans Max, and was so at the time of filing
      the petition for bankruptcy.





35
 ***Table
          of Contents***


**Audit
      Committee**





We
      do not
      have a separately-designated standing audit committee. The entire board of
      directors performs the functions of an audit committee, but no written charter
      governs the actions of the board of directors when performing the functions
      of
      that would generally be performed by an


audit
      committee. The board of directors approves the selection of our independent
      accountants and meets and interacts with the independent accountants to discuss
      issues related to financial reporting. In addition, the board of directors
      reviews the scope and results of the audit with the independent accountants,
      reviews with management and the independent accountants our annual operating
      results, considers the adequacy of our internal accounting procedures and
      considers other auditing and accounting matters including fees to be paid to
      the
      independent auditor and the performance of the independent auditor.





We
      do not
      have an audit committee financial expert because of the
      size
      of our company and our board of directors at this time. We believe that we
      do
      not require an audit committee financial expert at this time because we retain
      outside consultants who possess these attributes.





For
      the
      fiscal year ended June 30, 2006, the board of directors:




1.
            Reviewed
                and discussed the audited financial statements with management,
                and





2.
            Reviewed
                and discussed the written disclosures and the letter from our independent
                auditors on the matters relating to the auditor's
                independence.





Based
      upon the board of directors’ review and discussion of the matters above, the
      board of directors authorized inclusion of the audited financial statements
      for
      the fiscal year ended June 30, 2006 to be included in this Annual Report on
      Form
      10-KSB and filed with the Securities and Exchange Commission.





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 ***Table
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**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires our
      directors and executive officers and persons who beneficially own more than
      ten
      percent of a registered class of the Company’s equity securities to file with
      the SEC initial reports of ownership and reports of changes in ownership of
      common stock and other equity securities of the Company. Officers, directors
      and
      greater than ten percent beneficial shareholders are required by SEC regulations
      to furnish us with copies of all Section 16(a) forms they file. To the best
      of
      our knowledge based solely on a review of Forms 3, 4, and 5 (and any amendments
      thereof) received by us during or with respect to the fiscal year ended June
      30,
      2006, the following persons have failed to file, on a timely basis, the
      identified reports required by Section 16(a) of the Exchange Act during the
      fiscal year ended June 30, 2006:





Name
                and principal position
            Number
                of
              late
                reports
            Transactions
                not
              timely
                reported
            Known
                failures to
              file
                a required formDr.
                Raymond Brouzes, CEO & President
            0
            1
            0Samuel
                J. Higgins, Director
            0
            4
            1Benjamin
                Langford, Director
            0
            0
            0





**Code
      of Ethics Disclosure**





As
      of
      June 30, 2006, we have not adopted a Code of Ethics for Financial Executives,
      which include our principal executive officer, principal financial officer,
      principal accounting officer or controller, or persons performing similar
      functions.





We
      have
      begun the process of drafting a code of ethics which will be filed with the
      Security and Exchange Commission upon its adoption by the board of directors.





37
 ***Table
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**Item
      10. Executive Compensation**




The
      table
      below summarizes all compensation awarded to, earned by, or paid to our current
      executive officers for each of the last three completed fiscal
      years.





Annual
                Compensation
            Long
                Term CompensationName
            Title
            Year
            Salary
              ($)
            Bonus
              ($)
            Other
                Annual Compensation
              ($)
            Restricted
                Stock
              Awarded
              ($)
            Options/
              SARs
              (#)
            LTIP
              Payouts
              ($)
            All
                Other
              Compensation
              ($)Dr.
              Raymond
                Brouzes
            President
                CEO and Director
            2006
              2005
              2004
            142,102
              62,500
              n/a
            0
              0
              n/a
            0
              0
              n/a
            0
              1,200,000(1)
              n/a
            0
              1,000,000
              n/a
            0
              0
              n/a
            0
              0
              n/aSamuel
                Higgins
            Secretary
                Treasurer and Director
            2006
              2005
              2004
            37,172
              60,000
              n/a
            0
              0
              n/a
            0
              0
              n/a
            108,275(2)
              0
              n/a
            0
              1,000,000
              n/a
            0
              0
              n/a
            0
              0
              n/aBenjamin
                Langford
            Director
                and Former President
            2006
              2005
              2004
            13,000
              8,545
              2,000
            1,875
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              150,000
            0
              0
              0
            0
              0
              0Donald
                Whitehead
            Former
              Secretary
                and Director
            2006
              2005
              2004
            n/a
              n/a
              500
            n/a
              n/a
              0
            n/a
              n/a
              0
            n/a
              n/a
              0
            n/a
              n/a
              75,000
            n/a
              n/a
              0
            n/a
              n/a
              0Jeffrey
                Floyd
            Former
              Treasurer
                and Director
            2006
              2005
              2004
            n/a
              n/a
              500
            n/a
              n/a
              0
            n/a
              n/a
              0
            n/a
              n/a
              0
            n/a
              n/a
              54,000
            n/a
              n/a
              0
            n/a
              n/a
              0(1)
            The
                dollar value was calculated by multiplying the closing market price
                of
                $2.00 on April 15, 2005, the date of the grant, by the 600,000 shares
                of
                restricted common stock awarded.(2)****
            The
                dollar value was calculated by multiplying the closing market price
                of
                $3.05 on May 3, 2006, the date of the grant, by the 35,500 shares
                of
                restricted common stock awarded. These shares were awarded to
                International Equity Partners, and Mr. Higgins has an indirect beneficial
                ownership in shares held by International Equity
                Partners.





