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
      1934





For
      the
      fiscal year ended December 31, 2006.





OR





[
      ]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND


EXCHANGE
      ACT OF 1934 (NO FEE REQUIRED)





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


Commission
      File Number 0-29195








OnScreen
      Technologies, Inc.


(Name
      of
      Small Business Issuer in Its Charter)





Colorado
            (7310)
            84-1463284(State
                or jurisdiction of
            (Primary
                Standard Industrial
            (I.R.S.
                Employerincorporation
                or organization)
            Classification
                Code Number)
            Identification
                No.)








600
      NW
      14th Avenue, Suite 100


Portland,
      Oregon 97209


(503)
      417-1700


(Address
      and Telephone Number of Principal Executive Offices and Principal Place of
      Business)





Russell
      L. Wall, CEO/President


OnScreen
      Technologies ,
      Inc.


600
      NW
      14th Avenue, Suite 100


Portland,
      Oregon 97209, (503) 417-1700


(Name,
      Address and Telephone Number of Agent for Service)








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





Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, par value
      $0.001.





The
      issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
      the
      Exchange Act during the past 12 months (or for such shorter period that the
      registrant was required to file such reports) and (2) has been subject to such
      filing requirements for the past 90 days. [X] Yes [  ] 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. [X]





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


The
        issuer's revenues for its most
        recent fiscal year ended December 31, 2006 were $256,688.





The
      aggregate market value of the voting common equity held by non-affiliates as
      of
      December 31, 2006 was $29,528,902 (calculated by excluding shares owned
      beneficially by affiliates, directors and officers).





As
      of
      February 28, 2007, the registrant had 147,640,855 shares of common stock
      outstanding and 75,543 shares of Series A Convertible Preferred Stock
      outstanding and no shares of Series B Convertible Preferred
      outstanding.





2





**Index**
            **Part
                I**Item
                1.
            Description
                of Business
            4OnScreen
                WayCool Thermal Management Technology
            4LED
                Sign Industry Overview
            5OnScreen
                LED Technology
            6OnScreenTM
                Sign Products
            7Tensile
                Roll-Up
            8OnScreen
                Technologies, Inc. Business Strategy
            8Intellectual
                  PropertyOwnership of OnScreen Technology
            9Fusion
                Three, LLC Settlement
            9OnScreen
                Technology Intellectual Property Protection
            10Employees
            12Risks
                Related to Our Business
            12Risks
                Related to Our Common Stock
            15Item
                2.
            Description
                of Property
            17Item
                3.
            Legal
                Proceedings
            18Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            18Part
                IIItem
                5.
            Market
                for Common Equity and Related Stockholder Matters andSmall
                Business Issuer Purchases of Equity Securities
            18Recent
                Sales of Unregistered Securities
            21Shares
                Eligible for Sale
            22Item
                6.
            Management's
                Discussion and Analysis
            23Critical
                Accounting Policies
            25Liquidity
                and Capital Resources
            26Results
                of Operations
            27Item
                7.
            Financial
                Statements
            31Item
                8.
            Changes
                In and Disagreements with Accountants on Disclosure
            31Item
                8A.
            Controls
                and Procedures
            31Item
                8B
            Other
                Matters
            31Part
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control PersonsCompliance
                with Section 16(a) of the Exchange Act
            31Shareholder
                Communication
            32Business
                Experience of Executive Officers and Directors
            32Audit
                Committee
            35Audit
                Committee Report
            35Item
                10.
            Executive
                Compensation
            35Summary
                Compensation Table
            41Outstanding
                  Equity Awards at Fiscal Year-End
            42Director
                Compensation
            43Employment
                  Agreements
            44Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Managementand
                  Related Stockholder Matters
            45Employee
                Equity Incentive Plans
            48Item
                12.
            Certain
                Relationships and Related Transactions
            49Item
                13.
            Exhibits
                and Reports
            51Exhibits
            53Item
                14.
            Principal
                Accountants Fees and Services
            55Signatures
            56Certifications
            57




3


This
      Annual Report on Form 10-KSB and the documents incorporated herein by reference
      contain forward-looking statements that have been made pursuant to the
      provisions of the Private Securities Litigation Reform Act of 1995. Such
      forward-looking statements are based on current expectations, estimates and
      projections about our industry, management's beliefs, and assumptions made
      by
      management. Words such as "anticipates," "expects," "intends," "plans,"
      "believes," "seeks," "estimates," variations of such words and similar
      expressions are intended to identify such forward-looking statements. These
      statements are not guarantees of future performance and are subject to certain
      risks, uncertainties and assumptions that are difficult to predict; therefore,
      actual results and outcomes may differ materially from what is expressed or
      forecasted in any such forward-looking statements.





**PART
      I**





**Item
      1. Description of Business**





OnScreen
      Technologies, Inc. (sometimes hereafter referred to as “OnScreenTM” or “the
      Company”) is a Colorado corporation organized on April 21, 1998. The Company’s
      principal place of business is located at 600 NW 14th Avenue, Suite 100,
      Portland, Oregon 97209.





The
      Company is primarily focused on commercialization of its innovative thermal
      cooling technology, WayCool, and the commercial adoption of its sign display
      platform products under the names RediAlertTM and Living WindowTM. The Company is
      continuing efforts toward development and commercialization of its Tensile
      technology.





**OnScreenTM
      WayCool Thermal Management Technology**


Among
      the
      challenges and limitations in the development of high-end desktop computers
      and
      workstations is the thermal dissipation associated with advanced processors.
      It
      is anticipated that t he
      next
      generation of high-end processors using
      dual core design pushes the thermal envelope even further. This thermal
      challenge has been approached by manufacturers of high-powered processors by
      advancing heatsink
      and fan technology beyond the state of the art known only a few years ago.
      WayCool provides a straightforward scientific
      approach to addressing intense heat generated in electronic systems, including
      computers, home entertainment systems, test fixtures and medical monitoring
      devices. The
      proprietary WayCool Thermal Management technology
      transfers heat at extraordinarily high rates to promote superior thermal
      management.  The scalability of the cooling devices allows the removal of
      heat from the source towards large surface areas that are easily
      accessible.





WayCool
      Market Analysis


The
      Company received a report in May 2005 prepared by an independent third party
      new
      product research consulting firm that provided a comprehensive market
      compilation and analysis of the semiconductor industry shipments in the personal
      computer and server markets for major producers as well as an evaluation of
      the
      market impact of the WayCool Thermal Management Technology in
      context with the total semiconductor industry demand .
      The
      principal focus of the report was to determine a preliminary business valuation
      for WayCool in providing a viable solution for computer processor chip thermal
      management.





The
      report of the independent third party research firm found that the semiconductor
      industry is expected to move to the use of advanced cooling solutions
      to solve an increasing need for higher processing speeds so as to better
      manage greater power requirements. It is expected that exponential increases
      in
      thermal output could limit traditional thermal management solutions over the
      next three years.





4


The
      potential market opportunity for WayCool is very large. Third party analysis
      indicates that a market potential of over $5 billion exists in the vertical
      market of PC and server applications. The potential application of WayCool
      to
      other types of electronics, such as video display chips and other types of
      microprocessor-based electronics is estimated to equal or exceed the single
      market potential of PCs and servers.





Intellectual
      Property Rights to WayCool Thermal Management Technology


On
      January 10, 2005, the inventor/owner of the OnScreenTM LED technology patent
      conveyed ownership of the OnScreenTM, WayCool and WayFast patents to CH Capital,
      for value received. CH Capital is a California general partnership controlled
      by
      Bradley J. Hallock, currently a shareholder and director and William Clough,
      currently a shareholder, corporate secretary, corporate counsel and
      director.





On
      February 16, 2005, in consideration for the payment of two hundred thousand
      dollars ($200,000), CH Capital conveyed to the Company the OnScreenTM patent
      rights. This conveyance vested in the Company the ownership of the OnScreenTM LED
      technology patent.





March
      24,
      2006 CH Capital assigned to the Company all right, title and interest of the
      WayCool patent in consideration for a one time payment of eight hundred thousand
      dollars ($800,000) plus three year warrants that represent 7,040,485 common
      shares. The $800,000 amount represents reimbursement for the time and money
      CH
      Capital spent to acquire and develop the WayCool technology. This assignment
      has
      been recorded and is a matter of record with the United States Patent and
      Trademark Office. The Company now owns all right, title and interest of the
      WayCool patent.





**LED
      Sign** **Industry
      Overview**


The
      use
      of bright LEDs in large and small scale products has been expanding over the
      past several years. LED’s have become the technology of choice for products
      because they offer significant advantages in brightness, energy efficiency
      and
      longer product life over traditional illumination choices. Until the advent
      of
      high-brightness LED display technology, few options existed for videotext and
      motion displays to be viewed in d irect
      sunlight.





Energy
      consumption has become a limiting factor in the advancement of outdoor LED
      displays. Because significant energy is required to illuminate an LED motion
      display in direct sunlight, significant heat is generated when powering LED’s to
      brightness adequate to be seen in direct sunlight. Current LED packages and
      heat
      transfer mechanisms generally do not easily accommodate close pixel spacing
      on
      this generation of products - a limiting visual factor when viewed from any
      distance less than a couple hundred feet. It also means that, previously, a
      commercial product with real market potential, i. e., outdoor television and
      medium scale display advertising, up to now, has been technically difficult
      and
      expensive to produce. The required pixel spacing for high resolution displays,
      while limiting the corresponding heat transfer as with current display
      architectures, has been difficult and expensive to achieve.





To
      date,
      the leading cause preventing a larger proliferation of large-scale LED products
      has been cost. The Company believes that a more cost effective display
      technology can result in a significantly deeper market penetration for these
      displays.





5


**OnScreenTM
      LED Technology**


The
      Company’s sign display product lines utilize the OnScreenTM direct view LED
      (light emitting diode) technology (sometimes referred
      to as the “OnScreenTM LED architecture” or “OnScreenTM technology” or “OnScreenTM
LED technology”). The OnScreenTM LED architecture, incorporates a variety of
      patent pending designs of a new generation of bright LED products that provide
      key design improvements in wind load, heat dissipation, weight and brightness
      of
      LED sign displays.





OnScreen
      Technologies, Inc. has created a range of products with significant
      architectural benefits and brighter visibility than the current generation
      of
      sign displays. The
      Company’s sign displays are visible in direct sunlight, avoiding many of the
      disadvantages associated with current displays, including sun-loading,
      wind-loading and excessive weight. The OnScreenTM LED technology delivers simple
      light weight, see-through arrays that eliminate the need for complex modules.
      In
      the Company’s products, LEDs are equally spaced in a configuration that creates
      a system such that light and air can easily pass through the system that
      encourages rapid heat transfer, is lightweight and encourages convective airflow
      cooling.




The
      Company’s LED
      products are specially designed to provide display solutions into vertical
      markets including commercial and government. The commercial market targets
      include, but are not limited to, retail industry and point of purchase. The
      government market targets are all levels of Departments of Transportation,
      Homeland Security, Law Enforcement, Emergency Responders and FEMA.





Materials
      and Manufacturing Cost


OnScreen
      Technologies, Inc. has developed an open system that permits nearly unobstructed
      flow of air through the LED screen that significantly reduces wind loading.
      This
      advantage reduces weight of the sign system as well as the cost of the structure
      that supports the sign system. These advantages are present to some extent
      in
      all OnScreenTM LED sign product lines.





Structure
      Benefits


Wind
      loading is reduced because of the “grid design” that permits air to pass through
      the LED grid and, at the same time, the ambient fluid air dissipates the heat
      from the LEDs. Because of this lighter weight and the reduced wind loading
      of
      the OnScreenTM LED architecture, the foundation and support structure can be
      reduced in size and cost. In a typical large scale sign deployment, the cost
      allocation is 30% sign and 70% installation and infrastructure.





Storage,
      Shipping, Handling and Setup Cost


The
      Company’s products
      are lightweight, lighter than competitive systems, and offer significant savings
      in storage, shipping, handling and installation costs because of the “foldable”
feature of several models that can be shipped laid back-to-back with greatly
      decreased volume and weight resulting in lower shipping cost.





Life
      Cycle Cost


Because
      of increasing LED junction temperature in traditional LED displays, LED
      lifetime, brightness, and efficiency degrade. The Company’s products are
      designed to dramatically reduce the LED junction-to-environment thermal
      resistance resulting in a lower junction temperature for any given brightness.
      This yields higher brightness at lower power levels, thus reducing operating
      cost and increasing OnScreenTM LED based products use.





6


Weight


The
      unique OnScreenTM LED architecture reduces the weight-per-unit area compared to
      current systems primarily due to efficient convective air cooling that
      eliminates some of the heavy external cooling needed for traditional displays
      and the difference in the Company’s base architecture versus complex rigid solid
      circuit board modules in present LED displays.





Brightness


Greatly
      increased brightness can be achieved through the use of innovative optics that
      address spatial tuning, horizontal axis optics, angular aperture control and
      optical efficiency. While brightness resulting from the OnScreenTM LED
      architecture can be optimized through the use of the Company’s innovative pixel
      packages, standard off the shelf pixels are used as well, depending on the
      application.





**OnScreenTM
      Sign Products**


RediAlertTM


The
      Company has completed the initial production in its government emergency
      response product line. The first of this product line is the RediAlertTM Rapid
      Dispatch Emergency Signs. The RediAlertTM design is based on an arrangement of
      LEDs placed periodically along the edge of narrow horizontal louver like slats
      similar to Venetian blinds that provide structural integrity without sacrificing
      other advantages. The initial RediAlertTM product uses a thin, light-weight rigid
      support material as the principal structure to hold the LEDs and supply the
      necessary circuitry, The systematic elimination of support material results
      in a
      unique screen effect capable of permitting free flow of air between the slats
      and creating the appearance of an opaque background for easy reading of the
      sign
      in bright sunlight conditions.





The
      RediAlertTM is capable of displaying three lines of variable text at nine inch
      character size for messaging at emergency response incidents where it is
      important to quickly convey a message to motorists and pedestrians.
      Independently powered by 12VDC battery power, this easily deployable, folding
      3'
      x 5' illuminated screen provides law enforcement and emergency management
      personnel with the latest in technology and equipment to assist in communicating
      with the public. RediAlertTM products are designed to collapse and fit into the
      trunk of emergency vehicles. These products are capable of being deployed by
      a
      single person within minutes and represent a significant market for the Company.
      The Company’s target markets include the rapidly expanding Homeland Security
      effort, federal and state homeland defense, law enforcement, military, emergency
      response and traffic control.





Living
      Window TM


The
      Living WindowTM product line features electrical conductors imbedded in a rigid
      grid material that also serves as the structural member on to which the LEDs
      are
      mounted. The Company’s design permits a product that consists of approximately
      70% vacant space, through which ambient air can freely flow to permit heat
      transfer. This product line can provide highly effective advertising to several
      different vertical retail markets, such as auto dealerships, grocery stores,
      movie theaters, malls, and restaurants. Living WindowTM will enable retailers to
      communicate a bright three-to-six-line text message directly to customers
      through a 15 to 30 square feet, lightweight, see-through sign that is lighter
      than most comparable products and which can be easily installed in a window
      or
      suspended in a indoor environment. Living WindowTM enables any business owner to
      use a remote computer to display a message or change the existing message in
      a
      matter of seconds on one or more signs located in one or multiple remote
      locations. One of the most appealing factors of Living WindowTM is its
      revolutionary product design that does not interfere with the integrity of
      the
      building architecture and allows ambient light to enter.





7


**Tensile
      Roll-Up Sign Technology**


The
      innovative Tensile technology is currently in the design and prototyping stage.
      Tensile is a revolutionary LED sign design that features flexibility of the
      LED
      screen in addition
      to lightweight, see-through features as used in the other OnScreenTM sign
      products. The unique open design permits easy flow of ambient air through the
      X-Y grid for better heat dissipation. Full color and video motion are intended
      to be standard features. This product is designed for indoor and outdoor video
      displays, signage, indoor and outdoor lighting, including complex
      forms and decorative elements such as light-walls, light sculpture, and
      chandeliers. Among the advantages of Tensile is the ability to retrofit existing
      signage infrastructure with little modification due to the lightweight and
      advanced thermal management characteristics of Tensile. Furthermore, these
      innovative characteristics also allow Tensile to be used in new applications
      and
      locations where LED technology could not previously be used due to weight,
      thermal management and structural constraints.





LED
      Sign Market
      Potential


The
      Company is focusing its efforts towards further defining the market environment,
      size, growth, trends, competitive analysis, product roadmap, partnering strategy
      and commercial sales program. Specific applications of the OnScreenTM LED
      technology include: billboards, store windows, large screen indoor and outdoor
      products, outdoor commercial and residential televisions, curved and complex
      shaped displays, artistic light displays, Amber Alert project, Homeland
      Security, roadway “intelligent transportation systems” (ITS) and see-through
      displays on buildings. An additional potential marketing strategy is directed
      toward licensing the OnScreenTM LED technology intellectual property to worldwide
      manufacturers of LED sign products and components.





OnScreen
      Technologies, Inc. is currently pursuing markets related to LED products that
      include:


·
            Rapidly
                deployed, highly mobile, emergency response products, RediAlertTM. This
                product is directed toward government emergency response and public
                safety
                matters such as homeland security, Amber alert, automobile accidents,
                traffic control and public
                information.


·
            Indoor,
                see through window, commercial advertising products, Living WindowTM.The
                Company’s market focus is retail level such as automobile dealerships,
                restaurants and other retail markets. This product is intended to
                include
                an optional wireless modem capable of transmitting and receiving
                data to
                be displayed on the sign.





**OnScreen
      Technologies, Inc. Bus** **iness
      Strategy**


The
      implemented Company business strategy includes an expanding basis of innovative
      ideas and products based on its
      thermal cooling technology, WayCool and its OnScreenTM LED technology. The
      Company continues to develop and purchase OnScreenTM LED architecture related new
      product ideas and enhance its current technology. Examples of potential areas
      to
      which the company will look to create market opportunity include: LED pixel
      packages, custom mounting hardware, ventilation support systems and electronic
      subsystems.





Licensing


The
      Company intends to implement a broad intellectual property licensing program
      for
      select products in order to commercialize WayCool and various segments of the
      OnScreenTM LED technology, including Tensile for retail and large outdoor format
      applications, on a larger scale than is possible with the financial resources
      currently available to the Company. Through this program, the OnScreenTM
technology is intended to be exploited through the development of
      worldwide license and royalty agreements. This strategy has been adopted for
      several reasons:




8




·
            It
                is considerably less capital intensive than developing manufacturing
                and
                marketing capabilities.


·
            It
                provides revenue streams immediately through advance licensing
                fees.


·
            It
                provides an opportunity to fund further research and to build/develop
                the
                intellectual property portfolioof
                the Company.


·
            It
                can provide continuous long-term revenue
                streams.


·
            It
                provides a more rapid adaptation and proliferation of the OnScreenTM LED
                technology.


·
            It
                expedites finding potential corporate
                “partners”.


·
            It
                provides the opportunity for greater
                margins.





These
      benefits are intended to be used as the primary method for promoting rapid
      adoption of WayCool (Please see above the section “OnScreenTM WayCool Thermal
      Management Technology”) through licensing agreements with various suppliers in
      the microprocessor-based electronics markets. These include potential licensing
      relationships with chip original equipment manufacturers (OEMs), original
      development manufacturers (ODMs), as well as potential relationships with
      companies serving the after-market retail market segment. It is intended that
      a
      worldwide licensing strategy for WayCool will open significant business
      opportunities for this technology in a number of vertical market applications.
      WayCool is discussed above in the section entitled OnScreenTM WayCool Thermal
      Management Technology.





Outsource
      Manufacturing


The
      Company outsources the manufacture and assembly of the OnScreenTM LED technology
      product lines.





**Intellectual
      Property** **Ownership
      of OnScre** **enTM
      Technology**


The
        following describes the evolution of the license and ownership of the OnScreenTM
LED technology patent:


·
            On
                or about July 23, 2001, the Company entered into a Contract and License
                Agreement (hereafter the “License Agreement”) with the inventor of the
                OnScreenTM LED technology which agreement entitled the Company to 75% of
                the revenue generated from the direct view OnScreenTM LED sign technology
                with angular dimension greater than 30 inches and guaranteed the
                inventor
                a minimum royalty of $50,000 the first year, $100,000 the second
                year and
                $250,000 each year thereafter.


·
            On
                January 10, 2005 and February 16, 2005, the inventor/owner of the
                OnScreenTM LED technology patent conveyed ownership of the OnScreenTM,
                WayCool and WayFast patents to CH Capital, a related party of the
                Company,
                for value received. This conveyance is subject to the above stated
                OnScreenTM license rights of the
                Company.


·
            On
                February 16, 2005, in consideration for the payment of two hundred
                thousand dollars ($200,000), CH Capital conveyed to the Company the
                OnScreenTM patent rights. This conveyance vested in the Company the
                ownership of the OnScreenTM LED technology
                patent.


·
            On
                March 24, 2006,
                CH Capital assigned to the Company all right, title and interest
                to the
                WayCool patent in consideration for eight hundred thousand dollars
                ($800,000) and a three year warrant for 7,040,485 common shares at
                a per
                share price of $0.20. The $800,000 amount represents reimbursement
                for the
                time and money CH Capital spent acquiring and developingthe
                WayCool technology.





**Fusion
      Three, LLC Settle** **ment**


In
      August
      2002, the Company entered into an agreement with Fu sion
      Three, LLC whereby Fusion Three, LLC paid the annual $50,000 Company minimum
      royalty fee (See below, Intellectual Property Rights to OnScreenTM) in
      consideration for the Company’s conveying to Fusion Three, LLC 5% of the
      Company’s interest in the OnScreen License Agreement. In December 2002 the
      Company and Fusion Three, LLC entered into an addendum to the August 2002
      agreement whereby Fusion Three, LLC paid the $100,000 second year minimum
      royalty fee in consideration for an additional 10% of the Company’s interest in
      the OnScreen License Agreement. On January 14, 2004, the inventor agreed to
      accept $175,000 in lieu of the $250,000 third year minimum royalty fee payment.
      This payment was made by the Company to the inventor.





9


On
        February 3, 2004, the
        Company reached a Master Settlement and Release Agreement with Fusion Three,
        LLC
        whereby, in consideration for the exchange of mutual releases and Fusion
        Three,
        LLC relinquishing its claim to any of the OnScreenTM technology; the Company paid
        to Fusion Three, LLC $150,000 plus agreed to pay annually declining percentages
        of revenue derived from the commercialization of the direct view LED video
        display technology as follows: 5% in 2005 declining to 2% in year 2008 and
        thereafter.  In the event of a change of control of the Company, the
        percentage of revenue stated above would terminate and a single payment
        transaction fee would be paid to Fusion Three, LLC ranging from 10% of the
        OnScreen appraised value up to $100,000,000, 7.5% for the appraised value
        between $100,000,001 and $200,000,000, 5% of the appraised value between
        $200,000,001 and $300,000,000, and 4% of the appraised value between
        $300,000,001 and $400,000,000 and 3% for the appraised value between
        $400,000,001 and $500,000,000 and 2% for any appraised amounts between
        $500,000,001 and $600,000,000.





During
      April 2006 the Company negotiated the terms of a full and final settlement
      with
      Fusion Three, LLC whereby Fusion Three, LLC relinquished all rights and claims
      to any revenues and fees in consideration for our issuing to Fusion Three,
      LLC a
      three year warrant authorizing Fusion Three, LLC to purchase up to five million
      six hundred thousand (5,600,000) shares of our common stock at a per share
      price
      of $0.20. The Company also agreed to issue Fusion Three, LLC a warrant to
      purchase up to one million two hundred thousand (1,200,000) shares of our common
      stock at a per share price of $0.35 for 300,000 shares; $0.50 for 300,000
      shares; $0.75 for 300,000 shares and $1.00 for 300,000 shares before November
      15, 2007. Regarding all of the common shares underlying the warrants, the
      Company is obligated to file a Form SB-2 registration statement with the SEC
      within no more than one hundred twenty (120) days from the date of the
      agreement.





**OnScreen
      Technology Intellectual Property Prot**  **ection**


The
      Company relies
      on various intellectual property laws and contractual restrictions to protect
      its proprietary rights in products and services. These include confidentiality,
      invention assignment and nondisclosure agreements with its employees,
      contractors, suppliers and strategic partners. The confidentiality and
      nondisclosure agreements with employees, contractors and suppliers are in
      perpetuity or for a sufficient length of time so as to not threaten exposure
      of proprietary
      information. In addition, the Company intends to pursue the registration of
      our
      trademarks and service marks in the United States and internationally.


·
            A
                utility patent application was filed July 23, 2003 on the OnScreenTM LED
                technology that contains over 50 separate claims. The Company retained
                Knobbe, Martens, Olson & Bear, LLP and Banner & Witcoff, Ltd. to
                manage its current interests relative to the prosecution of the national
                and international patents. This patent was issued September 12,
                2006.


·
            A
                utility patent application was filed November 28, 2003 relating to
                the
                basic OnScreen architecture design. This basic OnScreen architecture
                is
                the basic principle for the OnScreen product line. A Notice of Allowance
                was issued by the USPTO October 3,
                2006.




10




·
            A
                utility patent application was filed May 18, 2004 on behalf of the
                Company
                to protect its intellectual property rights regarding their Living
                WindowTM
                product design. A Notice of Allowance was issued by the USPTO July
                6,
                2006.


·
            February
                10, 2005 a utility patent application was filed on behalf of the
                Company
                relating to the aerodynamic RediAlertTM LED sign system. This application
                is pending.


·
            A
                utility patent application was filed December 20, 2005 relating to
                the
                OnScreen WayCoolThermal
                Management Technology.This
                application is pending.


·
            September
                29, 2006 a utility patent was filed on behalf of the Company relating
                to
                the RediAlert product design.


·
            October
                4, 2006 a series of four Divisional patent applications were filed
                relating to the Living WindowTM product
                design.


·
            September
                7, 2006 a provisional patent application was filed relating to the
                OnScreen Tensile roll-up sign
                design.


·
            In
                the months of June, July, September and October 2006 Provisional
                patent
                applications were filed relating to various modifications and enhancements
                for the WayCool product design.


·
            August
                20, 2003 Patent Cooperation Treaty applications were filed relating
                to the
                basic OnScreen LED mesh design.


·
            December
                21, 2005 Patent Cooperation Treaty applications were filed relating
                to the
                WayCool product design.


·
            February
                10, 2006 Patent Cooperation Treaty applications were filed relating
                to the
                aerodynamic RediAlertTM LED sign system
                design.


·
            March
                24, 2006 CH Capital assigned to the Company all right, title and
                interest
                of the WayCool patent. This assignment has been recorded and is a
                matter
                of record with the United States Patent and Trademark
                Office.


On
        February 25, 2004, the Company was notified by the United States Patent and
        Trademark Offic e
        (USPTO)
        that the examining attorney reviewed the “OnScreenTM” trademark application and
        found no similar registered or pending mark registered under Trademark Act
        Section 2(d), U.S.C. Section 1052(d) TMEP sect 1105.01. The Company was,
        however, required to disclaim the unitary expression “onscreen technology”
because the individual component words of a complete descriptive phrase are
        not
        registerable. This disclaimer does not impair the “OnScreenTM” trademark or the
“OnScreenTM technology” words when used in conjunction with the trademark.





On
      May 2,
      2006 the United States Patent and Trademark Office permitted registration of
      the
      mark, RediAlertTM, under the Trademark Act of 1946, as amended.





On
      January 26, 2007 the Company was notified by the USPTO that the Statement of
      Use
      filed for the “Rapid Dispatch Emergency Signs” trademark has been accepted and
      the trademark registration will issue in due course.





The
      Company continues to pursue its applications for trademark registration relating
      to “Living Window” and “RediDMS” relating to
      its
      OnScreenTM LED architecture signage.





The
      Company continuously reviews and updates the existing patent and trademark
      filings and files new documentation both nationally and internationally (Patent
      Cooperation Treaty) in a continuing effort to maintain up to date patent and
      trademark protection of its intellectual property.





11


There
      is
      no assurance that the Company’s patents and trademark registrations will be
      granted. Furthermore, the Company is exposed to the risk that other parties
      may
      claim the Company infringes their existing patent and trademark rights, which
      could result in the Company’s inability to develop and market its products
      unless the Company enters into licensing agreements with the technology owner
      or
      could force the Company to engage in costly and potentially protracted
      litigation.





**Employees**


As
      of
      December 31, 2006, the Company had nine fulltime employees. None of its
      employees is represented by a labor union. The Company considers its relations
      with its employees to be good. The Company plans to add additional staff as
      needed to handle all phases of its business.





**Risks
      Related to Our Business**


*The
      Company’s limited operating history makes evaluating its business and prospects
      difficult* .


The
      Company has been involved in the LED based business since July 2001, but has
      only recently begun to direct all of its efforts to commercialization of the
      OnScreenTM technology. The Company’s limited operating history in this industry
      and the unproven nature of the OnScreenTM technology makes evaluation of its
      future prospects very difficult. To date the Company has not achieved
      profitability and the Company cannot be certain that it will sustain
      profitability on a quarterly or annual basis in the future. One should carefully
      consider the Company’s prospects in light of the risks and difficulties
      frequently encountered by early stage companies in new and rapidly evolving
      technology.





*The
      Company has all the risks of a new product developer in the LED technology
      business* .


The
      Company, as the owner of the OnScreenTM LED sign technology patents, assumed the
      responsibility for completing the development of the OnScreenTM technology and
      determining which products to commercialize utilizing the OnScreenTM technology.
      Because this is a new and unproven technology, there is a risk that the
      technology, operation and development of products could be unsuccessful or
      that
      the Company will not be successful in marketing any products developed with
      the
      OnScreenTM technology. Such failures would negatively affect the Company’s
      business, financial condition and results of operations.





*There
      is no assurance the Company will achieve profitability.*


To
      date
      the Company has not received significant revenue from the OnScreenTM technology.
      The Company has focused its scope of operation to the singular product line
      of
      the OnScreenTM LED sign technology. For the year ended December 31, 2006 the
      Company had a net loss of $14,481,333. The Company will need to begin generating
      significant revenues from the OnScreenTM LED architecture product line to offset
      current operational and development losses if the Company is to cover its
      current overhead expenses, including further development costs and marketing
      expenses. There is no assurance that the Company will achieve profitability.





During
      2005 and 2006, the Company funded its operations with net proceeds of
      approximately $15.7 million it received from financing activities. The Company
      believes that equity financing or debt will be available to fund its operations
      until revenue streams are sufficient to fund operations; however, the terms
      and
      timing of such equity or debt cannot be predicted. The Living WindowTM product
      line was commercialized during 2005 and the RediAlertTM product line was
      commercialized the late first half of 2006. The Company cannot assure that
      it
      will generate revenues by that date or that its revenues will be sufficient
      to
      cover all operating and other expenses of the Company. If revenues are not
      sufficient to cover all operating and other expenses, the Company will require
      additional funding.





12


*The
      Company will be dependent on third parties and certain relationships to fulfill
      its obligations.*


Because
      the Company has contracted the manufacturing of the OnScreenTM LED technology to
      unrelated companies that are better equipped financially and technologically
      to
      design and manufacture OnScreenTM LED technology end products, the Company is
      heavily dependent on these third parties to adequately and promptly provide
      the
      end product. The Company is dependent upon its ability to maintain the
      agreements with these designers and manufacturers and other providers of raw
      materials and components who provide the necessary elements to fulfill the
      Company’s product delivery obligations at the negotiated prices.





*The
      Company’s primary marketing focus for* RediAlertTM *is
      on government agencies* .


The
      Company’s primary marketing focus for its RediAlertTM product line is to sell to
      government agencies, such as departments of transportation, police departments
      and other emergency personnel. Generally, the inspection, approval process
      and
      funding involved with government agencies can take many months and are subject
      to cancellation by the governmental agency at any time and without penalty.
      The
      Company’s business could suffer if the Company is not successful in marketing
      its RediAlertTM product line to a significant number of governmental agencies or
      if contracts the Company may enter into with any such agencies were to be
      cancelled.





*The
      market for LED signage is extremely competitive* .


Because
      the LED signage industry is highly competitive, the Company cannot assure that
      it will be able to compete effectively. The Company is aware of several other
      companies that offer LED products, utilizing different technology than its
      OnScreenTM LED technology. All of these competitors have been in business longer
      than the Company has and have significantly greater assets and financial
      resources than are currently available to the Company. The Company expects
      competition to intensify as innovation in the LED industry advances and as
      current competitors expand their market into the portable, lightweight signage
      that is the initial market for the LED architecture. The Company cannot assure
      you that it will be able to compete successfully against current or future
      competitors. Competitive pressures could force the Company to reduce its prices
      and may make it more difficult for the Company to attract and retain customers.





*The
      Company depends on key personnel and will need to recruit new personnel as
      its
      business grows* .


As
      a
      small company OnScreenTM is currently dependent on the efforts of a limited
      number of management personnel. The Company believes that given the large amount
      of responsibility being placed on each member of its management team, the loss
      of the services of any member of this team at the present time would harm its
      business.





If
      the
      Company is successful in expanding its product and customer base, the Company
      will need to add additional key personnel as its business continues to grow.
      If
      the Company cannot attract and retain enough qualified and skilled staff, the
      growth of its business may be limited. The Company’s ability to provide services
      to customers and expand its business depends, in part, on its ability to attract
      and retain staff with professional experiences that are relevant to technology
      development and other functions the Company perform. Competition for personnel
      with these skills is intense. The Company may not be able to recruit or retain
      the caliber of staff required to carry out essential functions at the pace
      necessary to sustain or expand its business.





13


The
      Company believes its future success will depend in part on the
      following:


·
            the
                continued employment and performance of its senior
                management,


·
            its
                ability to retain and motivate their officers and key employees,
                and


·
            its
                ability to identify, attract, hire, train, retain, and motivate other
                highly skilled technical, managerial, marketing, sales and customer
                service personnel.





*If
      the Company fails to adequately protect its patents, trademarks and proprietary
      rights, its business could be harmed.*


The
      Company regards its patents, trademarks, trade secrets and similar intellectual
      property as critical to their success. The Company relies on trademark and
      patent law, trade secret protection and confidentiality or license agreements
      with their employees, customers, partners and others to protect its proprietary
      rights. Despite these precautions, it may be possible for a third party to
      copy
      or otherwise obtain and use the Company’s intellectual property without its
      authorization. Although the Company has been granted registration rights for
      its
      OnScreenTM trademark, there is no assurance its pending trademark applications
      for RediAlert, RediAd, Living Window, Rapid Dispatch Emergency Signs or RediDMS
      will be approved. Effective trademark, patent and trade secret protection may
      not be available in every country in which the Company may in the future offer
      its products. Therefore, the Company may be unable to prevent third parties
      from
      infringement on or otherwise decreasing the value of its trademarks, patents
      and
      other proprietary rights.





*If
      the Company is to remain competitive, the Company must be able to keep pace
      with
      rapid technological change.*


The
      Company’s future success depends, in part, on its ability to develop or license
      leading technologies useful in its business, enhance the ease of use of existing
      products, develop new products and technologies that address the varied needs
      of
      their customers, and respond to technological advances and emerging industry
      standards and practices on a cost-effective and timely basis. If the Company
      is
      unable, for technical, legal, financial or other reasons, to incorporate new
      technology in new features or products, the Company may not be able to adapt
      in
      a timely manner to changing market conditions or customer
      requirements.





*The
      Company may infringe intellectual property rights of third
      parties.*


Litigation
      regarding intellectual property rights is common in the software and technology
      industries. The Company may, in the future, be the subject of claims for
      infringement, invalidity or indemnification claims based on such claims of
      other
      parties' proprietary rights. These claims, whether with or without merit, could
      be time consuming and costly to defend or litigate, divert the Company’s
      attention and resources, or require the Company to enter into royalty or
      licensing agreements. There is a risk that such licenses would not be available
      on reasonable terms, or at all. Although the Company believes it has full rights
      to use its current intellectual property without incurring liability to third
      parties, there is a risk that its products infringe the intellectual property
      rights of third parties.





*Third
      parties may infringe on the Company’s intellectual property
      rights*


There
      can
      be no assurance that other parties will not claim infringement by the Company
      with respect to its current or future technologies. The Company expects that
      participants in its markets will be increasingly subject to infringement claims
      as the number of services and competitors in its industry segment grows. Any
      such claim, with or without merit, could be time-consuming, result in costly
      litigation, create service upgrade delays or require the Company to enter into
      royalty or licensing agreements. Such royalty or licensing agreements might
      not
      be available on terms acceptable to the Company, or at all. As a result, any
      such claim of infringement against the Company could have a material adverse
      effect upon its business, results of operations and financial
      condition.





14


**Risks
      Related to Our Co** **m** **mon
      Stock**


*The
      Company’s Common Stock price may be volatile, which could result in substantial
      losses for individual stockholders.*


The
      market price for the Company’s Common Stock is volatile and subject to wide
      fluctuations in response to factors, including the following, some of which
      are
      beyond its control, which means its market price could be depressed and could
      impair its ability to raise capital:


·
            actual
                or anticipated variations in its quarterly operating
                results;


·
            announcements
                of technological innovations or new products or services by the Company
                or
                its competitors;


·
            changes
                in financial estimates by securities
                analysts;


·
            conditions
                or trends relating to the LED and thermal cooling
                industries;


·
            changes
                in the economic performance and/or market valuations of other LED
                related
                companies;


·
            additions
                or departures of key personnel;


·
            fluctuations
                of the stock market as a whole.





*The
      Company’s Certificate of Incorporation limits director liability, thereby making
      it difficult to bring any action against them for breach of fiduciary
      duty.*


As
      permitted by Colorado law, the Company's Articles of Incorporation limits the
      liability of directors to the Company or its stockholders for monetary damages
      for breach of a director's fiduciary duty, with certain exceptions. These
      provisions may discourage shareholders from bringing suit against a director
      for
      breach of fiduciary duty and may reduce the likelihood of derivative litigation
      brought by shareholders on behalf of the Company against a director.





*The
      Company may be unable to meet its future capital
      requirements.*


The
      Company is substantially dependent on receipt of additional capital to
      effectively execute its business plan. If adequate funds are not available
      to
      the Company on favorable terms the Company will not be able to develop new
      products or enhance existing products in response to competitive pressures,
      which would affect its ability to continue as a going concern. The Company
      cannot be certain that additional financing will be available to it on favorable
      terms when required, or at all. If the Company raises additional funds through
      the issuance of equity, equity-related or debt securities, such securities
      may
      have rights, preferences or privileges senior to those of the rights of its
      common stock and its stockholders may experience additional
      dilution.





*Penny
      stock regulations may impose certain restrictions on marketability of our
      stock* .


The
      Securities and Exchange Commission (the "Commission") has adopted regulations
      which generally define a "penny stock" to be any equity security that has a
      market price (as defined) of less than $5.00 per share or an exercise price
      of
      less than $5.00 per share, subject to certain exceptions. As a result, the
      Company’s Common Stock is subject to rules that impose additional sales practice
      requirements on broker-dealers who sell such securities to persons other than
      established customers and accredited investors (generally those with assets
      in
      excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
      with their spouse). For transactions covered by these rules, the broker-dealer
      must make a special suitability determination for the purchase of such
      securities and have received the purchaser's written consent to the transaction
      prior to the purchase. Additionally, for any transaction involving a penny
      stock, unless exempt, the rules require the delivery, prior to the transaction,
      of a risk disclosure document mandated by the Commission relating to the penny
      stock market. The broker-dealer must also disclose the commission payable to
      both the broker-dealer and the registered representative, current quotations
      for
      the securities and, if the broker-dealer is the sole market maker, the
      broker-dealer must disclose this fact and the broker-dealer's presumed control
      over the market. Finally, monthly statements must be sent disclosing recent
      price information for the penny stock held in the account and information on
      the
      limited market in penny stocks. Consequently, the "penny stock" rules may
      restrict the ability of broker-dealers to sell our securities.





15


*The
      Company has never paid dividends on its Common Stock and do not expect to pay
      any in the foreseeable future. Preferred Shares impose restrictions on our
      ability to pay Common Stock dividends.*


A
      potential purchaser should not expect to receive a return on their investment
      in
      the form of dividends on our Common Stock. The Company has never
      paid cash dividends on its
      Common Stock and the Company does not expect to pay dividends in the foreseeable
      future. Our ability to pay dividends on our Common Stock is restricted by the
      terms of our agreements with the holders of our Series A and Series B
      Convertible Preferred Stock. Holders of our Series A Convertible Preferred
      Stock
      are entitled to annual dividends of 10%. As of December 31, 2006, the Company
      has 90,543 Series A convertible Preferred shares outstanding. In the past,
      the
      Company has fulfilled its dividend obligations on the Series A and Series B
      Convertible Preferred Stock through a combination of the issuance of additional
      shares of its Series A Convertible Preferred Stock and cash payments.





On
      December 31, 2005 dividends payable for the Series A Convertible Preferred
      Stock
      was $144,956 and on December 31, 2006 dividends payable for the Series A
      Convertible Preferred Stock was $27,353. Holders of the Company’s Series B
      Convertible Preferred Stock are entitled to annual dividends of $1.00 per share.
      As of this filing, all Series B Convertible Preferred Stock had been converted
      to common shares.





*Substantial
      sales of our Common Stock could cause our stock price to rapidly
      decline* .


The
      market price of our Common Stock may fall rapidly and significantly due to
      sales
      of our Common Stock from other sources such as:


·
            Common
                Stock underlying the conversion rights of our Series A and Series
                B
                Convertible Preferred Stock.


·
            Common
                Stock underlying the exercise of outstanding options and
                warrants.


·
            Common
                Stock, which are available for resale under Rule 144 or are otherwise
                freely tradable and which are not subject to lock-up
                restrictions.





Any
      sale
      of substantial amounts of our Common Stock in the public market, or the
      perception that these sales might occur, whether as a result of the sale of
      Common Stock received by shareholders upon conversion of our Series A or Series
      B Convertible Preferred Stock, exercise of outstanding warrants or options
      or
      otherwise, could lower the market price of our Common Stock. Furthermore,
      substantial sales of our Common Stock in a relatively short period of time
      could
      have the effect of depressing the market price of our Common Stock and could
      impair our ability to raise capital through the sale of additional equity
      securities.





The
      covenants with our Series A and Series B Convertible Preferred Stock
      shareholders restrict our ability to incur debt outside the normal course,
      acquire other businesses, pay dividends on our Common Stock, sell assets or
      issue our securities without the consent of holders of a majority of the Series
      A and Series B Convertible Preferred Stock outstanding. Such arrangements may
      adversely affect our future operations or may require us to make additional
      concessions to the holders of the Series A and Series B Convertible Preferred
      Stock in order to enter into transactions or take actions management deems
      beneficial and in the best interests of the holders of our Common
      Stock.





16


*Note
      conversions could result in dilution of common stock*


The
      conversion of outstanding promissory notes may result in substantial dilution
      to
      the interests of other holders of common stock, since the investors may
      ultimately convert and sell the full amount issuable on conversion under the
      notes.





*Downward
      pressure on the stock price could encourage short selling*


The
      significant downward pressure on the price of the common stock as the selling
      stockholders convert and sell material amounts of common stock could encourage
      short sales by the selling stockholders or others. This could place significant
      downward pressure on the price of the common stock.





In finance ,
      short
      selling or "shorting" is a way to profit from the decline in price of a security ,
      such as stock or a bond .  A
      short
      sale is generally the sale of a stock you do not own. Investors who sell short
      believe the price of the stock will fall. If the price drops, you can buy the
      stock at the lower price and make a profit. If the price of the stock rises
      and
      you buy it back later at the higher price, you will incur a loss.





When
      you
      sell short, your brokerage firm loans you the stock. The stock you borrow comes
      from either the firm’s own inventory, the margin account of another of the
      firm’s clients or another brokerage firm. As with buying stock on margin, you
      are subject to the margin rules. Other fees and charges may apply. If the stock
      you borrow pays a dividend, you must pay the dividend to the person or firm
      making the loan.





*The
      forward-looking information in this Form 10-KSB may prove
      inaccurate* .


This
      Form
      10-KSB contains forward-looking statements and information that are based on
      management's beliefs as well as assumptions made by, and information currently
      available to, management. When used in this document, words such as
      "anticipate," "believe," "estimate," "expect," and, depending on the context,
      "will" and similar expressions, are intended to identify forward-looking
      statements. Such statements reflect our current views with respect to future
      events and are subject to certain risks, uncertainties and assumptions,
      including the specific risk factors described above. Should one or more of
      these
      risks or uncertainties materialize, or should underlying assumptions prove
      incorrect, actual results may vary materially from those anticipated, believed,
      estimated or expected. The Company does not intend to update these
      forward-looking statements and information.





**Item
      2. Description of Property**





The
      Company owns no real estate. On October 15, 2004 the Company signed a lease
      with
      Safety Harbor Centre commencing December 1, 2004 for five years
      leasing an office suite at a monthly rental of $2,814 (plus a pro rata share
      of
      common area maintenance and taxes).





Effective
      November 11, 2005, the Company relocated its corporate home office to 600 NW
      14 th Avenue,
      Suite 100, Portland, Oregon 97209. The Company retains a field office in Safety
      Harbor, Florida. In October 2005, the Company signed a lease with Market Place
      I
& II, LLC to lease 7,500 square feet of office space at 600 NW
      14 th Avenue,
      Suite 100, Portland, Oregon 97209 beginning November 1, 2005 through December
      31, 2010, which lease is renewable for an additional five years at the option
      of
      the Company. The initial monthly base rent is $9,062.50 for December 2005
      through October 2007, thereafter the rent increases slightly.





17


**Item
      3. Legal Proceedings**





The
      Company has no pending legal proceedings.





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





The
      2006
      Annual Meeting of Shareholders was held on December 6, 2006, t o
      elect 3
      directors to hold office for two-year terms and one director to hold office
      for
      a one year term. The Board of Directors fixed the close of business on October
      12, 2006 as the record date for the determination of shareholders entitled
      to
      receive notice of, and to vote at, the Annual Meeting. All such stockholders
      of
      record were properly notified and proxies were distributed. The following votes
      were tabulated:


The
      vote
      for William J. Clough, Seat 1 (two year term) of the Board of Directors was:


For     Withhold


[80,683,316]   [20,466,979]


The
      vote
      for Bradley J. Hallock, Seat 3 (two year term) of the Board of Directors was:


For     Withhold


[80,728,932]   [20,421,363]


The
      vote
      for Steven S. Hallock, Seat 4 (one year term) of the Board of Directors was:


For     Withhold


[100,601,918]   [548,377]


The
      vote
      for John P. Rouse, Seat 5 (two year term) of the Board of Directors was:


For     Withhold


[95,379,937]   [5,770,358]





**PART
      II**





**Item
      5. Market for Common Equity, Related Stockholder Matters and Small Business
      Issuer Purchases of Equity Securities**





Market
      Value


The
      Company’s Common Stock is traded on the OTC Bulletin Board (OTCBB) under the
      trading symbol "ONSC". The following table sets forth, the high and low bid
      prices of its Common Stock for the four quarters of 2005 and 2006 as reported
      by
      the National Quotation Bureau. The bid prices quoted on the OTCBB reflect
      inter-dealer prices without retail mark-up, markdown or commission and may
      not
      represent actual transactions.




Year
              Quarter
              High
                  Bid
              Low
                  Bid2005
              First
                  Quarter
              .890
              .800Second
                  Quarter
              .720
              .600Third
                  Quarter
              .220
              .200Fourth
                  Quarter
              .240
              .2202006
              First
                  Quarter
              .580
              .170Second
                  Quarter
              .700
              .350Third
                  Quarter
              .510
              .270Fourth
                  Quarter
              .480
              .270


18


Description
      of Securities


The
      Company currently has authorized 200,000,000 common shares $0.001 par value
      and
      10,000,000 preferred shares $0.001 par value. Of the 10,000,000 authorized
      preferred shares, 5,000,000 shares have been designated as Series A Convertible
      Preferred and 30,000 shares have been designated as Series B Convertible
      Preferred. As of December 31, 2006, the Company’s outstanding shares consisted
      of 147,127,238 issued and outstanding shares of common stock, 90,543 shares
      of
      Series A Convertible Preferred Stock, and no shares of Series B Convertible
      Preferred Stock. As of December 31, 2006, the Company had in excess of 3,000
      shareholders of record.





The
      description of the Company’s capital stock does not purport to be complete and
      is subject to and qualified in its entirety by its Articles of Incorporation
      and
      Bylaws, amendments thereto, including the Certificates of Designation for its
      Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
      and by the provisions of applicable Colorado law. The Company’s transfer agent
      is Computershare Trust Company, Inc., 350 Indiana Street, Suite 800, Golden,
      Colorado 80401.





The
      holders of Common Stock and Series A Convertible Preferred are entitled to
      one
      vote per share and holders of Series B Convertible Preferred shares are entitled
      to one thousand votes per share for the election of directors and all other
      purposes and do not have cumulative voting rights. There is a restriction on
      the
      payment of any common stock dividends because any cumulative preferred stock
      dividends are required to be paid prior to the payment of any common stock
      dividends. Also, the retained earnings of the Company would be restricted upon
      an involuntary liquidation by the cumulative unpaid preferred dividends to
      the
      preferred stockholders and for the $1.00 per share Series A and $240 per share
      Series B liquidation preferences. Holders of the Company’s Common Stock do not
      have any pre-emptive or other rights to subscribe for or purchase additional
      shares of capital stock, no conversion rights, redemption, or sinking-fund
      provisions.





The
      Company has not paid any dividends on its common stock since inception. The
      Company expects to continue to retain all earnings generated by its operations
      for the development and growth of its business and do not anticipate paying
      any
      cash dividends to its common shareholders in the foreseeable future. The payment
      of future dividends on the common stock and the rate of such dividends, if
      any,
      will be determined by the Company’s Board of Directors in light of its earnings,
      financial condition, capital requirements and other factors.


Set
        forth below is a summary of the current outstanding securities, transactions
        and
        agreements, which relate to 34,361,744 shares of common stock the Company
        is
        required to reserve for potential future issuances. There
        are
        1,332,938 unvested shares of the Company’s common stock related to employment
        agreements which vested and were issued in January 2006.  There are
        1,767,500 shares of the Company’s common stock available under the 2005 Equity
        Incentive Stock Plan.





Convertible
      Preferred Shares


As
      of
      December 31, 2006, the Company had 90,543 shares of Series A Convertible
      Preferred stock outstanding and no shares of Series B Convertible Preferred
      Stock outstanding. The Series A preferred shares convert to common shares at
      a
      ratio of four common shares plus
      one
      common bonus share for each share of Series A Preferred. There is $9,054 in
      accrued Series A Preferred dividends that convert into 45,272 shares of the
      Company’s common stock at a per share price of $0.20 for certain shareholders
      who elected to convert accrued dividends to common shares.





19


Convertible
      Promissory Notes


During
      2005 and the first quarter of 2006, the Company privately placed $10,300,000
      of
      12% convertible promissory notes. The holders of these notes were granted
      piggyback registration rights for the Company’s common shares underlying the
      conversion feature of the notes. These notes are convertible to common stock
      at
      $.25 per share. Note holders who purchased $500,000 or more of these notes
      received 100,000 additional common shares. All of the notes were converted
      into
      41,200,000 shares of the Company’s common stock during the second quarter of
      2006. In addition, the Company issued to such note holders warrants to acquire
      10,300,000 shares of its common stock at an exercise price of $.01 per share.
      These warrants have a three (3) year term. All of the shares of the common
      stock
      issued upon the conversion of the notes and the shares of common stock
      underlying the common stock purchase warrants are granted piggyback registration
      rights. Warrants representing 2,525,000 common shares have not yet been
      exercised as of December 31, 2006.





During
      the last three quarters of 2006, the Company privately placed approximately
      $5,431,000 of 12% convertible promissory notes. These notes were convertible
      to
      common stock at a per share price equal to eighty percent (80%) of the average
      closing bid price of one share of Company common stock for 10 days preceding
      the
      Conversion Date.