**Compensation
      to Directors**





We
      currently compensate Mr. Benjamin Langford $1,000 on a monthly basis for his
      service as a member of the board of directors. Other than the compensation
      paid
      to Mr. Langford, our directors are not compensated for serving on our board
      of
      directors.





**Summary
      of Options Grants**





We
      have
      not granted any stock options to our executive officers during the year ended
      June 30, 2006. We have not granted any stock options to our executive officers
      or employees since June 30, 2006.





38
 ***Table
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**Item
      11.**  **Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters**





The
      following table sets forth, as of June 30, 2006, the beneficial ownership of
      our
      common stock by each executive officer and director, by each person known by
      us
      to beneficially own more than 5% of the our common stock and by the executive
      officers and directors as a group. As used in this table, "beneficial ownership"
      means the sole or shared power to vote, or to direct the voting of, a security,
      or the sole or shared investment power with respect to a security (i.e., the
      power to dispose of, or to direct the disposition of, a security). In addition,
      for purposes of this table, a person is deemed, as of any date, to have
      "beneficial ownership" of any security that such person has the right to acquire
      within 60 days after such date.





**Title
                of class**
            **Name
                and address**
              **of
                beneficial owner**
            **Amount
                of**
              **beneficial
                ownership**
            **Percent**
              **of
                class****(1)****Current
                Executive Officers & Directors:**Common
            Dr.
                Raymond Brouzes(2)
              One
                World Trade Center
              121
                S.W. Salmon Street, Suite 1100
              Portland,
                Oregon 97204
            2,500,000
                shares
            6.9%Common
            Samuel
                J. Higgins(3)
              One
                World Trade Center
              121
                S.W. Salmon Street, Suite 1100
              Portland,
                Oregon 97204
            19,740,762
                shares
            54.8%Common
            Benjamin
                Langford
              One
                World Trade Center
              121
                S.W. Salmon Street, Suite 1100
              Portland,
                Oregon 97204
            0
                shares
            0%**Total
                of All Current Directors and Officer:**
            22,240,762
                shares
            60.1%





(1)
            The
                percentage shown is based on denominator of 35,004,257 shares of
                common
                stock issued and outstanding for the company as of June 30, 2006,
                plus the
                particular beneficial owner’s right to acquire common stock exercisable
                within 60 days.





(2)
            Included
                in the calculation of beneficial ownership for Dr. Brouzes are 1,500,000
                shares of common stock and options which are exercisable within 60
                days to
                purchase 1,000,000 shares of common stock. These options are immediately
                exercisable at the price of $1.52 per share and expire on April 14,
                2010.





(3)
            Included
                in the calculation of beneficial ownership for Mr. Higgins are options
                which are exercisable within 60 days to purchase 1,000,000 shares
                of
                common stock. These options are immediately exercisable at the price
                of
                $1.52 per share and expire on April 14, 2010. Mr. Higgins has an
                indirect
                beneficial ownership in 16,590,762 shares held by International Equity
                Partners S.A.
              
              Mr.
                Higgins also has an indirect beneficial ownership in 1,000,000 shares
                held
                by Higgins Irrevocable Trust with his spouse as trustee. Mr. Higgins
                has
                an indirect beneficial ownership in 900,000 shares held by HJS Family
                Trust for the benefit of Mr. Higgins’ sons. Mr. Higgins has an indirect
                beneficial ownership as trustee in 250,000 shares held by Bessie
                Family
                Trust.  In accordance with Rule 13d-4 of the Exchange Act, Mr.
                Higgins disclaims beneficial ownership in these shares.