Additionally,
      each investor was issued a warrant to purchase at any time within three (3)
      years following the date of investment, at a per share price of one cent
      ($0.01), that number of shares of OnScreen common stock as is equal in value
      to
      one tenth the principal investment. Such value shall be determined by the
      average per share closing bid price of OnScreen common stock for the 10 days
      preceding the date of investment. As of December 31, 2006, 13,361,380 common
      shares were issued pursuant to the conversion of these promissory notes and
      exercise of the warrants; 9,631,771 common shares are held in reserve as
      issuable upon the conversion of the balance of the promissory notes and the
      shares of common stock underlying the common stock purchase warrants and common
      share underlying the warrants.





Fusion
      Three, LLC Settlement


In
      August
      2002, the Company entered into an agreement with Fusion Three, LLC whereby
      Fusion Three, LLC paid an annual $50,000 Company license fee in consideration
      for the Company’s conveying to Fusion Three, LLC 5% of the Company’s interest in
      the OnScreen License Agreement. In December 2002 the Company and Fusion Three,
      LLC entered into an addendum to the August 2002 agreement whereby Fusion Three,
      LLC paid a $100,000 second year revenue guarantee in consideration for an
      additional 10% of the Company’s interest in the OnScreen License Agreement. On
      January 14, 2004, the inventor agreed to accept $175,000 in lieu of the $250,000
      third year annual revenue guarantee payment.





On
      February 3, 2004, the Company reached a Master Settlement and Release Agreement
      whereby, in consideration for the exchange of mutual releases and Fusion Three,
      LLC relinquishing any claim to any of the OnScreenTM technology, the Company paid
      to Fusion Three, LLC $150,000 plus agreed to pay annually declining percentages
      of revenue derived from the commercialization of the direct view LED video
      display technology: 5% in 2005 declining to 2% in year 2008 and
      thereafter.  In the event of a change of control of the Company, the
      percentage of revenue stated above would terminate and a single payment
      transaction fee would be paid to Fusion Three, LLC ranging from 10% of the
      OnScreen appraised value up to $100,000,000, 7.5% for the appraised value
      between $100,000,001 and $200,000,000, 5% of the appraised value between
      $200,000,001 and $300,000,000, and 4% of the appraised value between
      $300,000,001 and $400,000,000 and 3% for the appraised value between
      $400,000,001 and $500,000,000 and 2% for any appraised amounts between
      $500,000,001 and $600,000,000.





20


During
      April 2006 the Company negotiated the terms of a full and final settlement
      with
      Fusion Three, LLC whereby Fusion Three, LLC relinquishes all rights and claims
      to any revenues and fees in consideration for our issuing to Fusion Three,
      LLC a
      three year warrant authorizing Fusion Three, LLC to purchase up to five million
      six hundred thousand (5,600,000) shares of our common stock at a per share
      price
      of $0.20. We also agreed to issue Fusion Three, LLC a warrant to purchase up
      to
      one million two hundred thousand (1,200,000) shares of our common stock at
      a per
      share price of $0.35 for 300,000 shares; $0.50 for 300,000 shares; $0.75 for
      300,000 shares and $1.00 for 300,000 shares before November 15,
      2007.


Employees,
        Consultants and Advisors
 In
        an effort to attract high caliber qualified employees, management committed
        the
        Company to issue 8,966,939 underlying common shares relating to warrants
        and
        options to employees, consultants and members of the scientific advisory
        board
        and employee stock grants. These warrants and options have exercise prices
        ranging from $.01 to $.75 with terms of one (1) to five (5) years. Additionally,
        the Company dedicated 2,000,000 common shares to the Employee Incentive Plan,
        which have been registered under cover of Form S-8. As of December 31, 2006,
        the
        Company had issued 232,500 underlying common shares related to the Employee
        Incentive Plan.





Other
      than as described herein, there are currently no plans, arrangements,
      commitments or understandings for the issuance of additional shares of Common
      Stock.





**Recent
      Sales of Unregistered S** **ecurities**





*Common
      St* *ock*


The
      following unregistered common stock shares are for the fourth quarter of 2006,
      all other unregistered sales would be reflected in the 10-QSB filing for that
      quarter. For all stock transactions listed below, the company relied on Section
      4(2) of the Securities Act of 1933 as the basis for an exemption from
      registration for these issuances.


During
        the fourth quarter of 2006, the Company issued 10, 926,438
        shares of common stock to certain convertible note holders in conjunction
        with
        the conversion of their notes payable debt of $3,115,000.





During
      the fourth quarter of 2006, the Company converted 310,000 shares of the
      Company’s Series A convertible preferred stock into 1,550,000 shares of the
      Company’s common stock at the request of certain Series A convertible preferred
      stock holders. The conversion ratio was four common plus one common bonus share
      for each share of Series A Preferred. The Company also converted accrued Series
      A Preferred dividends of $32,500 into 162,500 shares of the Company’s common
      stock at a per share price of $0.20 for certain shareholders who elected to
      convert accrued dividends to common shares.





During
      the fourth quarter of 2006, the Company issued 820,858 shares of its common
      stock to certain former note holders for the exercise of their warrants. The
      warrants were exercised for proceeds of $8,209.





During
      the fourth quarter of 2006, the Company issued 60,000 shares of its common
      stock
      to a former employee for the exercise of their warrant. The warrant was
      exercised for proceeds of $600.





21


During
      the fourth quarter of 2006, the Company issued 100,000 shares of its common
      stock to its Chief Operating Officer / Chief Financial Officer for the exercise
      of his warrant. The warrant was exercised for proceeds of $25,000.





During
      the month of December 2006, the Company issued 1,828,517 shares of its common
      stock to a note holder in conjunction with their conversion of the sum of the
      note’s principal ($500,000) and the note’s accrued interest ($26,613) into the
      Company’s common stock.





*Series
      A Converti* *ble
      Preferred Stock*


The
      following unregistered Series A Convertible Preferred Stock shares are for
      the
      fourth quarter of 2006, all other unregistered sales would be reflected in
      the
      10-QSB filing for that quarter.





The
      Company designated 5,000,000 shares of preferred stock as new Series A
      Convertible Preferred Stock (“Series A”). The Series A is convertible to common
      shares on a four-for-one basis, is due dividends at $0.10 per share as
      authorized by the Board, has a liquidation value of $1.00 per share and has
      equivalent voting rights as common shares on a share for share basis. Once
      the
      Series A shares have been issued, they cannot be reissued. On the Balance Sheet,
      the shares issued are higher than the shares outstanding due to the conversion
      of the Series A to common stock.





The
      company relied on Section 4(2) of the Securities Act of 1933 as the basis for
      an
      exemption from registration for these issuances. During the fourth quarter
      of
      2006, the Company converted 310,000 shares of the Company’s Series A convertible
      preferred stock into 1,550,000 shares of the Company’s common stock at the
      request of certain Series A convertible preferred stock holders. The conversion
      ratio was four common plus one common bonus share for each share of Series
      A
      Preferred. The Company also converted accrued Series A Preferred dividends
      of
      $32,500 into 162,500 shares of the Company’s common stock at a per share price
      of $0.20 for certain shareholders who elected to convert accrued dividends
      to
      common shares.





*Series
      B Convertible Preferr* *ed
      Stock*


On
      February 3, 2004, the Company’s board of directors designated 30,000 shares of
      preferred stock as Series B Convertible Preferred Stock (“Series B”). The Series
      B is convertible to common shares on a one thousand-for-one ratio, is due
      dividends at $1 per share, payable quarterly, as authorized by the Board and
      the
      dividends are cumulative. Series B has a liquidation value of $240 per share
      and
      has voting rights of one thousand votes per Series B share. Once the Series
      B
      shares have been issued, they cannot be reissued. There were no shares of Series
      B Convertible Preferred Stock issued as of December 31, 2006.





**Shares
      Eligible for Future Sale**


As
      of
      December 31, 2006, we had outstanding 147,127,238 shares of Common Stock. Of
      these shares, 56,575,338 shares
      are freely tradable without restriction or limitation under the Securities
      Act.





The
      90,551,900 shares of Common Stock held by existing shareholders as of December
      31, 2006 that are "restricted" within the meaning of Rule 144 adopted under
      the
      Securities Act (the "Restricted Shares"), may not be sold unless they are
      registered under the Securities Act or sold pursuant to an exemption from
      registration, such as the exemption provided by Rule 144 promulgated under
      the
      Securities Act. The Restricted Shares were issued and sold by us in private
      transactions in reliance upon exemptions from registration under the Securities
      Act and may only be sold in accordance with the provisions of Rule 144 of the
      Securities Act, unless otherwise registered under the Securities Act.





22


As
      of
      December 31, 2006 we had issued and outstanding 90,543 shares of Series A
      Convertible Preferred Stock, of which 90,543 are "restricted" within the meaning
      of Rule 144 as noted above.





As
      of
      December 31, 2006, no shares of Series B Convertible Preferred Stock were issued
      and outstanding.





January
      23, 2007, the Company filed with the Securities and Exchange Commission a
      registration statement on Form SB-2 pursuant to the Securities Act of 1933,
      as
      amended, with respect to the offer, issuance and sale of an aggregate of
      100,646,995 shares of our Common Stock being registered therein to certain
      of
      our stockholders named in the Prospectus and their transferees. The Company
      will
      not receive any proceeds from the sale of the shares, but the Company may
      receive proceeds from the Selling Stockholders if they exercise their warrants.





The
      possibility of future sales by existing stockholders, including Selling
      Stockholders, under Rule 144 or otherwise will, in the future, have a depressive
      effect on the market price of our Common Stock, and such sales, if substantial,
      might also adversely affect our ability to raise additional
      capital.





*Certain
      Provisions of the Articles of Incorporation and Colorado Business Corporation
      Act*


Our
      Articles of Incorporation provides that, to the fullest extent permitted by
      Colorado Business Corporation Act as the same exists or may hereafter be
      amended, a director of the corporation shall not be liable to the corporation
      or
      its shareholders for monetary damages for breach of fiduciary duty as a
      director.





The
      Company shall indemnify and advance expenses to a director or officer in
      connection with a proceeding to the fullest extent permitted or required by
      or
      in accordance with the indemnification sections of the Colorado Business
      Corporation Act that provides that, “The corporation shall indemnify a person
      who was wholly successful, on the merits or otherwise, in the defense of any
      proceeding to which the person was a party because the person is or was a
      director, against reasonable expenses incurred by him or her in connection
      with
      the proceeding.”





**Item
      6. Management** **'s
      Discussion and Analysis**





*Important
      Note about Forward-Looking Statements*


The
      following discussion and analysis should be read in conjunction with our audited
      financial statements as of December 31, 2006 and un-audited 10-QSB filings
      for
      the first three quarters of 2006 and the notes thereto, all of which are
      included elsewhere in this Form 10-KSB. In addition to historical information,
      the following discussion and other parts of this Form 10-KSB contain
      forward-looking information that involves risks and uncertainties. Our actual
      results could differ materially from those anticipated by such forward-looking
      information due to factors discussed under "Risk Factors" and elsewhere in
      this
      Form 10-KSB.





The
      statements that are not historical constitute "forward-looking statements".
      Said
      forward-looking statements involve risks and uncertainties that may cause the
      actual results, performance or achievements of the Company and its subsidiaries
      to be materially different from any future results, performance or achievements,
      express or implied by such forward-looking statements. These forward-looking
      statements are identified by their use of such terms and phrases as "expects",
      "intends", "goals", "estimates", "projects", "plans", "anticipates", "should",
      "future", "believes", and "scheduled".





23


The
      variables which may cause differences include, but are not limited to, the
      following: general economic and business conditions; competition; success of
      operating initiatives; operating costs; advertising and promotional efforts;
      the
      existence or absence of adverse publicity; changes in business strategy or
      development plans; the ability to retain management; availability, terms and
      deployment of capital; business abilities and judgment of personnel;
      availability of qualified personnel; labor and employment benefit costs;
      availability and costs of raw materials and supplies; and changes in, or failure
      to comply with various government regulations. Although the Company believes
      that the assumptions underlying the forward-looking statements contained herein
      are reasonable, any of the assumptions could be inaccurate; therefore, there
      can
      be no assurance that the forward-looking statements included in this Form 10-KSB
      will prove to be accurate.





In
      light
      of the significant uncertainties inherent in the forward-looking statements
      included herein, the inclusion of such information should not be regarded as
      a
      representation by the Company or any person that the objectives and expectations
      of the Company will be achieved.





*Losses
      from Operations; Accumulated Deficit; Negative Net worth and Going Concern.*


Historically,
      the Company has not generated sufficient revenues from operations to self-fund
      its capital and operating requirements. These factors raise substantial doubt
      concerning its ability to continue as a going concern. For the foreseeable
      future, the Company expects that its working capital will come from funding
      that
      will primarily include equity and debt placements.


*Overview*
 OnScreen
        Technologies, Inc. has pioneered and is commercializing innovative thermal
        management solutions capable of revolutionizing the LED display, semiconductor
        and electronic packaging
        industries. Utilizing its patent-pending thermal technologies and architecture,
        the Company has developed highly advanced, proprietary LED display solutions
        under the names RediAlertTM and Living
        WindowTM and
        cooling applications through its WayCool product line. Additionally, the
        Company
        is continuing efforts towards
        development and commercialization of its Tensile technology.
 
 During
        the year ended December 31, 2006, the Company continued to incur significant
        losses from operations. The Company incurred a net loss of $14,481,333 for
        the
        year ended December 31, 2006. This net loss of $14,481,333 includes non-cash
        charges of $2,842,520 for compensation and services expense including
        amortization of deferred compensation related to equity given or to be given
        to
        employees and consultants for services provided, $3,647,450 of non-cash
        amortization of the intrinsic value of convertible debt and the warrant related
        debt discount, and $2,780,000 of non-cash loss for the value of warrants
        issued
        as a settlement.





Management
      has continued to raise the capital needed to fund the development and marketing
      of the Company’s OnScreenTM products during 2006. During the year ended December
      31, 2006 the Company received proceeds of $10.9 million for unsecured notes
      less
      $0.4 million of expenses. These funds will assist the Company to continue to
      develop its OnScreenTM products and continue the Company’s operations until the
      Company brings the OnScreenTM products to market. However ,
      the
      Company anticipates expanding and developing its technology and product lines
      which will require additional funding.





24


**Critical
      Accounting Policies**


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that have a significant impact on the results the
      Company will report in the Company's financial statements. Some of the Company's
      accounting policies require the Company to make difficult and subjective
      judgments, often as a result of the need to make estimates of matters that
      are
      inherently uncertain. Actual results may differ from these estimates under
      different assumptions or conditions.





*Asset
      Impairment*


The
      Company reviews its long-lived assets for impairment whenever events or changes
      in circumstances indicate that the carrying amount of the asset exceeds its
      fair
      value and may not be recoverable. In performing the review for recoverability,
      the Company estimates the future cash flows expected to result from the use
      of
      the asset and its eventual disposition. If the sum of the expected future cash
      flows (undiscounted and without interest charges) is less than the carrying
      amount of the asset, an impairment loss is recognized as the excess of the
      carrying amount over the fair value. Otherwise, an impairment loss is not
      recognized. Management estimates the fair value and the estimated future cash
      flows expected. Any changes in these estimates could impact whether there was
      impairment and the amount of the impairment.





*Valuation
      of Non-Cash Capital Stock Issuances*


The
      Company values its stock transactions based upon the fair value of the equity
      instruments. Various methods can be used to determine the fair value of the
      equity instrument. The Company may use the fair value of the consideration
      received, the quoted market price of the stock or a contemporaneous cash sale
      of
      the common or preferred stock. Each of these methods may produce a different
      result. Management uses the method it determines most appropriately reflects
      the
      stock transaction. If a different method was used it could impact the expense
      and equity stock accounts.





*Patent
      Costs*


The
      Company estimates the patents it has filed have a future beneficial value to
      the
      Company; thus, it capitalizes the costs associated with filing for its patents.
      At the time the patent is approved, the patent costs associated with the patent
      will be amortized over the useful life of the patent. If the patent is not
      approved, at that time the costs will be expensed. A change in the estimate
      of
      the patent having a future beneficial value to the Company will impact the
      other
      assets and expense accounts of the Company.





*Revenue
      Recognition*


The
      recognition of the Company’s revenues
      requires judgment, including whether a sale includes multiple elements, and
      if
      so, whether vendor-specific objective evidence (VSOE) of fair value exists
      for
      those elements. Customers receive certain elements of our products over a period
      of time. These elements include installation and training services. The ability
      to identify VSOE for those elements and the fair value of the respective
      elements could materially impact the amount of earned and unearned revenue.
      Also, the Company offers an extended warranty for which the revenues are
      initially recorded as deferred revenue and recorded to revenue ratably over
      the
      applicable warranty period. The Company does not have any history as to the
      costs expected to be incurred in performing these services. Therefore, revenues
      may be recorded that are not in proportion to the costs expected to be incurred
      in performing these services.





25
 
 **Liquidity
          and Capital Resources**
 *General*
 The
          Company’s cash and cash equivalents balance at December 31, 2006 is $570,501.
          The Company has a net working capital balance at December 31, 2006 of
          $1,166,957. The Company has funded its operations and investments in equipment
          through cash from operations, equity financings and borrowing from private
          parties as well as related parties. It has also funded its operations through
          stock paid to vendors, consultants and certain employees.





*Cash
      used in operations*


The
      Company’s operating requirements generated a negative cash flow from operations
      of $9,398,621 during 2006.





During
      2006 and 2005, the Company has used stock and warrants as a form of payment
      to
      certain vendors, consultants and employees. For 2006, the Company recorded
      a
      total of $2,842,520 for compensation and services expense including amortization
      of deferred compensation related to equity given or to be given to employees
      and
      consultants for services provided.


During
        2006, the Company recorded two additional significant non-cash entries -
        interest expense of $3,647,450 for the intrinsic value of convertible debt
        and
        the amortization of warrant related debt discount and $2,780,000 in stock
        based
        settlement loss.





As
      the
      Company focuses on the OnScreenTM technology during 2007, it will continue to
      fund research and development related to the OnScreenTM products as well as sales
      and marketing efforts related to these products. The Company does not expect
      to
      record significant revenue until its RediAlert TM product
      line is fully deployed nationwide. The RediAlert TM product
      line began shipping during the third quarter of 2006.





*Capital
      Expenditures and Investments*


During
      2006, the Company invested $25,150 in fixed assets which was mainly computer
      equipment and software used for sales, marketing and research and development.
      Since the Company outsources the manufacture of its products, the Company
      anticipates its fixed asset expenditures for 2007 to be similar to 2006.





The
      Company invested $153,869 in patent costs and $800,000 in technology rights
      during 2006. The Company expects its investment in patent costs will continue
      throughout 2007 as it invests in patents to protect the rights to use its
      OnScreen TM product
      developments.





*Financing
      activities*


During
      2006, the Company received $10,499,950 of proceeds from unsecured convertible
      notes. The Company paid $525,475 on an unsecured notes payable during 2006.
      During 2006, the Company converted $14,081,000 of convertible unsecured notes
      into 54,561,380 shares of its common stock. The Company plans on raising the
      capital needed to fund the further development and marketing of the Company’s
      products.





26


*Recap
      of liquidity and capital resources*


The
      Company is seeking to raise additional capital for the commercialization of
      its
      OnScreenTM technology product lines which the Company believes will provide
      sufficient cash to meet its short-term working capital requirements for the
      next
      twelve months. As the Company continues to expand and develop its technology
      and
      product lines, additional funding will be required. The Company will attempt
      to
      raise these funds through borrowing instruments or issuing additional equity.





Management
      expects the OnScreen TM LED
      technology to be commercialized during 2006 and 2007. The Company cannot
      assure that it will generate material revenues by that date or that its revenues
      will be sufficient to cover all operating and other expenses of the Company.
      If
      revenues are not sufficient to cover all operating and other expenses, the
      Company will require additional funding. There is no assurance the Company
      will
      be able to raise such additional capital. The failure to raise additional
      capital or generate product sales in the expected time frame will have a
      material adverse effect on the Company.





*Off-Balance
      Sheet Arrangements*


As
      of
      December 31, 2006, we have no off-balance sheet arrangements.





**Results
      of Operations**


The
      accompanying financial statements reflect the operations of the Company for
      the
      fiscal years ended December 31, 200 6
      and
      2005.


*Revenue*
 During
        the year ended 2006, revenue was $256,688 and $133,650 for the same period
        during 2005. The revenue for year ended December 31, 2006 is comprised of
        $100,670 from RediAlert TM products, $110,380 from Living Window TM products
        and related add-ons, and $45,638 from sale of wireless modems. For the year
        ended December 31 2005, the Company recorded $92,474 from Living
        Window TM products
        and related add-ons and $41,176 of rental revenue from the LED
        Truck.





The
      Company began shipping its RediAlert TM product
      during late July 2006. As the RediAlert TM product
      penetrates the marketplace, the Company’s expects its revenues will increase
      during 2007 compared to 2006.





During 2006,
      69%
      of revenues were derived from four customers at 24%, 22%, 12% and 11%. During
      2005, 43% of revenues were derived from three customers at 19%, 12% and 12%.


*Cost
        of revenue*
 The
        cost
        of revenue for the year ended December 31, 2006 and 2005 was $1,586,823 and
        $170,533, respectively. The significant increase of $1,516,290 during 2006
        compared to prior year is primarily the result of a $1,245,431 inventory
        write-down of impaired inventory to net realizable market value, increased
        unit
        shipments, and higher initial production costs for RediAlert. While the Company
        is introducing its new products and until it sells larger volumes to get
        economies of scale, it expects the cost of sales to fluctuate between periods
        as
        a percentage of its revenues.
  *Selling,
      General and Administrative Expenses*


Selling,
      General and Administrative (SG&A) expenses includes such items as wages,
      consulting, general office expenses, business promotion expenses and costs
      of
      being a public company including legal and accounting fees, insurance and
      investor relations.





27


SG&A
        expenses increased
        from $4,942,320 for the year ended December 31, 2005 to $6,422,006 for the
        same
        period during 2006. This increase of $1,479,686 or 30% is primarily the result
        of increased non-cash expenses of approximately $1.5 million.
 
 For
        the
        year ended December 31, 2006 compared to 2005, the Company recorded non-cash
        compensation of approximately $2,842,500 and $1,379,000, respectively.
 
 The
        company anticipates its sales and marketing expenditures and general and
        administrative expenses to significantly decrease during 2007 compared to
        2006
        as the Company has significantly reduced its infrastructure during the fourth
        quarter of 2006 by shifting its selling efforts through distributors and
        independent representatives versus internal sales personnel. It is the Company’s
        belief that the current infrastructure is sufficient to handle the process
        of
        commercialization and marketing of its OnScreenTM product lines.


*Research
        and Development* **
 The
        research and development costs are related to the OnScreenTM technology to which
        the Company acquired the licensing rights. The increase of $1,241,896 in
        research and development from $2,661,965 during the year ended December 31,
        2006
        compared to $1,420,069 during the same period in 2005 is a result of activities
        to further research and develop the OnScreenTM technology and products including
        WayCool prototyping. Since the Company anticipates lower development costs
        for
        the RediAlert TM product
        and a reduction in external consulting fees for research and development
        during
        2007, the Company estimates that research and development expenses will
        significantly decrease during 2007 compared to 2006.





*Restructuring
      costs*


During
      the fourth quarter of 2005, the Company moved its headquarters to Portland,
      Oregon from Safety Harbor, Florida. As part of the corporate office relocation,
      the Company incurred $78,801 of restructuring costs for severance for seven
      employees and relocation expenses for two employees during 2005 and an
      additional $13,987 during 2006. No additional expenses are
      anticipated.


*Impairment
        Loss*
 The
        Company recorded a $48,711 impairment loss during 2006. During
        the Fourth Quarter of 2006, the Company wrote off the remaining balance of
        its
        LED Truck resulting in an impairment loss of $48,214 as the truck was no
        longer
        generating revenue. During 2005, there was no impairment loss
        recorded.


*Bad
      Debt*


Bad
      debt
      expense has decreased by $9,447 during 2006 compared to 2005. The Company does
      not anticipate this to be a large item during 2007.


*Other
        Income*
 The
        Company recorded $ 29,450
        of
        other income during 2006 primarily from office rental income of $27,700.
        During
        2005, there was no other income recorded.
 
 *Other
        Expense*
 During
        2006, the Company recorded $1,695 related to a loss on the disposal of certain
        fixed assets. During 2005, the Company recorded a $16,787 loss related to
        the
        disposal of certain fixed assets related to moving the headquarters to Portland
        Oregon from its Florida location.





*Investment
      Income*


During
      2004, i n
      order
      for the Company to optimize its return on the equity funds it has raised, it
      invested in certain liquid marketable securities. During 2006 and 2005, the
      Company recorded $40,576 and $20,680, respectively, of investment income net
      of
      any losses related to these investments.





28


*Financing
      Fees*


During
      2005 and 2006, the Company engaged outside services to assist in raising
      capital. Based on funding acquired via this third party, financing fees (cash
      and warrants) of $1,268,100 were incurred during 2006. During 2005, there were
      no financing fees recorded.





*Settlement
      Gain (Loss), Net*


The
      Company recorded a net settlement gain (loss) for the year ended December 31,
      2006 of $(2,478,325). The Company did not have any significant settlement gain
      (loss) during the fiscal year 2005.


The
        Company recorded a settlement gain for the year ended December 31, 2006 of
        $301,675. During 2005, the Company reached a settlement with Capitol City
        Trailers regarding the use of one of its trucks. For the twelve months ended
        December 31, 2006, the Company had received $20,833, which it has recorded
        as a
        settlement gain. During the first quarter of 2006, the Company reached a
        settlement with Mobile Magic where Mobile Magic agreed to pay $175,000 as
        settlement of the Company’s claim against it. Due to
        the financial condition of Mobile Magic, the Company had not recorded as
        of June
        30, 2006 a receivable of $175,000 for the remaining amount. During August
        2006,
        Mobile Magic paid the first installment of $50,000 due per the agreement.
        The
        settlement of $175,000 with Mobile Magic was recorded during the third quarter
        as a settlement gain. The Company also had recorded approximately $150,000
        as a
        payable to Mobile Magic who was constructing a truck that the Company never
        received. As part of the agreement the Company does not owe the $150,000
        and
        recorded a settlement gain for this amount during the first quarter of 2006.
        This was offset by legal fees of $44,158.