39
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**Item
      12. Certain Relationships and Related
      Transactions**





Except
      as
      disclosed below, none of our directors or executive officers, nor any proposed
      nominee for election as a director, nor any person who beneficially owns,
      directly or indirectly, shares carrying more than 5% of the voting rights
      attached to all of our outstanding shares, nor any members of the immediate
      family (including spouse, parents, children, siblings, and in-laws) of any
      of
      the foregoing persons has any material interest, direct or indirect, in any
      transaction over the last two years or in any presently proposed transaction
      which, in either case, has or will materially affect us.





§
            On
                March 14, 2006, we agreed to accept the proposal of Samuel J. Higgins
                to
                convert $975,000.00 of the debt owed to International Equity Partners
                by
                our company for 319,672 shares of restricted common stock at the
                closing
                market price on March 14, 2006 of $3.05 per share. Mr. Higgins is
                an
                officer and director of our Company and wholly owns International
                Equity
                Partners.





§
            During
                the fiscal year ended June 30, 2006, we issued shares of our common
                stock
                to private lenders in satisfaction of debts misrepresented as those
                of our
                company. It was discovered that in 2005 specific lenders had lent
                sums of
                money to an individual who misrepresented himself as having the authority
                of our company. The individual borrowed funds and provided lenders
                a note
                promising repayment in shares of our common stock if the borrowings
                were
                not repaid within a specific period.





On
      February 6 2006, International Equity Partners Stock partially resolved the
      issue of the New Zealand private lenders and issued its own stock as follows:
      Christopher James Briggs - 7,100 shares; William Ross Collier and Susan Louise
      Collier - 5,680 shares; Robert James Franklin, Carolyn Jane Franklin, and
      Cornwall Trustees, Ltd. as trustees of the RJ and CJ Franklin Family Trust
      -
      35,500 shares; R.J. and R.P. Briggs - 28,400 shares; David and Wendy Fagan
      -
      85,200 shares; Daryl Brian Klein - 4,260 shares; Alternate Investment Methods,
      Ltd. - 28,400 shares; Andrew Jack Thomas - 14,200 shares; and David James Shaw
      -
      2,000 shares.





On
      February 15, 2006, International Equity Partners Stock issued its own stock
      to
      the remaining New Zealand private lenders as follows: Anthony James Gibb -
      2,000
      shares; Arvin James Harris - 4,000 shares; Michelle Anne King - 1,420 shares;
      Mark Blakeway - 1,420 shares; Owen Saunders - 7,100 shares; and Neil and Joanne
      Wackrow - 4,260 shares; and 241,400 shares for shares issued to Michael and
      Cindy Younger, and Paul and Jean Younger in June 2005.





We
      issued
      a total of 472,340 shares of common stock to International Equity Partners
      in
      consideration for the release of claims against our company brought by these
      private lenders in New Zealand and an assignment of any claims we may wish
      to
      assert as a result of the private loan transactions.





40
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**Item
      13. Exhibits**





Exhibit
                Number
            Description3.1
            Articles
                of Incorporation, as amended(1)3.2
            By-laws,
                as amended(1)31.1
            Certification
                of Chief Executive Officer pursuant to
                Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer pursuant to
                Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer and Chief
                Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002





(1)
            Incorporated
                by reference to Axial Vector’s 10-SB Registration
                Statement.








41
 ***Table
          of Contents***


**Item
      14. Principal Accountant Fees and Services**





**Audit
      Fees**





The
      aggregate fees billed by our auditors for professional services rendered in
      connection with a review of the financial statements included in our quarterly
      reports on Form 10-QSB and the audit of our annual consolidated financial
      statements for the fiscal years ended June 30, 2006 and 2005 were approximately
      $22,500 and $19,000 respectively.





**Audit-Related
      Fees**





Our
      auditors did not bill any additional fees for assurance and related services
      that are reasonably related to the performance of the audit or review of our
      financial statements.





**Tax
      Fees**




Our
      auditors dis not bill any additional fees for tax related services for the
      fiscal years ended June 30, 2006 and 2005.





**All
      Other Fees**





Our
      auditors did not bill for any other fees for any other services for the fiscal
      years ended June 30, 2006 and 2005.




42
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          of Contents***


**SIGNATURES**





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





**Axial
      Vector Engine Corp.**





By:


/s/ 
      Raymond
      Brouzes


Raymond
      Brouzes


Chief
      Executive Officer and


Chief
      Financial Officer





October
      13, 2006




In
      accordance with the requirements of the Securities Act of 1933, this
      registration statement was signed by the following persons in the capacities
      and
      on the date stated:




By: By:


/s/ 
      Raymond
      Brouzes                                /s/ 
Samuel J.
      Higgins Raymond
      Brouzes Samuel
      J.
      Higgins Director Director











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