During
      April 2006 the Company negotiated the terms of a full and final settlement
      with
      Fusion Three, LLC whereby Fusion Three, LLC relinquishes all rights and claims
      to any revenues and fees in consideration for the Company issuing to Fusion
      Three, LLC a three year warrant authorizing Fusion Three, LLC to purchase up
      to
      5,600,000 shares of common stock at a per share price of $0.20. The Company
      also
      agreed to issue Fusion Three, LLC a warrant to purchase up to 1,200,000 shares
      of common stock at per share price of $0.35 for 300,000 shares; $0.50 for
      300,000 shares; $0.75 for 300,000 shares and $1.00 for 300,000 shares before
      November 15, 2007. During the second quarter of 2006, the Company recorded
      a net
      settlement loss of $2,780,000 associated with this transaction.


*Change
        in value of warrant liability*
 During
        the year ended December 31, 2006, a gain of $3,718,543 was recorded for the
        change in fair value of derivative liabilities. The Company no longer has
        any
        financial instruments with indeterminate shares and as such the value of
        warrant
        liability at September 28, 2006 has been reclassified to equity.
 *Intrinsic
          value of convertible debt and amortization of* *warrant
          related debt discount*
 The
          Company recorded an expense of $3,647,451 for the year ended December 31,
          2006
          for the intrinsic value of convertible debt and the amortization of warrant
          related debt discount. There was $305,742 of remaining unamortized debt
          discount
          amounts at December 31, 2006. The Company recorded an expense of $1,676,481
          for
          the year ended December 31, 2005 for the intrinsic value of convertible
          debt and
          the amortization of debt discount. The total intrinsic value of convertible
          debt
          recorded was $1,778,436 and a debt discount of $215,275. The remaining
          $317,230
          was expensed during the first quarter of 2006.





29


*Interest
      Expense*


The
      Company incurred $395,214 and $336,051 of interest expense during 2006 and
      2005,
      respectively. The interest expense of $395,214 for the year ended December
      31,
      2006 is for the interest on the unsecured convertible notes
      payable.





The
      interest expense of $336,051 for year ended December 31, 2005 is for the
      interest on the $1.5 million unsecured note entered into during March 2005
      which
      was replaced with unsecured convertible notes and the $3.5 million of unsecured
      convertible notes entered into during the third and fourth quarter of
      2005.


*Net
        Loss*
 The
        net
        loss of $14,481,333 for the year ended December 31, 2006 increased $5,999,208
        or
        71% compared to the same period in 2005. The increase in net loss during
        2006
        compared to 2005 is mainly the result of recording a higher expense $1,970,970
        for intrinsic value of convertible debt and amortization of debt discount
        related to the convertible notes payable, increased net settlement loss of
        $2,494,692 primarily due to the Fusion Three, LLC transaction, higher operating
        expenses of 2,696,012 resulting from increased research and development costs
        and $1.6 million of non-cash SG&A expenses, and the impact of an inventory
        write-down of impaired inventory to market value of $1,245,431 . This is
        partially offset by a gain of $3,718,543 recorded for the change in fair
        value
        of derivative liabilities.





*Preferred
      Stock Dividends*


During
      the year ended December 31, 2006 and 2005, the Company recorded Series A
      Convertible Preferred Stock dividends of $49,801 and $201,895, respectively.
      During 2006, Series A Convertible Preferred shareholders accepted the Company’s
      offer to receive all outstanding dividends through March 2006 in either cash
      or
      common shares at a per share price of $0.20.





During
      the year ended December 31, 2006, the Company recorded Series B Convertible
      Preferred Stock dividend income of $17,775 as it reversed prior year accruals
      of
      $17,900 pertaining to Series B Convertible Preferred Stock dividends partially
      offset by a dividend payment of $125.





**Item
      7. Financial Statements**


The
        Financial Statements and the report of Salberg & Company, P.A. dated March
        23,
        2007 are attached hereto and incorporated herein by
        reference.





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





None.





**Item
      8A. Controls and Procedures**





*Evaluation
      of disclosure controls and procedures* *.*


Under
      the
      supervision and with the participation of our management, including its Chief
      Executive Officer and Chief Financial Officer, the Company conducted an
      evaluation of the effectiveness of the design and operations of its disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as of December 31, 2006. Based on this
      evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
      concluded that its disclosure controls and procedures were effective such that
      the material information required to be included in its Securities and Exchange
      Commission (“SEC”) reports is recorded, processed, summarized and reported
      within the time periods specified in SEC rules and forms relating to OnScreen
      Technologies, Inc. during the period when this report was being
      prepared.





30


*Changes
      in internal controls over financial reporting* *.*


In
      addition, there were no significant changes in the Company’s internal control
      over financial reporting that could significantly affect these controls during
      fiscal year ended December 31, 2006. The Company has not identified any
      significant deficiency or materials weaknesses in its internal controls, and
      therefore there were no corrective actions taken.





**Item
      8B. Other Matters**





There
      are
      no matters to be reported under this Item.





**PART
      III**


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





Our
      Bylaws permit the number of directors to be fixed by resolution of the Board
      of
      Directors, but to be no less than one. The Board of Directors has set the
      maximum number of members to no more than five members. Directors are elected
      by
      a plurality of the votes cast by the holders of Common and Preferred Stock
      and
      serve two year terms or until their successors have been elected and qualified
      or until their earlier resignation or removal. Currently, there are five (5)
      directors. The
      standards relied upon by the Board of Directors in determining whether a
      director is “independent” are posted on our website at www.onscreentech.com .





Subject
      to terms of their employment agreements, if
      any,
      officers of the Company hold office until their successors are elected and
      qualified, subject to earlier removal by the Board of Directors.





The
      Board
      of Directors has four
      standing committees: Audit Committee, Compensation Committee, Nomination
      Committee and Business Advisory Board. No incumbent director attended fewer
      than
      100% of the total number of meetings held by all committees on which such
      director served. Our board currently appoints the members of the committees.
      Our
      Audit Committee and Compensation Committee each have a written charter approved
      by our board. Copies of the current committee charters and a description of
      our
      Nomination Committee are posted on our website at www.onscreentech.com .





The
      following are officers and directors of the Company.





Name
            Age
            PositionRussell
                L. Wall
            63
            President/Chief
                Executive Officer, Director and Chairman of the Audit CommitteeWilliam
                J. Clough, Esq.
            55
            Executive
                Vice President of Corporate Development, Corporate Secretary, Director
                and
                General CounselBradley
                J. Hallock
            48
            Director,
                Compensation CommitteeJohn
                P. Rouse
            49
            DirectorSteven
                S. Hallock
            50
            DirectorMark
                R. Chandler
            52
            Chief
                Financial Officer and Chief Operating
                Officer





31


Given
      that OnScreenTM is
      a
      small entity, the Company is dependent on the efforts of
      a
      limited number of management personnel. The Company believes that because of
      the
      large amount of responsibility being placed on each member of its management
      team, the loss of services of any member of this team at the present time would
      harm its business. Each member of its management team
      supervises the operation and growth of one or more integral parts of its
      business.





**Shareholder
      Communications**


Company
      shareholders who wish to communicate with the Board of Directors or an
      individual director may write to OnScreen Technologies, Inc., 600 NW
      14 th Avenue,
      Suite 100, Portland, Oregon 97209, (503) 417-1700, fax (503) 417-1717 or to
      the
      attention of an individual director. Your letter should indicate that you are
      a
      shareholder and whether you own your shares in street name. Letters received
      will be retained until the next Board meeting when they will be available to
      the
      addressed director. Such communications may receive an initial evaluation to
      determine, based on the substance and nature of the communication, a suitable
      process for internal distribution, review and response or other appropriate
      treatment. There is no assurance that all communications will receive a
      response.





**Business
      Experience of Directors and Executive Officers**


Russell
      L. Wall, President/Chief Executive Officer, Director and Chairman of the Audit
      Committee


Russell
      L. Wall was appointed to the Board of Directors in November 2003, elected to
      serve a one year term at the 2004 Annual Meeting of Shareholders and re-elected
      to a two year term at the 2005 Annual Meeting of Shareholders. He was named
      President and Chief Executive Officer effective November 9, 2006 and also serves
      as Chairman of the Audit Committee. Mr. Wall holds a Bachelor of Science degree
      in Engineering from Iowa State University, a MBA degree in finance/marketing
      from University of Santa Clara and a Chartered Financial Analyst designation.
      Prior to his retirement in 2000, Mr. Wall was Chief Financial Officer for 12
      years with a publicly traded company. His responsibilities included
      financial/accounting management, internal and external financial reporting,
      strategic planning and other operational duties. Mr. Wall brings 5 years
      experience in the financial securities industry as a consultant and portfolio
      manager with a Wall Street and a private investment management firm. He also
      brings 10 years Fortune 100 company experience in the engineering and
      construction industry with assignments as Analysis and Development Engineer,
      Planning and Control Manager and Project Manager.





William
      J. Clough, Esq., Executive Vice President of Corporate Development, Corporate
      Secretary, Director and General Counsel


William
      J. Clough was a police officer for 16 years, working at the local, state, and
      federal levels. In 1987 while working as a Federal Air Marshall in Southern
      Europe and the Middle East, Mr. Clough decided to attend law school. He received
      his Juris Doctorate, *cum
      laude* ,
      from
      the University of California, Hastings College of the Law in 1990. He operated
      his own law firm with offices in Los Angeles, San Francisco and Honolulu for
      12
      years. Mr. Clough obtained the largest ever non-wrongful death jury verdict
      in
      Los Angeles County Superior Court in 2000 and successfully represented parties
      in multi-million dollar cases throughout the United States. He is certified to
      practice law in state and federal courts in California, Illinois, Hawaii, and
      before the United States Supreme Court. Mr. Clough has represented large
      manufacturing and entertainment entities, including work with MGM Studios,
      20th
      Century Fox, News Corp., Lions Gate Films,
      Artisan Pictures, Sony and Mediacopy. Mr. Clough was appointed to the Board
      of
      Directors, effective March 1, 2006 and was reelected at the December 2006
      shareholder’s meeting to serve an additional two year term.





32


Bradley
      J. Hallock, Director, Compensation Committee


Bradley
      J. Hallock, age 48, was appointed to the Board of Directors in April 2004 and
      was re-elected at the December 2006 shareholders’ meeting to serve an additional
      two year term. Mr. Hallock brings to the board over 25 years of corporate
      experience. Mr. Hallock was the founder and Chief
      Executive Officer of C and R, Ltd., a provider of wholesale services to the
      automobile industry, with annual revenue in excess of $10,000,000. For three
      years, Mr. Hallock served as a Senior Executive for First America Automotive,
      Inc. (FAA), an $800,000,000 annual revenue company that was later acquired
      by
      Sonic Automotive, Inc. (NYSE:SAH). As a Senior Executive at FAA, he conceived
      and implemented the “Auto Factory” concept to vertically integrate used car
      operations across disparate retail franchises on a regional basis. He led the
      expansion of this concept into a $100,000,000 annual revenue division of FAA
      resulting with industry leading profitability. During his tenure at FAA, Mr.
      Hallock was a key member of the merger and acquisition team, where he was
      instrumental in the successful acquisition and integration of over 50 new car
      retail franchises.





John
      P. Rouse, Director


John
      P.
      Rouse brings to the board 30 years of business management experience. For the
      last 17 years Mr. Rouse has been the President/Owner/Founder of Washington
      Equipment Manufacturing Company, Inc. (WEMCO), located in the State of
      Washington. WEMCO is a multi-million dollar manufacturing company. As its
      Founder, Mr. Rouse was personally responsible for setting up the engineering,
      manufacturing and financial aspects of WEMCO and continues to run the daily
      operations. Prior to founding WEMCO, Mr. Rouse spent 12 years as equipment
      and
      operations manager for DHH Investments and its subsidiary companies, Acme
      Concrete, Acme Concrete Construction Division, Acme Concrete Asphalt Division,
      Acme Concrete Ready Mix in Richland, WA, Yakima Concrete and Asphalt Company
      and
      Cunningham Sand, Gravel and Asphalt. The Construction and Asphalt Divisions
      operated in most of the Western United States and the Concrete Division was
      one
      of the largest users of cement in the United States. As a member of DHH’s
      Executive Committee, Mr. Rouse was responsible for daily operations and
      financial/budgeting. Mr. Rouse was appointed to the Board of Directors,
      effective March 17, 2006 and was reelected at the December 2006 shareholder’s
      meeting to serve an additional two year term.





Steven
      S. Hallock, Director


Steven
      S.
      Hallock is the President of Fremont Ford/Mazda an automobile dealership
      generating $80,000,000 in annual revenue. Additionally, he functions as a
      corporate trainer for Sonic Automotive, a Fortune 300 company and was one of
      the
      architects of their industry leading training program. Prior to his present
      position, Mr. Hallock was the Northern California Regional Vice President in
      charge of 22 Automotive Dealerships generating over 1 billion in annual
      revenues. In his prior role, Mr. Hallock was the Chief Operating Officer for
      First America Automotive, an automotive company comprised of 26 automobile
      dealerships in California. Mr. Hallock started his automotive career as a
      general manager and partner in the HG Automotive group, a group of automobile
      dealerships operating in Northern California generating $250 million in annual
      revenues. Mr. Hallock graduated *Cum
      Laude* from
      Pepperdine Law School in 1981. Mr. Hallock has served as chairperson of the
      OnScreen Technologies, Inc. Business Advisory Board since March 2006. Mr.
      Hallock was appointed to the Board of Directors, effective August 28, 2006 and
      was
      reelected at the December 2006 shareholder’s meeting to serve an additional one
      year term.





33


Mark
      R. Chandler, Chief Financial Officer and Chief Operating
      Officer


Mark
      R.
      Chandler joined OnScreen in January 2004 after
      working 23 years with Sara Lee Corporation where he held several senior
      positions in finance, general management and operations. He most recently was
      the CEO of Business Development Europe and a member of the Board of Directors
      of
      Sara Lee Apparel Europe. Previously, he was Group Chief Financial Officer for
      the $2 billion European apparel group for Sara Lee responsible for all financial
      and administrative activities, IT, and strategic planning. Additionally, he
      led
      the organization and launch of a new technological breakthrough product for
      the
      European apparel market. Mr. Chandler has extensive and diversified
      international experience in finance, IT, strategic planning and implementation,
      operations and general management, treasury, business development and corporate
      development including acquisitions and divestments. Mr. Chandler began his
      career with American Express in New York and held several financial positions
      with General Foods. He moved to Playtex, Inc. in 1980 and actively participated
      in two leverage buyouts prior to the company being sold to Sara Lee in 1991.
      Mr.
      Chandler earned a Bachelor of Arts degree in Mathematics and Economics from
      Whitman College and his MBA in Finance and Marketing from Columbia University
      Graduate School of Business. Mr. Chandler is a member of the European Executive
      Council.





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





**Code
      of Ethics**


The
      Company Board of Directors adopted a Code of Ethics for Principal Executives
      and
      Financial Officers that describes the required conduct of honest and ethical
      behavior in the conduct of their duties. This code does not cover every issue
      that may arise, but sets out basic principles relating to conflict
      of interest, corporate
      opportunities, insider trading, confidentiality, protection and proper use
      of
      company assets, compliance with laws, rules and regulations, reporting of
      illegal or unethical behavior and accountability. The Code
      of Ethics is available for viewing on our website at
      www.onscreentech.com . Copies
      of our Code of Business Conduct and Ethics will be provided free of charge
      upon
      written request to OnScreen Technologies, Inc., 600 N.W. 14 th Avenue,
      Suite 100, Portland, Oregon 97209.





**Audit
      Committ** **ee**


The
      Audit
      Committee is established pursuant to the Sarbanes-Oxley Act of 2002 for the
      purposes of overseeing the company’s accounts and financial reporting processes
      and audits of its financial statements. The Audit Committee is directly
      responsible for, among other things, the appointment, compensation, retention
      and oversight of our independent Registered Public Accounting firm, review
      of
      financial reporting, internal company processes of business/financial risk
      and
      applicable legal, ethical and regulatory requirements.





The
      Audit
      Committee is currently comprised of the Company Board of Directors. Russell
      L.
      Wall serves as committee Chairman. Mr. Wall is independent in accordance with
      applicable rules promulgated by the Securities and Exchange Commission and
      NASDAQ listing standards. Mr. Wall has an understanding of generally accepted
      accounting principles and has experience preparing, auditing, analyzing or
      evaluating financial statements that present a breadth and level of complexity
      of accounting issues that are generally comparable to the breath and complexity
      of issues that can reasonably be expected to be raised by the financial
      statements of the Company, including our balance sheet, income statement and
      cash flow statement. He has an understanding of internal controls and procedures
      for financial reporting and an understanding of audit committee functions as
      well as the ability to access the general application of such accounting
      principles in connection with the accounting for estimates, accruals and
      reserves. The
      Board
      of Directors has determined that Mr. Wall is an “audit committee financial
      expert” as defined in Section 401(h) of Regulation S-K promulgated by the SEC
      under the Exchange Act. Our Audit Committee acts pursuant to a written charter,
      a copy of which is available from the Company and is posted on our website
      at
      www.onscreentech.com. The Audit Committee has established a procedure to receive
      complaints regarding accounts, internal controls and auditing
      issues.





34


**Audit
      Committee Report**


The
      Audit
      Committee reviews the financial information that will be provided to the
      shareholders and others, the systems of internal controls established by
      management and the Board and the independence and performance of the Company’s
      audit process.





The
      Audit
      Committee has:


1.
            Reviewed
                and discussed with management the audited financial statements included
                in
                the Company’s Annual Report and Form
                10-KSB;


2.
            Discussed
                with Salberg & Company, PA , the Company’s independent auditors, the
                matters required to be discussed by statement of Auditing Standards
                No.
                61, as amended, as adopted by the Public Company Accounting Oversight
                Board;


3.
            Received
                the written disclosures and letter from Salberg & Company, PA as
                required by Independence Standards Board Standard No. 1;
                and


4.
            Discussed
                with Salberg & Company, PA its
                independence.





Based
      on
      these reviews and discussions, the Audit Committee has recommended that the
      audited financial statements be included in the Company’s annual report on Form
      10-KSB for the year ended December 31, 2006. The Audit Committee has also
      considered whether the amount and nature of non-audit services provided by
      Salberg & Company, PA is compatible with the auditor’s
      independence.





**Item
      10. Executive Compensation**





**Compensation
      Discussion and Analysis**


*Compensation
      Committee Members*


The
      Compensation Committee of the Board of Directors is appointed by the Board
      of
      Directors to discharge the Board's responsibilities with respect to all forms
      of
      compensation of the Company's executive officers, to administer the Company's
      equity incentive plans, and to produce an annual report on executive
      compensation for use in the Company's 10-KSB. The
      Compensation Committee consists of two members of the board of directors,
      Russell L. Wall and Bradley J. Hallock.





*Role
      of Committee*


The
      Compensation Committee discharges the Board’s responsibilities relating to
      general compensation policies and practices and to compensation of our
      executives.  In discharging its responsibilities, the Compensation
      Committee establishes principles and procedures in order to ensure to the Board
      and the shareholders that the compensation practices of the Company are
      appropriately designed and implemented to attract, retain and reward high
      quality executives, and are in accordance with all applicable legal and
      regulatory requirements.  In this context, the Compensation Committee’s
      authority, duties and responsibilities are:


·
            To
                annually review the Company’s philosophy regarding executive
                compensation.


·
            To
                periodically review market and industry data to assess the Company’s
                competitive position, and to retain any compensation consultant to
                be used
                to assist in the evaluation of directors’ and executive officers’
                compensation.




35






·
            To
                establish and approve the Company goals and objectives, and associated
                measurement metrics relevant to compensation of the Company’s executive
                officers,


·
            To
                establish and approve incentive levels and targets relevant to
                compensation of the executive
                officers.


·
            To
                annually review and make recommendations to the Board to approve,
                for all
                principal executives and officers, the base and incentive compensation,
                taking into consideration the judgment and recommendation of the
                Chief
                Executive Officer for the compensation of the principal executives
                and
                officers.


·
            To
                separately review, determine and approve the Chief Executive Officer’s
                applicable compensation levels based on the Committee’s evaluation of
                the Chief Executive Officer’s performance in light of the Company’s and
                the individual goals and
                objectives.


·
            To
                periodically review and make recommendations to the Board with respect
                to
                the compensation of directors, including board and committee retainers,
                meeting fees, equity-based compensation, and such other forms of
                compensation as the Compensation Committee may consider
                appropriate.


·
            To
                administer and annually review the Company’s incentive compensation plans
                and equity-based plans.


·
            To
                review and make recommendations to the Board regarding any executive
                employment agreements, any proposed severance arrangements or change
                in
                control and similar agreements/provisions, and any amendments, supplements
                or waivers to the foregoing agreements, and any perquisites, special
                or
                supplemental benefits.


·
            To
                review and discuss with management, the Compensation Disclosure and
                Analysis (CD&A), and determine the Committee’s recommendation for the
                CD&A’s inclusion in the Company’s annual report filed on Form 10-K
                with the SEC.





*Committee
      Meetings*


Our
      Compensation Committee meets as often as necessary to perform its duties and
      responsibilities.  The Compensation Committee held eight meetings during
      fiscal 2006. On an as requested basis, our Compensation Committee receives
      and
      reviews materials prepared by management, consultants, or committee members,
      in
      advance of each meeting.  Depending on the agenda for the particular
      meeting, these materials may include:


·
            Minutes
                and materials from the previous
                meeting(s);


·
            Reports
                on year-to-date Company and Partnership financial performance versus
                budget;


·
            Reports
                on progress and levels of performance of individual and Company
                performance objectives;


·
            Reports
                on the Company’s financial and stock performance versus a peer group of
                companies;


·
            Reports
                from the Committee’s compensation consultant regarding market and industry
                data relevant to executive officer
                compensation;


·
            Reports
                and executive compensation summary worksheets, which sets forth for
                each
                executive officer: current total compensation and incentive compensation
                target percentages, current equity ownership holdings and general
                partner
                ownership interest, and current and projected value of each and all
                such
                compensation elements, including distributions and dividends there
                from,
                over a five year period.





36


**Compensation
      Philosophy**


*General
      Philosophy*


Our
      compensation philosophy is based on the premise of attracting, retaining and
      motivating exceptional leaders, setting high goals, working toward the common
      objectives of meeting the expectations of customers and stockholders, and
      rewarding outstanding performance.  Following this philosophy, in
      determining executive compensation, we consider all relevant factors, such
      as
      the competition for talent, our desire to link pay with performance, the use
      of
      equity to align executive interests with those of our stockholders, individual
      contributions, teamwork and performance, each executive’s total compensation
      package, and internal pay equity. We strive to accomplish these objectives
      by
      compensating all employees with total compensation packages consisting of a
      combination of competitive base salary and incentive
      compensation.





*Pay
      for Performance*


At
      the
      core of our compensation philosophy is our strong belief that pay should be
      directly linked to performance.  We believe in a pay for performance
      culture that places a significant portion of executive officer total
      compensation as contingent upon, or variable with, individual performance,
      Company performance and achievement of strategic goals including increasing
      shareholder value.





The
      performance based compensation for our executives may be in the form of (i)
      annual cash incentives to promote achievement of, and accountability for,
      shorter term performance plans and strategic goals, and (ii) equity grants,
      designed to align the long-term interests of our executive officers with those
      of our shareholders, by creating a strong and direct link between executive
      compensation and shareholder return over a multiple year performance
      cycle.  Long term incentive equity awards are granted in restricted stock.
      These shares/units generally vest over a two-year period.  This opportunity
      for share ownership was provided in order to provide incentive and retain key
      employees and align their interests with our long term strategic goals.





*Base
      Compensation to be Competitive within Industry*


A
      key
      component of an executive’s total compensation base salary is designed to
      compensate executives commensurate with their respective level of experience,
      scope of responsibilities, sustained individual performance and future
      potential.  The goal has been to provide for base salaries that are
      sufficiently competitive with other similar-sized companies, both regionally
      and
      nationally, in order to attract and retain talented leaders.





**Compensation
      Setting Process**


*Management’s
      Role in the Compensation Setting Process.*


Management
      plays a significant role in the compensation-setting process.  The most
      significant aspects of management role are:


·
            Assisting
                in establishing business performance goals and
                objectives;


·
            Evaluating
                employee and company performance;


·
            CEO
                recommending compensation levels and awards for executive
                officers;


·
            Implementing
                the Board approved compensation plans;
                and


·
            Assistance
                in preparing agenda and materials for the Committee
                meetings.





The
      Chief
      Executive Officer and the General Counsel and Secretary generally attend the
      Committee meetings.  However, the Committee also regularly meets in
      executive session.  The Chief Executive Officer makes recommendations with
      respect to financial and corporate goals and objectives, and makes non CEO
      executive compensation recommendations to the Compensation Committee based
      on
      company performance, individual performance and the peer group compensation
      market analysis. The Compensation Committee considers and deliberates on this
      information and in turn makes recommendations to the Board of Directors, for
      the
      Board’s determination and approval of the executives’ and other members of
      senior management’s compensation, including base compensation, short-term cash
      incentives and long-term equity incentives.  The Chief Executive Officer’s
      performance and compensation is reviewed, evaluated and established separately
      by the Compensation Committee and ratified and approved by the Board of
      Directors.





37


*Setting
      Compensation Levels*


To
      evaluate our total compensation is competitive and provides appropriate rewards
      to attract and retain talented leaders, as discussed above, we may rely on
      analyses of peer companies performed by independent compensation consultants
      and
      on other industry and occupation specific survey data available to us.  Our
      general benchmark is to establish both base salary and total compensation for
      the executive officers at the 50th percentile of the peer group data,
      recognizing that a significant portion of executive officer total compensation
      should be contingent upon, or variable with, achievement of individual and
      Company performance objectives and strategic goals, as well as being variable
      with stockholder value.  Further, while the objective for base salary is at
      the 50th percentile of the peer group data, executives’ base salaries are
      designed to reward core competencies and contributions to the Company, and
      may
      be increased above this general benchmark based on (i) the individual’s
      increased contribution over the preceding year; (ii) the individual’s
      increased responsibilities over the preceding year; and (iii) any increase
      in median competitive pay levels.





*Setting
      Performance Objectives*


The
      Company’s business plans and strategic objectives are generally presented by
      management at the Company’s annual board meeting.  The board engages in an
      active discussion concerning the financial targets, the appropriateness of
      the
      strategic objectives, and the difficulty in achieving same.  In
      establishing the compensation plan, our Compensation Committee then utilizes
      the
      primary financial objectives from the adopted business plan, operating cash
      flow, as the primary targets for determining the executive officers’ short-term
      cash incentives and long term equity incentive compensation.  The Committee
      also establishes additional non-financial performance goals and objectives,
      the
      achievement of which is required for funding of a significant portion (25%)
      of
      the executive officers’ incentive compensation. In 2006, these non financial
      performance goals and objectives included achieving accurate financial reporting
      and timely SEC filings; demonstrating full compliance and superior performance
      in the Company’s environmental, health and safety practices; performing
      appropriate SOX/404 remediation activities and achieving successful testing
      of
      and compliance with SOX requirements; and general and administrative expense
      management.





*Annual
      Evaluation*


The
      Chief
      Executive Officer recommends the actual incentive award amounts for all other
      executives based on actual company performance relative to the targets as well
      as on individual performance, and recommends the executives’ base salaries
      levels for the coming year.  The Compensation Committee considers these
      recommendations generally at the end of each fiscal year in determining its
      recommendations to the Board of Directors for the final short-term cash
      incentive and long-term equity award amounts for each executive and for the
      executive’s base salary levels. The actual incentive amounts awarded to each
      executive are ultimately subject to the discretion of the Compensation Committee
      and the Board of Directors.





Additional
      equity-based awards may be also granted to executives, as well as other
      employees, upon commencement of employment, for promotions or special
      performance recognition, or for retention purposes, based on the recommendation
      of the Chief Executive Officer.  In determining whether to recommend
      additional grants to an executive, the Chief Executive Officer typically
      considers the individual’s performance and any planned change in functional
      responsibility.





38


**Elements
      of Executive Compensation**


*Total
      Compensation*


Total
      compensation for our executives consists of three elements: (i) base salary;
      (ii) incentive cash award based on achieving specific performance targets as
      measured by cash flow and other objectives; and (iii) equity incentive award,
      which is also performance based and paid out over a future period in the form
      of
      restricted stock or warrants.  Base salaries are the value upon which both
      the incentive compensation percentage targets are measured against.  For
      evaluation and comparison of overall compensation of the executives, and to
      assist it in making its compensation decisions, the Compensation Committee
      reviews an executive compensation summary, which sets forth for each executive:
      current compensation and current equity ownership holdings as well as the
      projected value of each and all such compensation elements, including
      distributions and dividends therefrom.





*Base
      Salaries*


Base
      salaries are designed to compensate executives commensurate with their
      respective level of experience, scope of responsibilities, and to reward
      sustained individual performance and future potential.  The goal has been
      to provide for base salaries that are sufficiently competitive with other
      similar-sized companies, both regionally and nationally, in order to attract
      and
      retain talented leaders.





*Incentive
      Compensation*


Incentive
      compensation is intended to align compensation with business objectives and
      performance and enable the company to attract, retain and reward high quality
      executive officers whose contributions are critical to short and long-term
      success of the Company.  The executives’ incentive awards are based upon
      three key performance metrics: 1) the Company’s operating cash flow; 2)
      achievement of agreed-upon strategic and corporate performance goals; and 3)
      each executive’s departmental and individual goals and performance.  The
      actual incentive amounts awarded to each executive are ultimately subject to
      the
      discretion of the Compensation Committee and the Board of Directors





*Incentive
      Plan Compensation*


Incentive
      awards are paid out in cash, restricted common stock or warrant awards. 
The incentive award targets for the executives are established at the beginning
      of the year as a percentage of their base salary, and the actual awards are
      determined at the following year’s Annual Board of Directors meetings based on
      actual company performance relative to established goals and objectives, as
      well
      as on evaluation of the executive’s relevant departmental and individual
      performance during the past year.  The award of restricted common stock
      generally vests over a two year term in four equal six months traunches. The
      award of restricted common stock purchased through warrants generally vests
      immediately upon issuance of the warrant which generally has a validity of
      three
      years and a per share purchase price of the fair market value of our common
      stock on the date of grant. The awards are intended to serve as a means of
      incentive compensation for performance.





*Retirement
      Plans*


The
      Company does not maintain an employee retirement plan or a 401(k) plan nor
      do we
      provide any supplemental retirement benefits to our senior
      executives.





39


*Change
      in Control Agreements*


Our
      executives are not awarded any type of protection upon a change in
      control. **





*Perquisites*


The
      Company does not provide for any perquisites or any other benefits for its
      senior executives that are not generally available to all
      employees.





**Compensation
      Committee Report**


We
      have
      reviewed and discussed the foregoing Compensation Discussion and Analysis with
      management.  Based on our review and discussion with management, we have
      recommended to the Board of Directors that the Compensation Discussion and
      Analysis be included in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2006.




Submitted
                by:
            Russell
                L. Wall, Chairman
              Bradley
                J. HallockMembers
                of the Compensation Committee





40


**Summary
      Compensation Table**


The
      following table sets forth the compensation paid by the Company for the fiscal
      years 2005 and 2006 to the Company’s Chief Executive Officer and two most highly
      compensated executive officers of the Company. During fiscal year 2006, the
      Company changed Chief Executive Officers.




**SUMMARY
      COMPENSATION TABLE**




Name
              and
              Principal
              Position
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
              ($)
            Non-
              Equity
              Incentive
              Plan
              Compen-
              sation
              ($)
            Change
                in
              Pension
              Value
                and
              Nonquali-
              fied
              Deferred
              Compensa-
              tion
              Earnings
              ($)
            All
              Other
              Compen
              sation
              ($)
            Total
              ($)Russell
                L. Wall, CEO / President / Director (1)
            2006
            -
            -
            -
            -
            -
            -
            -
            -2005
            -
            -
            -
            -
            -
            -
            -
            -Charles
                R. Baker, Former CEO / President (2)
            2006
            271,764
            100,000
            -
            -
            -
            -
            9,000
            380,7642005
            125,480
            -
            -
            940,000
            -
            -
            -
            1,065,480Mark
                R. ChandlerCOO
                / CFO (3)
            2006
            180,000
            5,000
            520,000
            
            -
            -
            -
            705,0002005
            180,000
            -
            240,000
            -
            -
            -
            -
            420,000William
                J. Clough EVP / General Counsel/Director (4)
            2006
            180,000
            50,000
            -
            16,000
            -
            -
            11,000
            257,0002005
            62,308
            -
            -
            -
            -
            -
            4,000
            66,308





1.
            Mr.
                Wall was named President and Chief Executive Officer effective November
                9,
                2006 and also serves as a member of the Company’s Board of
                Directors.


2.
            Mr.
                Baker joined the Company on June 13, 2005 and stepped down August
                28,
                2006. During 2005 per his employment contract, Mr. Baker was issued
                by the
                Company a warrant to purchase 2,000,000 restricted common shares
                within
                three years from date of issuance at a per share price of $0.01.
                During
                2005 as recognition for services as a Director of the Company, Mr.
                Baker
                was issued a warrant to purchase 100,000 restricted common shares
                within
                three years from date of issuance at a per share price of $0.75.
                Per the
                terms of his employment agreement, Mr. Baker was paid a one time
                sign on
                bonus of $100,000 which was payable upon the successful completion
                of an
                equity round of financing by the Company.


3.
            Mr.
                Chandler was issued 250,000 shares of the Company’s Series A Convertible
                Preferred Stock and 1,000 shares of the Company’s Series B Convertible
                Preferred Stock during 2006. He was issued 240,000 shares of the
                Company's
                Series A Convertible Preferred Stock during
                2005.


4.
            Mr.
                Clough joined the Company on September 1, 2005. During 2006 as recognition
                for services as a Director of the Company, Mr. Clough was issued
                a warrant
                to purchase 100,000 restricted common shares within three years from
                date
                of issuance at a per share price of $0.20. Per the terms of his employment
                agreement, Mr. Clough was paid a one time sign on bonus of $50,000
                which
                was payable upon the successful completion of an equity round of
                financing
                by the Company.





41


**Outstanding
      Equity Awards at Fiscal Year-end**


The
      following table sets forth the outstanding equity awards at December 31, 2006
      to
      each of the named executive officers:







**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**




Option
                Awards
            Stock
                AwardsName
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Exercisable
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Unexercisable
              (c)
            Equity
              Incentive
              Plan
              Awards:
              Number
              of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
              (#)
            Option
              Exercise
              Price
              ($)
            Option
              Expiration
              Date
            Number
              of
                Shares
              or
                Units
              of
                Stock
              That
                Have
              Not
              Vested
              (#)
            Market
              Value
                of
              Shares
                or
              Units
                of
              Stock
              That
                Have
              Not
              Vested
              ($)
            Equity
              Incentive
              Plan
              Awards:
              Number
              of
              Unearned
              Shares,
              Units
                or
              Other
              Rights
              That
                Have
              Not
              Vested
              (#)
            Equity
              Incentive
              Plan
              Awards:
              Market
                or
              Payout
              Value
              of
              Unearned
              Shares,
              Units
                or
              Other
              Rights
              That
                Have
              Not
              Vested
              ($)Russell
                L. Wall (1)
            100,000
            -
            -
            0.25
            2/10/2007
            -
            -
            -
            -Russell
                L. Wall (1)
            600,000
            -
            -
            0.25
            10/6/2009
            -
            -
            -
            -Charles
                R. Baker (2)
            2,000,000
            -
            -
            0.01
            12/5/2010
            -
            -
            -
            -Charles
                R. Baker (2)
            100,000
            -
            -
            0.75
            3/1/2008
            -
            -
            -
            -Mark
                R. Chandler (3)
            500,000
            -
            -
            0.25
            10/6/2009
            -
            -
            -
            -William
                J. Clough (4)
            100,000
            -
            -
            0.20
            2/28/2009
            -
            -
            -
            -





1.
            In
                recognition for services as a director of the Company, the Board
                of
                Directors during 2004 authorized issuance to Mr. Wall a warrant to
                purchase 700,000 restricted common shares within five years from
                date of
                issuance at a per share price of
                $0.25


2.
            During
                2005 per his employment contract, Mr. Baker was issued by the Company
                a
                warrant to purchase 2,000,000 restricted common shares within three
                years
                from date of issuance at a per share price of $0.01. During 2005
                as
                recognition for services as a Director of the Company, Mr. Baker
                was
                issued a warrant to purchase 100,000 restricted common shares within
                three
                years from date of issuance at a per share price of
                $0.75.


3.
            In
                recognition for past services
                rendered by Mr. Chandler, by August 23, 2004 Board of Directors
                resolution, the board authorized issuance to him a warrant to purchase
                500,000 restricted common shares within five years from date of issuancea
                per share price of $0.25.


4.
            During
                2006 as recognition for services as a Director of the Company, Mr.
                Clough
                was issued a warrant to purchase 100,000 restricted common shares
                within
                three years from date of issuance at a per share price of
                $0.20.





42


**Director
      Compensation**




The
      following table sets forth the compensation paid by the Company for fiscal
      year
      2006 to the Company’s Board of Directors. Other than as noted below, no Director
      is compensated for the performance of duties in that capacity or for his/her
      attendance at Director’s meetings.




**DIRECTOR
      COMPENSATION**




Name
            Fees
              Earned
              or
              Paid
                in
              Cash
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
              ($)
            Non-Equity
              Incentive
                Plan
              Compensa-tion
              ($)
            Change
                in
              Pension
              Value
                and
              Nonqualified
              Deferred
              Compensation
              Earnings
                ($)
            All
                Other
              Compensa-tion
              ($)
            Total
              ($)Bradley
                J. Hallock (1)
            -
            -
            16,000
            -
            -
            -
            16,000Russell
                L. Wall
            -
            -
            -
            -
            -
            -
            -William
                J. Clough (2)
            -
            -
            16,000
            -
            -
            -
            16,000Steven
                S. Hallock (3)
            -
            -
            -
            -
            -
            -
            -John
                P. Rouse (4)
            -
            -
            46,000
            -
            -
            -
            46,000





1.
            In
                recognition for services to be rendered by Bradley J. Hallock as
                a member
                of the Board of Directors, the Board of Directors authorized issuance
                on
                February 28, 2006 to Mr. Hallock a warrant to purchase 100,000 restricted
                common shares within three years from date of issuance at a per share
                price of $0.20.


2.
            In
                recognition for services as a director of the Company, the Board
                of
                Directors authorized issuance on February 28, 2006 to William J.
                Clough a
                warrant to purchase 100,000 restricted common shares within three
                years
                from date of issuance at a per share price of
                $0.20.


3.
            Not
                included as director compensation for Steven S. Hallock is a warrant
                to
                purchase 100,000 restricted common shares within three years from
                date of
                issuance at a per share price of $0.20 that was authorized for issuance
                on
                February 28, 2006 to Mr. Hallock as a member of the Business Advisory
                Board. Mr. Hallock was named to the Company’s Board of Directors on August
                28, 2006.


4.
            In
                recognition for services as a director of the Company, the Board
                of
                Directors authorized issuance on March 17, 2006 to John P. Rouse
                a warrant
                to purchase 100,000 restricted common shares within three years from
                date
                of issuance at a per share price of
                $0.61.





43


**Employment
      Agr** **eements**


During
      fiscal year 2006, three executive officers were employed under an employment
      agreement with the Company. On August 28, 2006, the Chief Executive Officer
      stepped down and left the Company thereby ending his employment agreement.
      The
      employment agreement for the Chief Operating Officer/Chief Financial Officer
      expired on December 31, 2006 and he is currently an at-will employee. The
      following are the employment agreements that were in force during fiscal year
      2006 for the two corporate officers:





Executive
      Vice President of Corporate Development, Corporate Secretary and General
      Counsel


The
      Company executed an employment contract with William J. Clough, Esq., the
      registrant’s Executive Vice President of Corporate Development, Corporate
      Secretary and General Counsel. The agreement has a term of three years from
      December 13, 2005. The agreement contains provisions: to terminate the employee
      for “Just Cause” which will terminate employee compensation; penalty for
      termination of employee without just cause; medical and dental insurance
      coverage; employee confidentiality and non-compete obligations. Mr. Clough’s
      contract provides for a monthly salary of $15,000 plus an automobile allowance
      of $1,000. Mr. Clough will be paid a one time sign on bonus of $50,000.00 upon
      completion of an equity round of financing by the Company. In addition, Clough
      shall be paid an annual bonus as follows: During the first year of employment,
      a
      guaranteed bonus equal to twenty-five percent (25%) of his annual base salary
      with the potential of earning up to fifty percent (50%) of his annual base
      salary based upon performance. During the balance of the contract term, Clough
      shall be paid a minimum annual bonus of at least fifteen percent (15%) of his
      base annual salary with the potential of receiving up to twenty-five percent
      (25%) of his annual base salary based upon performance.





Mr.
      Clough is a practicing attorney at law, licensed in state and federal courts
      of
      California, Illinois and Hawaii. In the capacity as General Counsel, Clough
      is
      responsible to direct, implement, control and otherwise manages all legal
      affairs and corporate governance. In the capacity as Executive Vice President
      of
      Corporate Development, Clough is responsible for advising and otherwise working
      with corporate top management relating to corporate funding, acquisitions,
      mergers, product approval and general corporate guidance and oversight of
      operations. Clough reports directly to the Board of Directors.


Chief
        Financial Officer and Chief Operating Officer
 Effective
        January 1, 2004, the Company executed a three-year employment agreement with
        Mark Chandler to serve as its Chief Financial Officer. The agreement provided
        for compensation to Mr. Chandler as follows: (i) Base salary of $120,000
        during
        2004, $150,000 during 2005 and $180,000 during 2006, (ii) a sign-on bonus
        of
        $10,000 payable before March 31, 2004 and participation for the bonus plan
        as
        set up by the Company, (iii) 120,000 shares of Series A convertible preferred
        stock for each period of June 2004, January 2005 and June 2005 and iv) a
        warrant
        to purchase 100,000 shares of common stock at an exercise price of $0.25
        which
        warrant expires on November 30, 2006. In the event of a change of control,
        the
        Series A Convertible Preferred stock issued to Mr. Chandler shall immediately
        accelerate and be issued within 30 days of written notice from the
        employee.





On
      August
      23, 2004 the Board of Directors increased the annual salary of Mark R. Chandler
      to $150,000 retroactive to January 1, 2004. Beginning November 1, 2004, Mr.
      Chandler’s annual salary was increased to $180,000.





In
      recognition for past services rendered by Mark R. Chandler, by August 23, 2004
      Board of Directors resolution, the board authorized issuance to Mark R. Chandler
      a warrant to purchase 500,000 restricted common shares within five years from
      date of issuance a
      per
      share price of $0.25.





44


In
      recognition of continuing services rendered by Mark R. Chandler, by August
      23,
      2004 Board of Directors resolution, the board authorized issuance to Mark R.
      Chandler three hundred seventy five thousand (375,000) Series A Convertible
      Preferred shares and one thousand five hundred (1,500) Series B Convertible
      Preferred shares in the following increments: 125,000 Series A shares and 500
      Series B shares on or about January 1, 2006; 125,000 Series A shares and 500
      Series B shares on or about July 1, 2006; and 125,000 Series A shares and 500
      Series B shares on or about December 31, 2006.





On
      December 31, 2006, Mr. Chandler’s employment contract expired and he currently
      is an at-will employee.





**Item
      11. S** **ecurity
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters**





The
      following table sets forth certain information regarding beneficial ownership
      of
      our common stock as of the date of this Form 10-KSB by: (i) each shareholder
      known by us to be the beneficial owner of 5% or more of the outstanding common
      stock, (ii) each of our directors and executives and (iii) all directors and
      executive officers as a group. Except as otherwise indicated, we believe that
      the beneficial owners of the common stock listed below, based on information
      furnished by such owners, have sole investment and voting power with respect
      to
      such shares, subject to community property laws where applicable. Shares of
      common stock issuable upon exercise of options and warrants that are currently
      exercisable or that will become exercisable within 60 days of filing this
      document have been included in the table.





45


BENEFICIAL
      INTEREST TABLE


Common
                Stock
            Series
                A ConvertiblePreferred
                StockName
                and Address of
              Beneficial
                Owner (1)
            Number
            Percent
                of
              Class
                (2)
            Number
            Percent
                of Class (3)
            Percent
                of
              all
                Voting
              Securities
                (4)Bradley
                J. Hallock (5)
            10,284,540
            6.82%
            -
            -
            6.82%William
                J. Clough (6)
            5,051,089
            3.34%
            -
            -
            3.34%Russell
                L. Wall (7)
            1,691,493
            1.14%
            -
            -
            1.14%Mark
                R. Chandler (8)
            8,155,285
            5.50%
            -
            -
            5.50%Charles
                R. Baker (9)
            2,100,000
            1.40%
            -
            -
            1.40%John
                P. Rouse (10)
            6,159,838
            4.17%
            -
            -
            4.17%Steven
                S. Hallock (11)
            8,224,627
            5.57%
            -
            -
            5.56%Walter
                and Whitney Miles (12)
              PO
                Box 130
              Auburn,
                WA 98071
            10,000,000
            6.77%
            -
            -
            6.77%Kjell
                H. Qvale (13)
              901
                Van Ness Avenue
              San
                Francisco, CA 94109
            7,500,000
            5.08%
            -
            -
            5.08%Jerry
                Ostrin
              3535
                Fillmore Street #302
              San
                Francisco, CA 94123
            -
            -
            45,000
            59.57%
            *Joel
                Fedder
              3590
                Mistletoe Lane
              Longboat
                Key, FL 34228
            -
            -
            25,000
            33.09%
            *Officers,
                  Directors,
                executives
                  as group (7 persons)
            41,666,872
            26.39%
            -
            -
            26.38%


*
        Less
        than 1 percent


(1)
            Except
                as otherwise indicated, the address of each beneficial owner is c/o
                OnScreen Technologies, Inc., 600 NW 14thAvenue, Suite 100, Portland, Oregon
                97209.


(2)
            Calculated
                on the basis of 147,640,855 shares of common stock issued and outstanding
                at February 28, 2007 except that shares of common stock underlying
                options
                and warrants exercisable within 60 days of the date hereof are deemed
                to
                be outstanding for purposes of calculating the beneficial ownership
                of
                securities of the holder of such options or warrants. This calculation
                excludes shares of common stock issuable upon the conversion of Series
                A
                Preferred Stock.


(3)
            Calculated
                on the basis of 75,543 shares of Series A Preferred Stock issued
                and
                outstanding at February 28, 2007.


(4)
            Calculated
                on the basis of an aggregate of 147,640,855 shares of common stock
                with
                one vote per share and 75,543 shares of Series A Preferred Stock
                with one
                vote per share issued and outstanding at February 28, 2007, except
                that
                shares of common stock underlying options and warrants exercisable
                within
                60 days of the date hereof are deemed to be outstanding for purposes
                of calculating beneficial ownership of securities of the holder of
                such
                options or warrants.


(5)
            Mr.
                Bradley J. Hallock's common stock shares include 3,100,000 shares
                he has
                the right to purchase pursuant to a warrant. Mr. Hallock’s common stock
                shares include 73,500 shares owned by his IRA
                account.


(6)
            Mr.
                Clough’s common shares include 3,640,485 shares he has the right to
                purchase pursuant to a warrant.




46




(7)
            Mr.
                Wall’s common stock shares include 700,000 shares he has the right to
                purchase pursuant to a warrant. Mr. Wall’s common stock shares include
                781,493 shares owned by his IRA
                account.


(8)
            Mr.
                Chandler’s common stock shares include 600,000 shares he has the right to
                acquire pursuant to a warrant. Mr. Chandler’s common stock shares include
                1,445,000 shares owned by his IRA account.


(9)
            Mr.
                Baker’s common stock shares include 2,100,000 shares he has the right to
                purchase pursuant to a warrant. Mr. Baker joined the Company on June
                13,
                2005 and stepped down August 28,
                2006.


(10)
            Mr.
                Rouse’s common stock shares include 100,000 shares he has the right to
                purchase pursuant to a warrant. Mr. Rouse’s common stock shares include
                16,500 shares owned by his IRA
                account.


(11)
            Mr.
                Steven S. Hallock’s common stock shares include 100,000 shares he has the
                right to purchase pursuant to a
                warrant.


(12)
            Mr.
                and Mrs. Miles’ common stock share position of 10,000,000 shares
                (including warrants) is comprised of direct entitlement (8,750,000
                shares)
                and related party management (1,250,000 shares) shares. The related
                party
                shares are held by their four sons: Jeffrey (312,500 shares), Joseph
                (312,500 shares), Matthew (312,500 shares), and Scott (312,500 shares).
                Mr. and Mrs. Miles’ direct entitlement and related party management common
                stock shares include 2,000,000 shares they (1,750,000 shares) and
                related
                parties (250,000 shares) have the right to purchase pursuant to a
                warrant.


(13)
            All
                shares are owned by Kjell H. Qvale Survivors Trust.





We
      relied
      upon Section 4(2) of the Securities Act of 1933 as the basis for an exemption
      from registration for the issuance of the above securities.





47


**Employee
      Equity Incentive Plans**





At
      December 31, 2006, the Company had outstanding the following equity compensation
      plan information:





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
              rights
            Number
                of securities
              remaining
                available
              for
                future issuance
              under
                equity
              compensation
                plansEquity
                compensation plans approved by security holders
            232,500
            $0.42
            1,767,500Equity
                compensation plans not approved by security holders
            7,734,001
            $0.13
            -Total
            7,966,501
            $0.14
            1,767,500





*Equity
      Compensation Plan Information*


On
      June
      26, 2000, the Company’s Board of Directors adopted the OnScreen Technologies,
      Inc. 2000 Stock Option Plan (the “Plan”). The Plan provides for the issuance of
      incentive stock options (ISOs) to any individual who has been employed by the
      Company for a continuous period of at least six months. The Plan also provides
      for the issuance of Non Statutory Options (NSOs) to any employee who has been
      employed by the Company for a continuous period of at least six months, any
      director, or consultant to the Company. The Company may also issue reload
      options as defined in the plan. The total number of common shares of common
      stock authorized and reserved for issuance under the Plan is 600,000 shares.
      The
      Board shall determine the exercise price per share in the case of an ISO at
      the
      time an option is granted and such price shall be not less than the fair market
      value or 110% of fair market value in the case of a ten percent or greater
      stockholder. In the case of an NSO, the exercise price shall not be less than
      the fair market value of one share of stock on the date the option is granted.
      Unless otherwise determined by the Board, ISOs and NSOs granted under the Plan
      have a maximum duration of 10 years.





On
      August
      25, 2005 the Company’s Board of Directors adopted the OnScreen Technologies,
      Inc. 2005
      Equity Incentive Plan (the
      “ Equity
      Incentive Plan”) and
      authorized 2,000,000 shares of Common Stock to fund the Plan. At the 2005 Annual
      Meeting of Shareholders held on December 13, 2005, the Equity Incentive Plan
      was
      approved by the Company shareholders.





The
      Equity Incentive Plan is intended to: (a) provide incentive to employees of
      the
      Company and its affiliates to stimulate their efforts toward the continued
      success of the Company and to operate and manage the business in a manner that
      will provide for the long-term growth and profitability of the Company; (b)
      encourage stock ownership by employees, directors and independent contractors
      by
      providing them with a means to acquire a proprietary interest in the Company
      by
      acquiring shares of Stock or to receive compensation which is based upon
      appreciation in the value of Stock; and (c) provide a means of obtaining and
      rewarding employees, directors, independent contractors and
      advisors.





48


The Equity
      Incentive Plan
      provides for the issuance of incentive stock options (ISOs) and Non Statutory
      Options (NSOs) to employees,
      directors and independent contractors of the Company. The
      Board
      shall determine the exercise price per share in the case of an ISO at the time
      an option is granted and such price shall be not less than the fair market
      value
      or 110% of fair market value in the case of a ten percent or greater
      stockholder. In the case of an NSO, the exercise price shall not be less than
      the fair market value of one share of stock on the date the option is granted.
      Unless otherwise determined by the Board, ISOs and NSOs granted under the Equity
      Incentive Plan
      have
      a maximum duration of 10 years.





*Equity
      compensation plans not approved by security holders*


The
      Company has outstanding at December 31, 2006, the following options issued
      under
      equity compensation plans not approved by security holders:





During
      2003, the Company issued warrants to the Scientific Advisory Board members
      for
      the right to acquire 75,000 shares of its common stock at an exercise price
      of
      $0.25. The warrants are fully vested and expire during 2008.





During
      2004, the Company issued options to various employees and a director for the
      right to acquire 1,800,000 shares of its common stock at an exercise price
      of
      $0.25. The options are fully vested and expire during 2007 to 2009.





During
      2005, the Company issued options to various employees and a director for the
      right to acquire 2,265,000 shares of its common stock at exercise prices ranging
      from $0.01 to $0.75. The options are fully vested and expire during 2007 to
      2010.





During
      2006, the Company issued options to various employees, directors, consultants
      for the right to acquire 3,594,001 shares of its common stock at exercise prices
      ranging from $0.01 to $0.61. The options expire during 2007 to 2011 are fully
      vested except for 350,000 shares.




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




Except
      as
      set forth herein, none of the
      Company’s directors or officers nor any person who beneficially owns, directly
      or indirectly, shares carrying more than 10% of the voting rights attached
      to
      its outstanding shares, nor any relative or spouse of any of the foregoing
      persons has any material interest, direct or indirect, in any transaction in
      any
      presently proposed transaction which has or will materially affect the
      Company.





During
      2006, the Company
      had employment agreements with its senior management. For description of the
      employment agreements, see “Executive Compensation” and “Employment
      Agreements”.





On
      February 3, 2004, Fusion Three, LLC (“F3”) and the Company reached a Master
      Settlement and Release Agreement whereby, in consideration for the exchange
      of
      mutual releases and F3 relinquishing any claim to any benefits of the OnScreen
      technology (including license payments), the Company paid $150,000 to F3 plus
      an
      annually declining percentage of OnScreen revenue of 5% in 2005 declining to
      2%
      in 2008 and thereafter. In the event of a change of control of the Company,
      the
      percentage of revenue shall terminate and a single payment shall be made to
      F3
      ranging from 10% of the appraised value of OnScreen if such appraised value
      is
      $100,000,000 or less, 71⁄2% of the appraised value between $100,000,001 and
      $200,000,000, 5% of the appraised value between $200,000,001 and $300,000,000,
      4% of the appraised value between $300,000,001 and $400,000,000, 3% of the
      appraised value between $400,000,001 and $500,000,000, and 2% of any appraised
      value between $500,000,001
      and $600,000,000. At the time the Company entered into this agreement, the
      former President of the OnScreen Products Division, Stephen K. Velte, was the
      manager of F3. In May 2006, F3 relinquished all of its revenue rights. For
      a
      more detailed explanation, please see the section above entitled “ Fusion
      Three, LLC Settlement”.





49


On
      January 10, 2005 and February 16, 2005, the inventor/owner of the OnScreenTM LED
      technology patent conveyed ownership of the OnScreenTM, WayCool and WayFast
      patents to CH Capital. Two of the current Board of Directors of the Company,
      Bradley J. Hallock and William J. Clough, have an interest in CH Capital. On
      February 16, 2005, in consideration for the payment of two hundred thousand
      dollars ($200,000), CH Capital conveyed to the Company the OnScreenTM patent
      rights. This conveyance now vests in the Company the ownership of the OnScreenTM
LED technology patent.





On
      October 4, 2005, the Company paid $50,000 to extend a letter of intent for
      the
      sale and purchase of certain intellectual property. Two of the current Board
      of
      Directors of the Company, Bradley J. Hallock and William J. Clough, has a
      controlling interest in the company (CH Capital) that is selling the
      intellectual property. The letter of intent gives the Company the right to
      acquire the WayCool technology for $800,000 and the issuance of warrants to
      acquire five percent of the Company’s fully diluted equity securities after
      giving effect to the Company’s fund raising efforts. The warrants have the same
      pricing and terms issued in connection with the Company’s private equity fund
      raising. On March 24, 2006, CH Capital assigned to the Company all right, title
      and interest to the WayCool patent in consideration for $800,000 and a three
      year warrant for 7,040,485 common shares at a per share price of $0.20. The
      $800,000 amount represents reimbursement for the time and money CH Capital
      spent
      acquiring and developing the WayCool technology. This
      assignment has been recorded and is a matter of record with the United States
      Patent and Trademark Office. For a more detailed explanation, please see the
      section above entitled “Intellectual Property Rights to WayCool Thermal
      Management Technology”.





During
      March 2005, the Company executed a $1.5 million unsecured six-month promissory
      note with a related party, CH Capital. The interest rate was 15% per annum.
      Interest only payments were due monthly until maturity of the note when the
      principal was due. Two of the current Company’s Board of Directors, Bradley J.
      Hallock and William J. Clough, has a controlling interest in CH Capital that
      was
      the note holder. The Company paid a $2,500 fee to extend this note to November
      1, 2005. On October 31, 2005, substitute convertible promissory notes totaling
      $1.5 million were executed with terms similar to the convertible promissory
      notes the Company had outstanding. One current Board of Director of the Company,
      Steven S. Hallock, participated in the substitute notes: promissory note of
      $1,000,000 held by a trust controlled by the director. The note held by the
      director was converted into common shares during 2006.





February
      16, 2005 the inventor of the OnScreen technology, who licensed to the Company
      the rights of the direct view LED video display technology with angular
      dimension greater than 30 inches, conveyed through a third party corporation,
      all of the inventor’s right, title and interest of the OnScreen
      technology to the Company for $200,000. The Company now owns all patent
      rights to the OnScreen technology unencumbered subject to the rights of F3
      relating to the percentages of revenue from commercialization of the direct
      view
      LED video display technology with angular dimension greater than 30 inches.
      Two
      of the current Board of Directors of the Company, Bradley J. Hallock and William
      J. Clough, has an interest in the third party corporation that conveyed these
      rights to the Company.





50


During
      the third quarter and fourth quarters of 2005, the Company executed three-month
      convertible promissory notes totaling $3.5 million. One of the note holders
      was
      the COO/CFO, Mark R. Chandler, who had a $100,000 note and another note holder
      is a current Board of Director of the Company, Bradley J. Hallock, who had
      a
      $100,000 note. The Company amended the notes to extend the notes for an
      additional six months. During March 2006, the bid price of the Company’s stock
      exceeded $0.35 per share for five consecutive days and the $100,000 note of
      the
      COO/CFO was converted into 400,000 shares of common stock and the $100,000
      note
      of the director was converted into 400,000 shares of common stock.





During
      the first quarter of 2006, the Company entered into three-month convertible
      promissory notes with several note holders including two current Board of
      Directors of the Company. One director, John P. Rouse, had two notes totaling
      $1,100,000 while the other director, Steven S. Hallock, had a note in the amount
      of $250,000. During March 2006, the bid price of the Company’s stock exceeded
      $0.35 per share for five consecutive days and the notes of the director totaling
      $1,100,000 were converted into 4,400,000 shares of common stock and the note
      of
      the director totaling $250,000 was converted into 1,000,000 shares of common
      stock.





On
      August
      28, 2006 the Company entered into a one-month promissory note for $150,000
      with
      John P. Rouse who is a Board of Director of the Company. Interest on this note
      accrued at the rate of 12%. On September 28, 2006 the promissory note was
      extended an additional 30 days with both principal and accrued interest for
      two
      months due October 28, 2006. On November 2, 2006 the Company paid the remaining
      principal and inte rest
      due
      of $153,200 on the promissory note.





**Item
      13. Exhibits and Reports**





*Indemnification
      of Directors and Officers*


The
      Colorado General Corporation Act provides that each existing or former director
      and officer of a corporation may be indemnified in certain instances against
      certain liabilities which he or she may incur, inclusive of fees, costs and
      other expenses incurred in connection with such defense, by virtue of his or
      her
      relationship with the corporation or with another entity to the extent that
      such
      latter relationship shall have been undertaken at the request of the
      corporation; and may have advanced such expenses incurred in defending against
      such liabilities upon undertaking to repay the same in the event an ultimate
      determination is made denying entitlement to indemnification. The Company's
      bylaws incorporate the statutory form of indemnification by specific
      reference.





Insofar
      as indemnification for liabilities may be invoked to disclaim liability for
      damages arising under the Securities Act of 1933, as amended, or the Securities
      Act of 1934 (collectively, the "Acts"), as amended, it is the position of the
      Securities and Exchange Commission that such indemnification is against public
      policy as expressed in the Acts and are therefore, unenforceable.





*Reports
      to Shareholders*


We
      intend
      to voluntarily send annual reports to our shareholders, which will include
      audited financial statements. We are a reporting company, and file reports
      with
      the Securities and Exchange Commission (SEC), including this Form 10-KSB as
      well
      as quarterly reports under Form 10-QSB. The public may read and copy any
      materials filed with the SEC at the SEC's Public Reference Room at 450 Fifth
      Street, N.W., Washington, D.C. 20549. Information on the operation of the Public
      Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The company
      files its reports electronically and the SEC maintains an Internet site that
      contains reports, proxy and information statements and other information filed
      by the company with the SEC electronically. The address of that site is
      http://www.sec.gov.




The
      company also maintains an Internet site, which contains information about the
      company, news releases and summary financial data. The address of that site
      is
      http://www.onscreentech.com.




51


**EXHIBITS**





The
      following exhibits are included as part of this Form 10-KSB.




Exhibit
                  No.
              Description3.11
              Amended
                  Articles of Incorporation of the Company.3.21
              Bylaws
                  of the Company.3.32
              Articles
                  of Amendment to Certificate of Incorporation - Certificate of
                  Designations, Preferences, Limitations and Relative Rights of the
                  Series A
                  Preferred Stock, filed July 25, 2002.3.42
              Articles
                  of Amendment to Articles of Incorporation-Terms of Series A Convertible
                  Preferred Stock, filed November 13, 2003.3.52
              Amendment
                  to Restated Articles of Incorporation, filed December 23,
                  2003.3.62
              Articles
                  of Amendment to Certificate of Incorporation - Certificate of Designations
                  of the Series B Convertible Preferred Stock, filed April 1,
                  2004.3.74
              Restated
                  Articles of Incorporation, Officers’ Certificate and Colorado Secretary of
                  State Certificate filed June 30, 2004 showing corporate name change
                  to
                  OnScreen Technologies, Inc.4.11
              Investment
                  Agreement dated May 19, 2000 by and between the Registrant and
                  Swartz
                  Private Equity, LLC.4.21
              Form
                  of "Commitment Warrant" to Swartz Private Equity, LLC for the purchase
                  of
                  1,000,000 shares common stock in connection with the offering of
                  securities.4.31
              Form
                  of "Purchase Warrant" to purchase common stock issued to Swartz
                  Private
                  Equity, LLC from time to time in connection with the offering of
                  securities.4.41
              Warrant
                  Side-Agreement by and between the Registrant and Swartz Private
                  Equity,
                  LLC.4.51
              Registration
                  Rights Agreement between the Registrant and Swartz Private Equity,
                  LLC
                  related to the registration of the common stock to be sold pursuant
                  to the
                  Swartz Investment Agreement.5.1
              Opinion
                  and consent of Johnson, Pope, Bokor, Ruppel & Burns, LLP, filed
                  herewith.10.12
              Employment
                  Agreement between the Registrant and John Thatch, dated November
                  2,
                  1999.10.22
              Contract
                  and License Agreement between the Registrant and John Popovich,
                  dated July
                  23, 2001.
  52
  10.32
              Agreement
                  by and among the Registrant, John Popovich and Fusion Three, LLC,
                  dated
                  January 14, 2004.10.42
              Letter
                  Agreement between the Registrant and John Popovich, dated January
                  15,
                  2004.10.52
              Master
                  Settlement and Release Agreement by and among the Registrant, Fusion
                  Three, LLC, Ryan Family Partners, LLC, and Capital Management Group,
                  Inc.,
                  dated February 3, 2004.10.62
              First
                  Amendment to Contract and License Agreement, dated February 3,
                  2004.10.72
              Employment
                  Agreement between the Registrant and Mark R. Chandler, COO/CFO,
                  dated
                  December 16, 2003.10.82
              Employment
                  Agreement between the Registrant and Stephen K. Velte, CTO dated
                  November
                  7, 2003.10.9
              Reserved.10.103
              Consulting
                  Services Agreement by and among the Registrant, David Coloris,
                  Excipio
                  Group, S.A., dated December 22, 2003.10.112
              Commission
                  Agreement between the Registrant and Gestibroker dated September
                  12,
                  2003.10.122
              Addendum
                  to Lease Agreement dated February 1, 2004.10.134
              Lease
                  Agreement dated October 15, 2004.10.144
              Second
                  Addendum to the Employment Agreement of John “JT” Thatch dated February 3,
                  2004.10.152
              Lockup
                  Agreement between the Registrant and Excipio Group, S.A., dated
                  December
                  12, 2003.10.162
              Agreement
                  between the Registrant and Visual Response Media Group, Inc., dated
                  February 3, 2004.10.174
              Assignment,
                  dated February 16, 2005, of OnScreenTM technology patents ownership from
                  inventor to CH Capital10.184
              Assignment,
                  dated February 16, 2005, of OnScreenTM technology patents ownership from CH
                  Capital to Company.10.194
              Contract
                  between SMTC Manufacturing Corporation and Company dated November
                  9,
                  200410.204
              Technology
                  Reseller Agreement between eLutions, Inc. and Company dated January
                  31,
                  2005
  53
  10.214
              Third
                  Addendum to the Employment Agreement of John “JT” Thatch dated March 28,
                  2005.10.224
              Promissory
                  Note dated March 25, 2005 evidencing $1,500,000 unsecured short
                  term
                  loan.10.235
              OnScreen
                  Technologies, Inc. 2005 Equity Incentive Plan10.244
              Employment
                  Agreement between the Registrant and Charles R. Baker dated November
                  21,
                  2005.10.254
              Employment
                  Agreement between the Registrant and William J. Clough, Esq. dated
                  November 21, 2005.13.14
              Annual
                  Report to security holders for 2005 on Form 10-KSB.14.15
              OnScreen
                  Technologies, Inc. Code of Ethics for Principal Executive and Financial
                  Officers and OnScreen Technologies, Inc. Code of Ethics and Business
                  Conduct Statement of General Policy15.17
              Letter
                  on unaudited interim financial information.22.16
              Proxy
                  Statement and Notice of 2006 Annual Shareholder
                  Meeting.23.47
              Consent
                  of Salberg & Company, P.A., Independent Registered Public Accounting
                  Firm for incorporation by reference of their report into Form 10-KSB
                  filed
                  herewith.
 Footnotes
        to Exhibits:





1
            Incorporated
                by reference to our Registration Statement on Form SB-2/A filed with
                the
                Commission on October 26, 2001.


2
            Incorporated
                by reference to our Form 10-KSB filed with the Commission on April
                14,
                2004.


3
            Incorporated
                by reference to our Report on Form S-8 filed with the Commission
                on
                January 15, 2004.


4
            Incorporated
                by reference to our Report on Form 10-KSB filed with the Commission
                on May
                4, 2005.


5
            Incorporated
                by reference to our Proxy Statement pursuant to Section 14(a) filed
                October 7, 2005.


6
            Incorporated
                by reference, Proxy Statement and Notice of 2005 Annual Shareholder
                Meeting filed with the Commission September 29,
                2006.


7
            Filed
                herewith.





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


*Compensation
        of Auditors*
 Audit
        Fees. The financial statements of the Company, which are furnished herein
        as of
        December 31, 2006, have been audited by Salberg & Company, P.A., Boca Raton,
        Florida, Independent Registered Public Accounting Firm. Salberg & Company,
        P.A. billed the Company an aggregate of $58,000 in fees and expenses for
        professional services rendered in connection with the audit of the Company’s
        financial statements for the fiscal year ended December 31, 2006 and the
        reviews
        of the financial statements included in each of the Company’s Quarterly Reports
        on Form 10-QSB during the fiscal year ended December 31, 2006. Salberg &
Company, P.A. billed the Company an aggregate of $54,000 in fees and expenses
        for professional services rendered in connection with the audit of the Company’s
        financial statements for the fiscal year ended December 31, 2005 and the
        reviews
        of the financial statements included in each of the Company’s Quarterly Reports
        on Form 10-QSB during the fiscal year ended December 31, 2005. Audit related
        fees for 2006 were $9,800 and for 2005 were $0. The Company paid these
        sums.





54


**Signatures**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed by the following
      persons on behalf of the Registrant and in the capacities and on the dates
      indicated.





OnScreen
      Technologies, Inc.





Name
            Title
            Date__/s/________________________
            CEO/President/Director
            March
                30, 2007Russell
                L. Wall__/s/________________________
            CFO/Principal
                Accounting Officer
            March
                30, 2007Mark
                R. Chandler__/s/________________________
            Audit
                Committee
            March
                30, 2007


Russell
      L. Wall




55
 
 
 **OnScreen
        Technologies, Inc.**
 
 **Financial
        Statements**
 
 **December
        31, 2006 and 2005**
  
 
 OnScreen
        Technologies, Inc.
 
 
 Contents
 
 PageReport
                  of Independent Registered Public Accounting Firm
              F-2Balance
                  Sheet
              F-3Statements
                  of Operations
              F-4Statement
                  of Changes in Stockholders’ Equity (Deficit)
              F-5Statements
                  of Cash Flows
              F-7Notes
                  to Financial Statements
              F-9
 
 F-1
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
        the
        Board of Directors and Shareholders of:
 Onscreen
        Technologies, Inc.:
 
 We
        have
        audited the accompanying balance sheet of Onscreen Technologies, Inc. as
        of
        December 31, 2006, and the related statements of operations, changes in
        stockholders' equity (deficit), and cash flows for the years ended December
        31,
        2006 and 2005. These financial statements are the responsibility of the
        Company's management. Our responsibility is to express an opinion on these
        financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Onscreen Technologies, Inc.
        as of
        December 31, 2006 and the results of its operations and its cash flows for
        the
        years ended December 31, 2006 and 2005 in conformity with accounting principles
        generally accepted in the United States of America.
 
 The
        accompanying financial statements have been prepared assuming the Company
        will
        continue as a going concern. As discussed in Note 1 to the financial statements,
        the Company has a net loss of $14,481,333 and cash used in operations of
        $9,398,621 in 2006 and an accumulated deficit of $42,971,052 at December
        31,
        2006. These matters raise substantial doubt about its ability to continue
        as a
        going concern. Management's plans as to these matters are also described
        in Note
        1. The financial statements do not include any adjustments that might result
        from the outcome of this uncertainty.
 
 
 SALBERG
        & COMPANY, P.A.
 Boca
        Raton, Florida
 March
        23,
        2007
  F-2
 
 **ONSCREEN
        TECHNOLOGIES, INC.**
 **BALANCE
        SHEET**
 **DECEMBER
        31, 2006**
 
 **ASSETS****CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              $
              570,501Accounts
                  receivable, net of allowance of $6,333
              
              
              11,295Inventory
              
              
              2,125,735Prepaid
                  expenses and other
              
              
              141,474**TOTAL
                  CURRENT ASSETS**
              
              
              2,849,005**PROPERTY
                  AND EQUIPMENT, NET**
              
              
              102,239**OTHER
                  ASSETS**Note
                  Receivable
              
              
              115,000Technology
                  rights, net
              
              
              4,509,900Patent
                  Costs
              
              
              582,965Deposits
                  and other
              
              
              22,173**TOTAL
                  OTHER ASSETS**
              
              
              5,230,038**TOTAL
                  ASSETS**
              
              $
              8,181,282**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****CURRENT
                  LIABILITIES**Accounts
                  payable
              
              $
              480,960Preferred
                  stock dividends payable
              
              
              27,353Accrued
                  expenses
              
              
              132,914Accrued
                  compensation
              
              
              85,000Deferred
                  Revenue
              
              
              8,260Convertible
                  note payable, net of discounts of $52,439
              
              
              947,561**TOTAL
                  CURRENT LIABILITIES**
              
              
              **1,682,048**Convertible
                  notes payable, net of discounts of $253,303
              
              
              396,697**TOTAL
                  LIABILITIES**
              
              
              **2,078,745****Commitments
                  and contingencies (Note 6)****STOCKHOLDERS'
                  DEFICIT**Preferred
                  stock, par value $0.001; 10,000,000 shares authorizedConvertible
                  Series A, preferred stock, 5,000,000 shares authorized,90,543
                  shares issued and outstanding;liquidation
                  preference of $90,543 at December 31, 2006
              
              
              91Convertible
                  Series B preferred stock, 30,000 shares authorized,and
                  no shares outstanding
              
              
              -Common
                  stock, par value $0.001; 200,000,000 shares authorized,147,127,238
                  shares issued and outstanding December 31, 2006
              
              
              147,127Additional
                  paid-in capital
              
              
              48,926,371Accumulated
                  deficit
              
              
              (42,971,052
              )**TOTAL
                  STOCKHOLDERS' EQUITY**
              
              
              6,102,537**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              8,181,282
 
 See
        accompanying notes to financial statements
  F-3
 
 **ONSCREEN
        TECHNOLOGIES, INC.**
 **STATEMENTS
        OF OPERATIONS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2006 AND 2005**
 
 **2006**
              
              **2005****REVENUES**Product
                  Sales
              
              $
              256,688
              
              $
              92,474Rental
                  Income
              
              
              **-**
              
              
              **41,176****Total
                  Revenue**
              
              
              **256,688**
              
              
              **133,650****COST
                  OF REVENUES**
              
              
              **1,586,823**
              
              
              **170,533****GROSS
                  PROFIT**
              
              
              **(1,330,135**
              **)**
              
              **(36,883**
              **)****OPERATING
                  EXPENSES**Selling,
                  general and administrative
              
              
              **6,422,006**
              
              
              **4,942,320**Research
                  and development
              
              
              **2,661,965**
              
              
              **1,420,069**Restructuring
                  costs
              
              
              **13,967**
              
              
              **78,801**Impairment
                  loss
              
              
              **48,711**
              
              
              **-**Bad
                  debt
              
              
              **2,333**
              
              
              **11,780****TOTAL
                  OPERATING EXPENSES**
              
              
              **9,148,982**
              
              
              **6,452,970****LOSS
                  FROM OPERATIONS**
              
              
              **(10,479,117**
              **)**
              
              **(6,489,853**
              **)****OTHER
                  INCOME (EXPENSE)**Other
                  income
              
              
              **29,450**
              
              
              **-**Other
                  expense
              
              
              **(1,695**
              **)**
              
              **(16,787**
              **)**Investment
                  income
              
              
              **40,576**
              
              
              **20,680**Change
                  in Fair Value of Warrant Liability
              
              
              **3,718,543**
              
              
              **-**Financing
                  Fees
              
              
              **(1,268,100**
              **)**
              
              **-**Settlement
                  gain
              
              
              **301,675**
              
              
              **16,667**Settlement
                  loss
              
              
              **(2,780,000**
              **)**
              
              **(300**
              **)**Interest
                  expense - Intrinsic value of convertible debt and amortization
                  of debt
                  discount
              
              
              **(3,647,451**
              **)**
              
              **(1,676,481**
              **)**Interest
                  expense
              
              
              **(395,214**
              **)**
              
              **(336,051**
              **)****TOTAL
                  OTHER INCOME (EXPENSE), NET**
              
              
              **(4,002,216**
              **)**
              
              **(1,992,272**
              **)****NET
                  LOSS**
              
              
              **(14,481,333**
              **)**
              
              **(8,482,125**
              **)**Preferred
                  stock dividends
              
              
              **(32,025**
              **)**
              
              **(201,895**
              **)****NET
                  LOSS ALLOCABLE TO COMMON STOCKHOLDERS**
              
              $
              (14,513,358
              )
              $
              (8,684,020
              )Basic
                  and diluted net loss per common share
              
              $
              (0.13
              )
              $
              (0.12
              )Basic
                  and diluted net loss per common share allocable to common
                  stockholders
              
              $
              (0.13
              )
              $
              (0.12
              )Weighted
                  average common shares outstanding
              
              
              **115,579,917**
              
              
              **70,116,586**
 
 See
        accompanying notes to financial statements
  F-4
 
 **ONSCREEN
        TECHNOLOGIES, INC.**
 **STATEMENT
        OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**
  SERIES
                  ASERIES
                  B
              
              PREFERRED
                  STOCK
              
              COMMON
                  STOCKPREFERRED
              
              AND
                  PREFERRED
              
              AND
                  COMMONSTOCK
              
              STOCK
                  ISSUABLE
              
              STOCK
                  ISSUABLESHARES
              
              AMOUNT
              
              SHARES
              
              AMOUNT
              
              SHARES
              
              AMOUNTBalance,
                  December 31, 2004
              
              
              -
              
              
              -
              
              
              2,772,205
              
              
              2,772
              
              
              63,680,020
              
              
              63,680Warrants
                  and options granted for service and compensationCancellation
                  of option granted for serviceRepricing
                  of optionsCommon
                  stock issued for options and warrants exercised in exchange for
                  cash and
                  accrued compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              605,000
              
              
              605Common
                  stock issued for services, compensation, and accrued
                  settlement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              986,251
              
              
              986Common
                  stock issued in conjunction with debt financing
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              800,000
              
              
              800Common
                  stock acquired from prior employee per agreement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (150,000
              )
              
              (150
              )Intrinsic
                  value of common stock conversion feature of convertible
                  debtSeries
                  A Preferred Stock dividends, $0.10 per shareSeries
                  A Preferred Stock converted to common stock
              
              
              
              
              
              
              
              
              (1,126,487
              )
              
              (1,126
              )
              
              4,505,948
              
              
              4,506Series
                  A Preferred Stock issued for services of employee
              
              
              
              
              
              
              
              
              240,000
              
              
              240Amortization
                  of deferred compensationNet
                  loss for the year ended December 31, 2005Unrealized
                  losses on marketable securities**Comprehensive
                  loss**Balance,
                  December 31, 2005
              
              
              -
              
              $
              -
              
              
              1,885,718
              
              $
              1,886
              
              
              70,427,219
              
              $
              70,427Reclassification
                  to equity of accrued compensation payable in stockWarrants
                  and options granted for service and compensationReclassification
                  of warrant liability, netCommon
                  stock issued for options and warrants exercised in exchange for
                  cash and
                  accrued compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,635,858
              
              
              9,636Common
                  stock issued for services and compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              213,883
              
              
              214Common
                  stock issued in conjunction with the conversion of debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              54,561,380
              
              
              54,561Beneficial
                  conversion value and value of warrants issued with convertible
                  debtSeries
                  A Preferred Stock dividends, $0.10 per shareSeries
                  A Preferred Stock dividends conversion to common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              837,023
              
              
              837Series
                  B Preferred Stock dividends reversalSeries
                  A Preferred Stock issued for services of employee
              
              
              
              
              
              
              
              
              250,000
              
              
              250Series
                  B Preferred Stock issued for services of employee
              
              
              1,000
              
              
              1Series
                  A Preferred Stock converted to common stock
              
              
              
              
              
              
              
              
              (2,045,175
              )
              
              (2,045
              )
              
              10,201,875
              
              
              10,202Series
                  B Preferred Stock converted to common stock
              
              
              (1,000
              )
              
              (1
              )
              
              
              
              
              
              
              
              1,250,000
              
              
              1,250Amortization
                  of deferred compensationNet
                  loss for the year ended December 31, 2006Unrealized
                  losses on marketable securities**Comprehensive
                  loss**Balance,
                  December 31, 2006
              
              
              -
              
              $
              -
              
              
              90,543
              
              
              91
              
              
              147,127,238
              
              $
              147,127
 (Continued)
 
 F-5
 
 (Continued)
              
              
              
              
              
              
              
              ACCUMULATED
              
              TOTALADDITIONAL
              
              ACCUM-
              
              DEFERRED
              
              OTHER
              
              STOCKHOLDERS’PAID-IN
              
              ULATED
              
              COMPENSATION
              
              COMPREHENSIVE
              
              EQUITYCAPITAL
              
              DEFICIT
              
              &
                  CONSULTING
              
              LOSS
              
              (DEFICIT)
                  IBalance,
                  December 31, 2004
              
              
              22,150,289
              
              
              (19,773,674
              )
              
              (438,282
              )
              
              -
              
              
              2,004,785Warrants
                  and options granted for service and compensation
              
              
              415,150
              
              
              
              
              
              
              
              
              
              
              
              415,150Cancellation
                  of option granted for service
              
              
              (27,200
              )
              
              
              
              
              27,200
              
              
              
              
              
              -Repricing
                  of options
              
              
              38,500
              
              
              
              
              
              
              
              
              
              
              
              38,500Common
                  stock issued for options and warrants exercised in exchange for
                  cash and
                  accrued compensation
              
              
              161,145
              
              
              
              
              
              
              
              
              
              
              
              161,750Common
                  stock issued for services, compensation, and accrued
                  settlement
              
              
              273,014
              
              
              
              
              
              (177,000
              )
              
              
              
              
              97,000Common
                  stock issued in conjunction with debt financing
              
              
              214,475
              
              
              
              
              
              
              
              
              
              
              
              215,275Common
                  stock acquired from prior employee per agreement
              
              
              (151,575
              )
              
              
              
              
              151,500
              
              
              
              
              
              (225
              )Intrinsic
                  value of common stock conversion feature of convertible
                  debt
              
              
              1,778,436
              
              
              
              
              
              
              
              
              
              
              
              1,778,436Series
                  A Preferred Stock dividends, $0.10 per share
              
              
              
              
              
              (201,895
              )
              
              
              
              
              
              
              
              (201,895
              )Series
                  A Preferred Stock converted to common stock
              
              
              (3,380
              )
              
              
              
              
              
              
              
              
              
              
              -Series
                  A Preferred Stock issued for services of employee
              
              
              239,760
              
              
              
              
              
              (143,333
              )
              
              
              
              
              96,667Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              437,241
              
              
              
              
              
              437,241Net
                  loss for the year ended December 31, 2005
              
              
              
              
              
              (8,482,125
              )
              
              
              
              
              
              
              
              (8,482,125
              )Unrealized
                  losses on marketable securities
              
              
              
              
              
              
              
              
              
              
              
              (4,413
              )
              
              (4,413
              )**Comprehensive
                  loss**
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,486,538
              )Balance,
                  December 31, 2005
              
              $
              25,088,614
              
              $
              (28,457,694
              )
              $
              (142,674
              )
              $
              (4,413
              )
              $
              (3,443,854
              )Reclassification
                  to equity of accrued compensation payable in stock
              
              
              469,112
              
              
              
              
              
              
              
              
              
              
              
              469,112Warrants
                  and options granted for service and compensation
              
              
              8,506,944
              
              
              
              
              
              
              
              
              
              
              
              8,506,944Reclassification
                  of warrant liability, net
              
              
              (3,718,543
              )
              
              
              
              
              
              
              
              
              
              
              (3,718,543
              )Common
                  stock issued for options and warrants exercised in exchange for
                  cash and
                  accrued compensation
              
              
              205,723
              
              
              
              
              
              
              
              
              
              
              
              215,359Common
                  stock issued for services and compensation
              
              
              8,595
              
              
              
              
              
              
              
              
              
              
              
              8,809Common
                  stock issued in conjunction with the conversion of debt
              
              
              13,040,950
              
              
              
              
              
              
              
              
              
              
              
              13,095,511Beneficial
                  conversion value and value of warrants issued with convertible
                  debt
              
              
              4,648,065
              
              
              
              
              
              
              
              
              
              
              
              4,648,065Series
                  A Preferred Stock dividends, $0.10 per share
              
              
              
              
              
              (49,801
              )
              
              
              
              
              
              
              
              (49,801
              )Series
                  A Preferred Stock dividends conversion to common stock
              
              
              166,568
              
              
              
              
              
              
              
              
              
              
              
              167,405Series
                  B Preferred Stock dividends reversal
              
              
              
              
              
              17,776
              
              
              
              
              
              
              
              
              17,776Series
                  A Preferred Stock issued for services of employee
              
              
              249,750
              
              
              
              
              
              (55,550
              )
              
              
              
              
              194,450Series
                  B Preferred Stock issued for services of employee
              
              
              269,999
              
              
              
              
              
              (59,999
              )
              
              
              
              
              210,001Series
                  A Preferred Stock converted to common stock
              
              
              (8,157
              )
              
              
              
              
              
              
              
              
              
              
              -Series
                  B Preferred Stock converted to common stock
              
              
              (1,249
              )
              
              
              
              
              
              
              
              
              
              
              -Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              258,223
              
              
              
              
              
              258,223Net
                  loss for the year ended December 31, 2006
              
              
              
              
              
              (14,481,333
              )
              
              
              
              
              
              
              
              (14,481,333
              )Unrealized
                  losses on marketable securities
              
              
              
              
              
              
              
              
              
              
              
              4,413
              
              
              4,413**Comprehensive
                  loss**
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (14,476,920
              )Balance,
                  December 31, 2006
              
              
              48,926,371
              
              
              (42,971,052
              )
              
              -
              
              
              -
              
              
              6,102,537
  See
        accompanying notes to financial statements
  F-6
 
 **ONSCREEN
        TECHNOLOGIES, INC.**
 **STATEMENTS
        OF CASH FLOWS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2006 AND 2005**
  **2006**
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  Loss
              
              $
              (14,481,333
              )
              $
              (8,482,125
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Warrants
                  and notes issued for compensation and services
              
              
              2,220,617
              
              
              486,650Stock
                  based settlement loss
              
              
              2,780,000
              
              
              -Non
                  cash settlement gain
              
              
              (150,016
              )Non-cash
                  interest expense, amortization of beneficial conversion value and
                  warrant
                  related debt discounts
              
              
              3,647,450
              
              
              1,676,481Bad
                  debt
              
              
              2,333
              
              
              11,780Write
                  down of inventory to lower of cost or market
              
              
              1,245,431
              
              
              -Amortization
                  of technology rights
              
              
              182,010
              
              
              20,000Amortization
                  of deferred consulting and compensation
              
              
              258,223
              
              
              437,241Amortization
                  of deferred financing fees
              
              
              381,050
              
              
              64,000Loss
                  on disposal of assets and asset shrinkage
              
              
              -
              
              
              16,787Loss
                  on sale of marketable securities
              
              
              4,413
              
              
              -Impairment
                  of long-lived assets
              
              
              48,711
              
              
              -Compensation
                  and services expense payable in common stock
              
              
              363,680
              
              
              454,775Depreciation
              
              
              126,348
              
              
              118,018Increase
                  in Warrant Liability
              
              
              (3,718,543
              )
              
              -Other
              
              
              -
              
              
              4,692**(INCREASE)
                  DECREASE IN ASSETS:**Accounts
                  receivable and other receivables
              
              
              (160
              )
              
              (28,401
              )Inventory
              
              
              (2,815,909
              )
              
              (552,648
              )Note
                  Receivable
              
              
              (115,000
              )
              
              -Prepaid
                  expenses and other current assets
              
              
              13,966
              
              
              (114,484
              )Deposits
                  and other assets
              
              
              70,804
              
              
              (20,429
              )**INCREASE
                  (DECREASE) IN LIABILITIES:**Accounts
                  payable
              
              
              587,725
              
              
              139,852Accrued
                  expenses
              
              
              (19,031
              )
              
              64,778Accrued
                  compensation
              
              
              (30,310
              )
              
              75,310Deferred
                  revenues
              
              
              (1,080
              )
              
              9,340Deferred
                  gain on sale of future revenues
              
              
              
              
              
              -**NET
                  CASH USED IN OPERATING ACTIVITIES**
              
              
              (9,398,621
              )
              
              (5,618,383
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Investment
                  in technology rights
              
              
              (800,000
              )
              
              -Investment
                  in patents
              
              
              (153,869
              )
              
              (380,439
              )Proceeds
                  from sales of marketable securities
              
              
              31,291
              
              
              396,541Proceeds
                  from sale of property and equipment
              
              
              -
              
              
              6,472Purchase
                  of property and equipment
              
              
              (25,150
              )
              
              (96,083
              )**NET
                  CASH USED IN INVESTING ACTIVITIES**
              
              
              (947,728
              )
              
              (73,509
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Series
                  A convertible preferred stock dividends paid
              
              
              (124
              )
              
              (121,250
              )Purchase
                  of treasury stock
              
              
              -
              
              
              (15,225
              )Proceeds
                  from notes and loans payable, net of expenses
              
              
              10,499,950
              
              
              5,011,000Payments
                  on notes and loans payable
              
              
              (525,475
              )
              
              (75,000
              )Proceeds
                  from sales of common stock and exercise of warrants and options,
                  net of
                  offering costs
              
              
              215,358
              
              
              121,750Deferred
                  stock issuance costs
              
              
              
              
              
              (63,892
              )Proceeds
                  from issuance of preferred stock - Series A
              
              
              
              
              
              -**NET
                  CASH PROVIDED BY FINANCING ACTIVITIES**
              
              
              10,189,709
              
              
              4,857,383NET
                  INCREASE IN CASH AND CASH EQUIVALENTS
              
              $
              (156,640
              )
              $
              (834,509
              )Cash
                  and Cash Equivalents at Beginning of Year
              
              
              727,141
              
              
              1,561,650**CASH
                  AND CASH EQUIVALENTS AT END OF YEAR**
              
              $
              570,501
              
              $
              727,141
 (continued)
  F-7
 
 (continued)
 2006
              
              2005**SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:**Interest
                  paid
              
              $
              386,915
              
              $
              261,785Income
                  taxes paid
              
              $
              -
              
              $
              -**SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH INVESTING AND FINANCING
                  ACTIVITIES:**Debt
                  and accrued liabilities settled/paid with common stock, net of
                  subscriptions receivable
              
              $
              -
              
              $
              181,664Discount
                  on debt for intrinsic value of convertible notes payable
              
              $
              4,987,618
              
              $
              1,778,436Other
                  comprehensive loss from unrealized loss
              
              $
              (4,413
              )
              $
              4,413Termination
                  of warrant and common stock returned
              
              $
              -
              
              $
              178,700Common
                  stock issued for conversion of Series A preferred stock
              
              $
              1,920
              
              $
              1,126Common
                  stock issued for conversion of Series B preferred stock
              
              $
              1
              
              $
              -Common
                  stock issued for accrued expense settlements
              
              $
              20,150
              
              $
              54,000Common
                  stock issued for deferred consulting and compensation
              
              $
              -
              
              $
              710,333Common
                  stock issued for the conversion of debt
              
              $
              13,095,511
              
              $
              215,275Value
                  of warrants paid for intangible technology rights
              
              $
              3,520,243
              
              
              -Accounts
                  payable converted to note payable
              
              $
              375,475
              
              
              -Common
                  stock issued to settle accrued preferred stock dividends
              
              $
              167,405
              
              
              -Accrual
                  of preferred stock dividends
              
              $
              32,025
              
              
              -Reclassification
                  of common stock payable to equity
              
              $
              469,112
              
              
              -
 
 See
        accompanying notes to financial statements
  F-8
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**


**Note
        1** **NATURE OF OPERATIONS AND BASIS OF PRESENTATION**
 
 OnScreen
        Technologies, Inc. (the Company) has pioneered and is commercializing innovative
        thermal management solutions capable of revolutionizing the LED display,
        semiconductor and electronic packaging industries. Utilizing its patent-pending
        thermal technologies and architecture, the Company has developed highly
        advanced, proprietary LED display solutions and cooling applications. The
        Company is primarily focused on commercialization of its innovative thermal
        cooling technology, WayCool, and the commercial adoption of its sign display
        platform product under the name RediAlert(TM) and Living Window(TM).
        Additionally, the Company is continuing efforts towards development and
        commercialization of its Tensile technology.
  The
        accompanying financial statements have been prepared on the assumption that
        the
        Company will continue as a going concern. As reflected in the accompanying
        financial statements, the Company has a net loss of $14,481,333 and cash
        used in
        operations of $9,398,621 for the year ended December 31, 2006 and an accumulated
        deficit of $42,971,052 at December 31, 2006. The ability of the Company to
        continue as a going concern is dependent on the Company's ability to bring
        the
        OnScreen(TM) products to market, generate increased sales, obtain positive
        cash
        flow from operations and raise additional capital. The financial statements
        do
        not include any adjustments that may result from the outcome of this
        uncertainty.
 
 The
        Company is continuing to raise additional capital which the Company believes
        will provide sufficient cash to meet its funding requirements to commercialize
        OnScreen(TM) technology product lines during 2007. As the Company continues
        to
        expand and develop its technology and product lines, additional funding will
        be
        required. The Company has experienced negative cash flows from operations
        and
        incurred net losses in the past and there can be no assurance as to the
        availability or terms upon which additional financing and capital might be
        available, if needed.
 
 
 **Note
        2** **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **(A)
        Use of Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those estimates.
        Significant estimates in 2006 and 2005 include estimates used to review the
        Company’s long-lived assets for impairment, inventory valuation, valuations of
        non-cash capital stock issuances, valuations of derivatives and the valuation
        allowance on deferred tax assets.
 
 **(B)
        Cash and Cash Equivalents**
  F-9
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 For
        purposes of the cash flow statement, the Company considers all highly liquid
        investments with maturities of three months or less at the time of purchase
        to
        be cash equivalents.
 
 **(C)
        Marketable Securities Available-For-Sale**
 
 In
        order
        for the Company to optimize its return on the equity funds it has raised,
        it
        invested in certain liquid marketable securities. The Company classifies
        these
        marketable securities as available-for-sale. These securities are recorded
        at
        fair market value, with unrealized gains or losses excluded from earnings
        and
        included in other comprehensive income within stockholders’ equity. Realized
        gains and losses on the sale of these securities are determined using the
        specific-identification method.
 
 There
        are
        no available-for-sale securities at December 31, 2006. The Company received
        proceeds of $31,146 from the sale of investments and recognized losses on
        sale
        of investments of $1,695 during the year ended December 31, 2006.
 
 **(D)
        Accounts Receivable**
 
 Accounts
        receivable consist of the receivables associated with the revenue derived
        from
        the Living Windows(TM) and RediAlert(TM) products. We record an allowance
        for
        doubtful accounts to allow for any amounts that may not be recoverable, which
        is
        based on an analysis of our prior collection experience, customer credit
        worthiness, and current economic trends. Based on management’s review of
        accounts receivable, an allowance for doubtful accounts of $6,333 at December
        31, 2006 is considered adequate. We determine receivables to be past due
        based
        on the payment terms of original invoices.
 
 **(E)
        Inventory**
  Inventories
        are stated at the lower of cost (first-in, first-out basis) or market. Finished
        goods inventory is valued at $967,735 and work in progress at $1,158,000
        at
        December 31, 2006. During 2006, the Company impaired $478,737 of defective
        finished goods inventory and $766,694 of work in progress which is included
        in
        Cost of Goods Sold on the Statement of Operations.
 
 **(F)
        Concentration of Credit Risk**
  The
        Company maintains its cash in bank deposit and financial institution deposit
        accounts, which, at times, exceed federally insured limits. The Company has
        not
        experienced any losses in such accounts through December 31, 2006.
 
 **(G)
        Property and Equipment**
 
 Property
        and equipment are recorded at the lower of fair value or cost, less accumulated
        depreciation and amortization. Major additions are capitalized. Minor additions
        and maintenance and repairs, which do not extend the useful life of an asset,
        are charged to operations when incurred. When property and equipment are
        sold or
        otherwise disposed of, the asset account and related accumulated depreciation
        account are relieved, and any gain or loss is included in operations.
        Depreciation is provided primarily using the straight-line method over the
        assets’ estimated useful lives of three to seven years. Estimated useful lives
        are periodically reviewed and, where appropriate, changes are made
        prospectively.
  F-10
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
  **(H)
        Long-Lived Assets**
 
 The
        Company periodically reviews its long-lived assets and certain identifiable
        assets related to those assets for impairment whenever circumstances and
        situations change such that there is an indication that the carrying amounts
        may
        not be recoverable. If the non-discounted future cash flows of the enterprise
        are less than their carrying amount, their carrying amounts are reduced to
        fair
        value and an impairment loss is recognized. See Note 3 for the impairment
        amounts that were recorded during 2006. There was no impairment amount recorded
        during 2005.
 
 **(I)
        Identifiable Intangible Assets**
 
 As
        of
        December 31, 2006, the Company had capitalized $4,842,743 of costs related
        to
        technology rights it had acquired since 2003. The Company is amortizing
        technology rights over a twenty year life.
 
 As
        of
        December 31, 2006, the Company had capitalized $582,965 of costs related
        to
        filing patent applications. When the patents are approved, the Company will
        then
        amortize these costs over the life of the patent. Any patents that are not
        approved will be expensed at that time. At December 31, 2006, all of the
        patents
        are pending approval.
 
 **(J)
        Accounting for Derivatives**
 
 The
        Company evaluates its convertible debt, options, warrants or other contracts
        to
        determine if those contracts or embedded components of those contracts qualify
        as derivatives to be separately accounted for under Statement of Financial
        Accounting Standards 133 “Accounting for Derivative Instruments and Hedging
        Activities” and related interpretations including EITF 00-19 “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock”.
 
 The
        result of this accounting treatment is that the fair value of the embedded
        derivative is marked-to-market each balance sheet date and recorded as a
        liability.  In the event that the fair value is recorded as a liability,
        the change in fair value is recorded in the consolidated statement of operations
        as an other income or expense.  Upon conversion or exercise of a derivative
        instrument, the instrument is marked to fair value at the conversion date
        and
        then that fair value is reclassified to equity. Equity instruments that are
        initially classified as equity that become subject to reclassification under
        SFAS 133 are reclassified to liability at the fair value of the instrument
        on
        the reclassification date.
 
 F-11
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 **(K)
        Stock-Based Compensation**
 
 On
        January 1, 2006, the Company implemented Statement of Financial Accounting
        Standard 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment” which
        replaced SFAS 123 “Accounting for Stock-Based Compensation” and superseded APB
        Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires
        the fair value of all stock-based employee compensation awarded to employees
        to
        be recorded as an expense over the related vesting period. The statement
        also
        requires the recognition of compensation expense for the fair value of any
        unvested stock option awards outstanding at the date of adoption. During
        2006,
        all employee stock compensation was recorded at fair value using the Black
        Scholes Pricing Model. In adopting SFAS 123(R), the Company used the modified
        prospective application (“MPA”). MPA requires the Company to account for all new
        stock compensation to employees using fair value and for any portion of awards
        prior to January 1, 2006 for which the requisite service has not been rendered
        and the options remain outstanding as of January 1, 2006, the Company recognized
        the compensation cost for that portion of the award for which the requisite
        service was rendered on or after January 1, 2006. The fair value for these
        awards is determined based on the grant-date. As of January 1, 2006, accrued
        compensation payable in common stock of $469,112 previously classified as
        a
        liability was reclassified as equity due to the implementation of SFAS
        123(R).
 
 Prior
        to
        January 1, 2001 the Company accounted for stock based compensation using
        the
        intrinsic value method under APB 25.
 
 The
        following table illustrates the effect on net loss available to common
        stockholders and loss per common share had the Company applied the fair value
        recognition provisions of SFAS No. 123 to stock-based employee compensation
        during 2005:
 
 
 2005Net
                  Loss Available to Common Stockholders:Net
                  loss available to common stockholders as reported
              
              $
              (8,684,020
              )Plus
                  total stock-based employee compensation cost included in the net
                  loss, net
                  of related tax effects
              
              
              469,318Less
                  total stock-based employee compensation expenses determined under
                  fair
                  value based method for all awards, net of related tax
                  effects
              
              
              (597,754
              )Pro
                  forma net loss
              
              $
              (8,812,456
              )Loss
                  per share:As
                  reported
              
              $
              (0.12
              )Pro
                  forma
              
              $
              (0.13
              )
 
 See
        Note
        7 section F, for additional disclosure and discussion of the Company’s employee
        stock plan and activity.
  F-12
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 The
        Company accounts for services provided by non-employees who are issued equity
        instruments based on the fair value of the consideration received or the
        fair
        value of the equity instruments, whichever is more reliably measurable on
        the
        measurement date. The amount related to the value of the stock awards is
        amortized on a straight-line basis over the required service periods.
 
 **(L)
        Revenue Recognition**
 
 The
        Company recognizes revenue from its products when persuasive evidence of
        an
        arrangement exists, the product(s) has been shipped, collectability is
        reasonably assured and the price is fixed or determinable. In the event that
        the
        contract provides for multiple elements (e.g., products, installation and
        training), the total amount invoiced is allocated to these elements based
        on
“vendor-specific objective evidence” of fair value. If any portion of the
        revenue is subject to forfeiture, refund or other contractual contingencies,
        the
        Company will postpone revenue recognition until these contingencies have
        been
        removed. The Company generally accounts for installation and training services
        separate from product revenue for those multi-element arrangements where
        services are a separate element and are not essential to the customer’s
        functionality requirements and there is “vendor-specific objective evidence” of
        fair value for these services. Installation and education services revenue,
        is
        recognized when the service has been performed.
 
 Revenue
        from warranty and maintenance activities is recognized ratably over the term
        of
        the warranty and maintenance period and the unrecognized portion is recorded
        as
        deferred revenue.
 
 The
        Company records any rental income from the LED truck pro-rata as earned over
        the
        rental period.
 
 **(M)
        Shipping and Handling Costs**
 
 Amounts
        invoiced to customers for shipping and handlings are included sales. 
Actual shipping and handling costs to ship products to our customers are
        included in cost of revenues and were approximately $15,000 for the year
        ended
        December 31, 2006.
 
 **(N)
        Warranty Reserves**
 
 The
        Company records a warranty reserve liability based on its estimates of future
        costs on sales recognized. There was no warranty reserve recorded at December
        31, 2006.
 
 **(O)
        Advertising**
 
 In
        accordance with Accounting Standards Executive Committee Statement of Position
        93-7, costs incurred for producing and communicating advertising of the Company
        are charged to operations as incurred. Advertising expense for the years
        ended
        December 31, 2006 and 2005 was $43,068 and $39,823, respectively.
  F-13
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 **(P)
        Income Taxes**
 
 Income
        taxes are accounted for under the asset and liability method of Statement
        of
        Financial Accounting Standards No. 109, “ *Accounting
        for Income Taxes* ”
(“SFAS
        109”). Under SFAS 109, deferred tax assets and liabilities are recognized for
        the future tax consequences attributable to differences between the financial
        statement carrying amounts of existing assets and liabilities and their
        respective tax bases. Deferred tax assets and liabilities are measured using
        enacted tax rates expected to apply to taxable income in the years in which
        those temporary differences are expected to be recovered or settled. The
        effect
        on deferred tax assets and liabilities of a change in tax rates is recognized
        as
        income in the period that includes the enactment date.
 
 Valuation
        allowances have been established against the Company’s deferred tax assets due
        to uncertainties in the Company’s ability to generate sufficient taxable income
        in future periods to make realization of such assets more likely than not.
        The
        Company has not recognized an income tax benefit for its operating losses
        generated during 2006 and 2005 based on uncertainties concerning the Company’s
        ability to generate taxable income in future periods. There was no income
        tax
        receivable at December 31, 2006 and 2005. In future periods, tax benefits
        and
        related deferred tax assets will be recognized when management considers
        realization of such amounts to be more likely than not.
 
 **(Q)
        Net Loss Per Share**
 
 In
        accordance with Statement of Financial Accounting Standards No. 128,
“ *Earnings
        per Share* ”,
        basic
        net loss per share is computed by dividing the net loss available to common
        stockholders for the period by the weighted average number of common shares
        outstanding during the period. Diluted net loss per share is computed by
        dividing net loss available to common stockholders by the weighted average
        number of common and common equivalent shares outstanding during the period.
        Common equivalent shares outstanding as of December 31, 2006 and 2005, which
        consist of options, warrants, convertible notes and convertible preferred
        stock,
        have been excluded from the diluted net loss per common share calculations
        because they are anti-dilutive. Accordingly, diluted net loss per share is
        the
        same as basic net loss per share for 2006 and 2005. The following table
        summarizes the potential common stock shares at December 31, 2006 which may
        dilute future earning per share.
 
 Convertible
                  preferred stock
              
              
              497,987Warrants
                  and options
              
              
              25,613,757Convertible
                  debt
              
              
              8,250,00034,361,744
 
 There
        are
        1,332,938 unvested shares of the Company’s common stock related to employment
        agreements which vested and were issued in January 2006. There are 1,767,500
        shares of the Company’s common stock available under the 2005 Equity Incentive
        Stock Plan.
 
 **(R)
        Fair Value of Financial Instruments**
  F-14
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 Statement
        of Financial Accounting Standards No. 107, “ *Disclosures
        about Fair Value of Financial Instruments* ,”
        requires disclosures of information about the fair value of certain financial
        instruments for which it is practicable to estimate that value. For purposes
        of
        this disclosure, the fair value of a financial instrument is the amount at
        which
        the instrument could be exchanged in a current transaction between willing
        parties, other than in a forced sale or liquidation.
 
 The
        Company believes the carrying amounts of the short-term financial instruments,
        including accounts receivable, notes payable and current liabilities reflected
        in the accompanying balance sheet approximate fair value at December 31,
        2006
        due to the relatively short-term nature of these instruments.
 
 **(S)
        Recent Accounting Pronouncements**
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS
        123(R)”), “Share-Based Payment.” This statement replaces SFAS No. 123
“Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” SFAS 123(R) will require the fair
        value of all stock option awards issued to employees to be recorded as an
        expense over the related vesting period. The statement also requires the
        recognition of compensation expense for the fair value of any unvested stock
        option awards outstanding at the date of adoption. The adoption of SFAS 123(R)
        will impact the Company by requiring it to use the fair-value based method
        of
        accounting for future and unvested employee stock transactions rather than
        the
        intrinsic method the Company currently uses. The Company adopted this SFAS
        as of
        January 1, 2006. The adoption of this SFAS did not have an impact on the
        Company’s financial statement through December 31, 2005, but will increased the
        cost of equity compensation by $32,756 during 2006 related to 182,500 of
        its
        options that were not vested at December 31, 2005 as the options are now
        valued
        at fair value instead of the intrinsic value.
 
 In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS 154”). This statement replaces APB Opinion No. 20 “Accounting Changes”
and FASB Statement No. 3 “Reporting Accounting Changes in Interim Financial
        Statements”. SFAS 154 applies to all voluntary changes in accounting principle
        and to changes required by an accounting pronouncement in the unusual instance
        that the pronouncement does not include specific transition provisions. SFAS
        154
        requires retrospective application to prior periods’ financial statements of
        changes in accounting principle, unless it is impracticable to determine
        either
        the period-specific effects or the cumulative effect of the change. When
        it is
        impracticable to determine the period-specific effects of an accounting change
        on one or more individual prior periods presented, this SFAS requires that
        the
        new accounting principle be applied to the balances of assets and liabilities
        as
        of the beginning of the earliest period for which retrospective application
        is
        practicable and that a corresponding adjustment be made to the opening balance
        of equity or net assets for that period rather than being reported in an
        income
        statement. When it is impracticable to determine the cumulative effect of
        applying a change in accounting principle to all prior periods, this SFAS
        requires that the new accounting principle be applied as if it were adopted
        prospectively from the earliest date practicable. The Company adopted this
        SFAS
        as of January 1, 2006. There is no current impact on the Company’s financial
        statements with the adoption of this FASB.
  F-15
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 SFAS
        153:
        In December 2004, the FASB issued this Statement addresses the measurement
        of
        exchanges of nonmonetary assets and is effective for nonmonetary asset exchanges
        occurring in fiscal years beginning after June 15, 2005. The adoption of
        SFAS
        153 has not had a material effect on the Company’s financial position or results
        of operations.
 
 FASB
        Statement No. 156, “Accounting for Servicing of Financial Assets—an amendment of
        FASB Statement No. 140” (FASB Statement No. 156”:. In March 2006, the FASB
        issued No. 156 which amends FASB Statement No. 140, Accounting for Transfers
        and
        Servicing of Financial Assets and Extinguishments of Liabilities, with respect
        to the accounting for separately recognized servicing assets and servicing
        liabilities. FASB No. 156 is effective for years beginning after September
        15,
        2006. The Company does not believe FASB No. 156 will have a material effect
        on
        the Company’s financial statements.
 
 FASB
        Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
        interpretation of FASB Statement No. 109” (“FIN 48”):  In June 2006, the
        FASB issued this statement which clarifies the accounting for uncertainty
        in
        income taxes recognized in an enterprise’s financial statements in accordance
        with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
        recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return. FIN 48, which is effective for fiscal years beginning after December
        15, 2006, also provides guidance on derecognition, classification, interest
        and
        penalties, accounting in interim periods, disclosure, and transition. The
        Company plans on reviewing in detail its tax situation to determine whether
        there are any uncertain tax positions but does not presently believe that
        there
        are any material matters.
 
 Statement
        No. 157, “Fair Value Measurements” (“FASB No. 157”):  In September 2006,
        the FASB issued  FASB No. 157 which defines fair value, establishes a
        framework for measuring fair value in generally accepted accounting principles
        (GAAP), and expands disclosures about fair value measurements. FASB No. 157
        applies under other accounting pronouncements that require or permit fair
        value
        measurements, the FASB having previously concluded in those accounting
        pronouncements that fair value is the relevant measurement attribute.
        Accordingly, this Statement does not require any new fair value
        measurements.
 
 Staff
        Accounting Bulletin No. 108, Considering the Effects of Prior Year
        Misstatements when Quantifying Misstatements in Current Year Financial
        Statements (“SAB 108”):  In September 2006, the Securities and
        Exchange Commission issued. SAB 108 which provides guidance on
        consideration of the effects of prior year misstatements in quantifying current
        year misstatements for the purpose of a materiality assessment. SAB 108 is
        effective for fiscal years ending after November 15, 2006. The adoption of
        SAB 108 did not have an impact on our  financial statements.
  F-16
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 FASB
        Staff Position EITF 00-19-2, Accounting for Registration Payment Arrangements
        (“FSP EITF 00-19-2”):  In December 2006, the FASB issued. FSP EITF 00-19-2
        which specifies that the contingent obligation to make future payments or
        otherwise transfer consideration under a registration payment arrangement,
        whether issued as a separate agreement or included as a provision of a financial
        instrument or other agreement, should be separately recognized and measured
        in
        accordance with FASB Statement No. 5, Accounting for Contingencies. A
        registration payment arrangement is defined in FSP EITF 00-19-2 as an
        arrangement with both of the following characteristics: (1) the arrangement
        specifies that the issuer will endeavor (a) to file a registration
        statement for the resale of specified financial instruments and/or for the
        resale of equity shares that are issuable upon exercise or conversion of
        specified financial instruments and for that registration statement to be
        declared effective by the US SEC within a specified grace period, and/or
        (b) to maintain the effectiveness of the registration statement for a
        specified period of time (or in perpetuity); and (2) the arrangement
        requires the issuer to transfer consideration to the counterparty if the
        registration statement for the resale of the financial instrument or instruments
        subject to the arrangement is not declared effective or if effectiveness
        of the
        registration statement is not maintained. FSP EITF 00-19-2 is effective for
        registration payment arrangements and the financial instruments subject to
        those
        arrangements that are entered into or modified subsequent to December 31,
        2006. For registration payment arrangements and financial instruments subject
        to
        those arrangements that were entered into prior to the issuance of FSP EITF
        00-19-2, this guidance is effective for financial statements issued for fiscal
        years beginning after December 15, 2006, and interim periods within those
        fiscal years. We do not expect the adoption of FSP EITF 00-19-2 to have a
        material impact on our consolidated financial statements.
  SFAS No. 159,
        The Fair Value Option for Financial Assets and Financial Liabilities
        (“SFAS 159”):  In February 2007, the FASB issued which permits
        entities to choose to measure many financial instruments and certain other
        items
        at fair value that are not currently required to be measured at fair value.
        SFAS 159 will be effective for us on January 1, 2008. We are currently
        evaluating the impact of adopting SFAS 159 on our financial position, cash
        flows, and results of operations.
 
 **(T)
        Reclassifications**
 
 Certain
        amounts in the 2005 financial statements have been reclassified to conform
        to
        the 2006 presentation.
 
 **(U)
        Segments**
 
 The
        Company operates as one segment. All internal analysis and financial reporting
        by management is performed as one segment.
 
 **Note
        3 Property and Equipment, net**
 
 Property
        and equipment is summarized as follows at December 31, 2006:
 
 Equipment
              
              
              81,922Computers
                  and software
              
              
              90,213Vehicles
              
              
              38,173Leasehold
                  improvements
              
              
              10,988221,296Less
                  accumulated depreciation
              
              
              (119,057
              )$
              102,239
  F-17
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 Depreciation
        expense for the years ended December 31, 2006 and 2005 amounted to $126,348
        and
        $118,018, respectively.
 
 During
        2006, management evaluated the recovery of the recorded value of the LED
        Truck
        and determined since, the Company did not receive any revenue from this truck
        during 2006 and the fair value of the truck was less than the net book value
        of
        the truck there was an impairment loss of $48,214 which was included in
        impairment loss on the Statements of Operations.
 
 **Note
        4 Technology Rights and License and Royalty agreements**
 
 The
        Company, under a license agreement, obtained an exclusive license in a patent
        for the manufacture, sale, and marketing of direct view video displays with
        an
        angular dimension of greater than 30 inches. Prior to 2005, the Company recorded
        a technology right intangible asset for the $522,500 it paid for these rights.
 
 Effective
        March 24, 2006, the Company purchased from CH Capital, Inc. all right, title
        and
        interest in and to the WayCool technology, patent application and Letters
        Patent. CH Capital, Inc. is a related party controlled by a director and
        an
        officer of the Company. To acquire this technology, the Company paid $800,000
        to
        CH Capital, Inc. and agreed to issue CH Capital, Inc. a three year warrant
        to
        acquire up to 7,040,485 shares of common stock at $0.20 per share. The warrant
        is valued at $3,520,243 using the Black Scholes option pricing model. The
        technology rights are amortized over the twenty-year estimated life of the
        technology. The Technology Rights at December 31, 2006 were as
        follows:
 
 Technology
                  Rights
              
              $
              4,842,743Accumulated
                  Amortization
              
              
              (332,843
              )$
              4,509,900
 
 The
        amortization of the technology rights during 2006 and 2005 was $182,009 and
        $20,000, respectively. The estimated annual amortization expense is $236,000
        for
        each for the next five years. The
        management of the Company has evaluated the technology rights for impairment
        and
        based upon its projected cash flow analysis from this technology believes
        there
        is no impairment of these technology rights at December 31, 2006.
 
 **Note
        5 Notes Payable, Convertible Notes Payable and Convertible Notes Payable,
        Related Parties**
 
 Notes
        payable and debt discounts as of December 31, 2006 and activity during 2006
        are
        summarized as follows:
  F-18
 
 **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 **Original**
              
              **Notes**
              
              **Notes**
              
              **Balance****Principal**
              
              **Converted**
              
              **Repaid**
              
              **12/31/06**Balance
                  at 12/31/05
              
              
              5,000,000
              
              
              (5,000,000
              )
              
              -
              
              
              -New
                  notes in 2006
              
              
              11,256,475
              
              
              (9,081,000
              )
              
              (525,475
              )
              
              1,650,000Total
              
              
              16,256,475
              
              
              (14,081,000
              )
              
              (525,475
              )
              
              1,650,000
  **Beneficial****Conversion**
              
              
              
              **Reclassification**
              
              **BCF
                  Discount****Feature**
              
              **Amortization**
              
              **to
                  Equity**
              
              **12/31/06**Balance
                  at 12/31/05
              
              
              270,163
              
              
              270,163
              
              
              -
              
              
              -New
                  notes in 2006
              
              
              2,292,191
              
              
              2,088,080
              
              
              -
              
              
              204,111Total
              
              
              2,562,354
              
              
              2,358,243
              
              
              -
              
              
              204,111
  **Warrant
                  Value****Warrant**
              
              
              
              **Reclassification**
              
              **Discount****Value**
              
              **Amortization**
              
              **to
                  Equity**
              
              **12/31/06**Balance
                  at 12/31/05
              
              
              -
              
              
              -
              
              
              -
              
              
              -New
                  notes in 2006
              
              
              2,355,874
              
              
              1,289,208
              
              
              965,035
              
              
              101,631Total
              
              
              2,355,874
              
              
              1,289,208
              
              
              965,035
              
              
              101,631Unamortized
                  discount at 12/31/06
              
              
              
              
              
              
              
              
              
              
              
              (305,742
              )Convertible
                  notes payable, net at 12/31/06
              
              
              
              
              
              
              
              
              
              
              
              1,344,258Less
                  current portion (Due November 15, 2007)
              
              
              
              
              947,561Notes
                  payable, net (Due from March to April, 2008)
              
              
              
              
              396,697
 
 During
        March 2005, the Company executed a $1.5 million unsecured six-month promissory
        note with a related party. The interest rate was 15% per annum. Interest
        only
        payments are due monthly until maturity of the note when the principal is
        due.
        One of the Company’s Board of Directors and another officer of the Company both
        have a controlling interest in the company that is the note holder. The Company
        paid a $2,500 fee to extend this note to November 1, 2005. On October 31,
        2005,
        substitute convertible promissory notes totaling $1.5 million were executed
        with
        terms similar to the convertible promissory notes the Company had outstanding
        (see below) with $1 million assigned to the adult brother of a related party
        (who management does not consider to be a related party), $100,000 assigned
        to a
        trust controlled by a member of our Board of Directors and $400,000 assigned
        to
        unrelated parties.
  F-19
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        the third and fourth quarters of 2005, the Company executed three-month
        convertible promissory notes totaling $3.5 million. One of the note holders
        is
        the CFO who has a $100,000 note with the same terms as the other note holders.
        The Company has the option to extend these notes for an additional three-month
        period. The Company has verbally extended those notes that came due and intends
        to extend the remaining notes. The interest rate is 12% per annum. Interest
        only
        payments are due monthly until the maturity of these notes at which time
        the
        principal is due. If the notes are paid prior to the maturity date or the
        extended maturity date, the Company is required to pay the interest for the
        entire three-month periods. The note holders have the right to convert their
        notes to common stock at the lower of the exercise price of $0.25 per share
        or
        the price set for a future equity offering. At December 31, 2005, the price
        for
        an equity offering was not set, therefore the conversion price was $0.25.
 
 The
        holders of the convertible notes have a security interest to the extent of
        their
        principal and interest in all assets currently owned by the Company including
        the patent portfolio.
 
 In
        total,
        the Company issued convertible notes totaling $5 million. All convertible
        notes
        were reviewed by management to determine if the embedded conversion rights
        qualified as derivatives under FASB Statement 133 “Accounting for Derivative
        Instruments and Hedging Activates” and related interpretations. Management
        determined the embedded conversion features were not derivatives and accordingly
        each convertible instrument is reflected as one combined instrument in the
        accompanying financial statements. Management then reviewed whether a beneficial
        conversion feature and value existed. The intrinsic value related to the
        convertible feature of the debt was valued at $1,778,436 and is being amortized
        over the three-month term of the notes. At December 31, 2005, $270,163 remained
        on the Company’s Balance Sheet as a discount to debt related to this convertible
        feature. The Company issued 800,000 shares of its common stock to several
        note
        holders who were eligible to receive 100,000 shares of common stock based
        upon a
        $500,000 investment. These shares were valued at $215,275 based upon the
        allocation of the $4,000,000 proceeds to debt and equity based upon their
        fair
        market values. At December 31, 2005, $47,067 remained on the Company’s Balance
        Sheet as a discount to debt related to the allocation of the proceeds to
        the
        800,000 shares of common stock.
 
 On
        January 30, 2006, the Company entered into a non-convertible promissory note
        with a vendor for $375,475. The payment terms were $50,000 every two weeks
        for a
        total of seven payments and an eighth payment of $25,475 on May 12, 2006.
        At
        June 30, 2006, this note has been paid off.
 
 During
        February 2006, the Company entered into three-month convertible promissory
        notes
        and received proceeds of $200,000. The Company had the option to extend these
        notes for an additional three-month period. Also during the first quarter
        of
        2006, the Company executed unsecured six-month convertible promissory notes
        totaling $5.1 million. The interest rate was 12% per annum. For $200,000
        of
        notes, the note holders had the right to convert the note to common stock
        at the
        lower of the exercise price of $0.25 per share or the price set for the equity
        round. For the $5.1 million of notes, the shares will convert to common stock
        if
        the Company’s bid price reaches or exceeds $0.35 of five consecutive days, then
        the notes will convert at $0.25 per share or the note holder could elect
        at any
        time to convert the note at $0.25 per share to common stock shares. The
        beneficial conversion intrinsic value related to the convertible feature
        of the
        debt was valued at $814,237 and was amortized over the three- to six-month
        term
        of the notes. For each note, the note holder received a warrant of one share
        of
        common stock for each $1 of note principal. The proceeds of the note were
        allocated to the note and warrants based upon the fair market value of each.
        This resulted in a discount on notes of $897,061 relating to the warrants
        which
        was amortized over the three- to six-month term of the notes. Interest only
        payments are due monthly until the maturity of this note at which time the
        principal is due. If the note is paid prior to the maturity date or the extended
        maturity date, the Company is required to pay the interest for the entire
        three-
        or six-month periods. The holders of the convertible notes have a security
        interest to the extent of their principal and interest in all assets currently
        owned by the Company including the patent portfolio.
  F-20
  **OnScreen
          Technologies, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006 and 2005**
 In
        February 2006 the Company amended certain of the notes that were issued in
        2005
        with principal amounts of $4,950,000 to extend the notes for an additional
        six
        months. The terms of the amended notes included the notes automatically convert
        to shares of common stock if the Company’s bid price reaches or exceeds $0.35
        for five consecutive days, then the notes will convert at $0.25 per share.
        Also
        a warrant for 1 share of common stock was given to the note holders for every
        $1
        of note principal balance. These warrants were recorded as a discount to
        debt at
        their fair market value of $898,500 which was amortized over the term of
        the
        notes.
 
 During
        March 2006, the bid price of the Company’s stock exceeded $0.35 per share for
        five consecutive days and convertible debt totaling $10,050,000 was converted
        into 40,200,000 shares of common stock. The Company recorded $1,362,093 of
        interest expense related to the remaining intrinsic value of convertible
        debt
        and amortization of debt discount of the notes at the time the debt was
        converted into common stock for those convertible debt instruments that had
        a
        beneficial conversion feature. For those convertible debt instruments that
        did
        not have a beneficial conversion feature, the unamortized debt discount of
        $1,012,102 was recorded as a credit to equity at the time of conversion pursuit
        to EITF 98-5.
 
 On
        April
        4, 2006, the Company converted $250,000 of convertible unsecured notes into
        1,000,000 shares of its common stock at $0.25 per share. The Company recorded
        $127,500 of interest expense related to the remaining intrinsic value of
        convertible debt and amortization of debt discount of the note at the time
        the
        debt was converted into common stock.
 
 In
        summary as of June 30, 2006 the convertible debt totaling $10,300,000 was
        converted into 41,200,000 shares of common stock.
 
 On
        May
        19, 2006 the Company entered into a promissory note for $500,000. Interest
        on
        this note accrues at the rate of 10% per annum and is payable at the time
        the
        note is paid in full. The note was payable when a proposed offering of the
        Company’s securities, with the note holder as placement agent, closes, or, in
        the event that the proposed offering did not close on or before the close
        of
        business on October 31, 2006, the note is payable thirty days after demand
        for
        payment from the holder. This note was not convertible. The note holder agreed
        to accept 1,828,517 shares of the Company’s common stock at the then current
        stock price as payment of the principal balance and accrued interest of $26,613.
        Accordingly no gain or loss was recognized for this transaction. These shares
        were issued December 4, 2006
  F-21
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 On
        May
        15, 2006 the Company entered into a promissory note with a shareholder for
        $1,000,000. Interest accrues at 12% per annum, payable monthly, with the
        first
        interest payment of $10,000 due June 5, 2006. The principal is payable in
        one
        installment on November 15, 2007. The note holder has the right to convert
        the
        note to the Company’s common stock at the greater of a per share price equal to
        80% of the average closing bid price of the stock for 10 days preceding the
        conversion date or $0.20. These conversion terms are pursuant to an amendment
        of
        September 28, 2006. Prior to the amendment, the embedded conversion option
        qualified as a derivative since the conversion rate was variable as there
        was no
        floor on the conversion price (see further discussion in Note 8). Accordingly,
        pursuant to FASB 155, the Company recorded this note at its fair value of
        $1,000,000 as of the issuance date. Unamortized debt discount as of December
        31,
        2006 is $52,439.
 
 On
        August
        28, 2006 the Company entered into a one-month non-convertible promissory
        note
        with a director of the Company for $150,000. Interest on this note accrues
        at
        the rate of 12%. On September 28, 2006 the promissory note was extended an
        additional 30 days with both principal and accrued interest for two months
        due
        by October 28, 2006. This note has been paid as of December 31,
        2006.
 
 During
        August 2006, the Company entered into unsecured eighteen-month convertible
        promissory notes totaling $486,000. Interest accrues at 12% per annum, payable
        monthly, until the maturity of these notes at which time the principal is
        due.
        The note holder has the right to convert the note to the Company’s common stock
        at the greater of a per share price equal to 80% of the average closing bid
        price of the stock for 10 days preceding the conversion date or $0.20. During
        September 2006 and October 2006, note holders converted $156,000 and $330,000
        respectively, of the notes into the Company’s common stock.
 
 During
        September 2006, the Company entered into unsecured eighteen-month convertible
        promissory notes totaling $240,000. Interest accrues at 12% per annum, payable
        monthly, until the maturity of these notes at which time the principal is
        due.
        The note holder has the right to convert the note to the Company’s common stock
        at the greater of a per share price equal to 80% of the average closing bid
        price of the stock for 10 days preceding the conversion date or $0.20. During
        September 2006 and October 2006, note holders converted $10,000 and $130,000,
        respectively, of the notes into the Company’s common stock. Unamortized debt
        discount as of December 31, 2006 is $40,378.
 
 During
        October 2006, the Company entered into unsecured eighteen-month convertible
        promissory notes totaling $3,205,000. Interest accrues at 12% per annum,
        payable
        monthly, until the maturity of these notes at which time the principal is
        due.
        The note holder has the right to convert the note to the Company’s common stock
        at the greater of a per share price equal to 80% of the average closing bid
        price of the stock for 10 days preceding the conversion date or $0.20. During
        October 2006, note holders converted $2,655,000 of the notes into the Company’s
        common stock. Unamortized debt discount as of December 31, 2006 is
        $212,925.
 
 **Note
        6 Commitments and Contingencies**
 
 **(A)
        Legal Matters**
  F-22
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 The
        Company may be involved in certain legal actions arising from the ordinary
        course of business. While it is not feasible to predict or determine the
        outcome
        of these matters, the Company does not anticipate that any of these matters
        or
        these matters in the aggregate will have a material adverse effect on the
        Company's business or its financial position or results of
        operations.
 
 **(B)
        Royalty and license fee Agreements**
 
 There
        are
        no commitments owed under royalty and license fee agreements.
  **(C)
        Employment Agreements**
 
 **Chief
        Executive Officer, President and Chairman of the Board of
        Directors**
 On
        December 12, 2005, the Company executed an agreement with the Chief Executive
        Officer/President and Chairman of the Board of Directors (“CEO”) that expires
        November 21, 2008. The CEO’s annual salary is $275,040. The CEO is eligible to
        receive a one-time sign-on bonus of $100,000 upon completion of an equity
        round
        of financing. The CEO is also eligible for annual bonuses with a minimum
        15%
        bonus of his salary and the potential to receive up to 100% bonus of his
        salary.
        In the first year, the CEO will receive a minimum bonus of $100,000. The
        Company
        granted five-year options to purchase two million shares of its common stock
        at
        an exercise price of $0.01 per share. This agreement was terminated in August
        2006 by mutual agreement.
 
 **Corporate
        Secretary, General Counsel and Executive Vice President of Corporate
        Development**
 On
        December 12, 2005, the Company executed an agreement with the Corporate
        Secretary, General Counsel and Executive Vice President of Corporate Development
        (“Corporate Secretary”) that expires November 21, 2008. The Corporate
        Secretary’s annual salary is $180,000. The Corporate Secretary is eligible to
        receive a one-time sign-on bonus of $50,000 upon completion of an equity
        round
        of financing. The Corporate Secretary is also eligible for annual bonuses
        with a
        minimum 25% bonus of his salary and the potential to receive up to 50% bonus
        of
        his salary.
 
 **Chief
        Financial Officer**
 On
        December 16, 2003, the Company executed a three-year employment agreement
        that
        is effective January 1, 2004 with its Chief Financial Officer (CFO). On October
        6, 2004, the Compensation Committee of the Board of Directors authorized
        an
        increase in the CFO’s salary to $180,000 effective November 1, 2004.
 
 On
        October 6, 2004, the Compensation Committee of the Board of Directors also
        granted the CFO 375,000 shares of Series A Convertible Preferred stock and
        1,500
        shares of Series B Convertible Preferred stock in the following increments:
        125,000 Series A shares and 500 Series B shares on or about January 1, 2006;
        125,000 Series A shares and 500 Series B shares on or about July 1, 2006,
        and
        125,000 Series A shares and 500 Series B shares on or about December 31,
        2006.
        These shares will be issued with the provision that the CFO has not terminated
        his employment voluntarily prior to the issuance of the shares. The 375,000
        shares of Series A Convertible Preferred Stock are valued at $1.00 per share
        based on contemporaneous cash sales during 2004. The total value of these
        Series
        A shares is $375,000 and is being expensed over the term of the CFO’s employment
        agreement. The 1,500 shares of Series B Convertible Preferred Stock are valued
        at $270 per share based on contemporaneous cash sales during 2004 of common
        stock multiplied times the conversion ratio of 1,000. The total value of
        these
        Series B shares is $405,000 and is being expensed over the term of the CFO’s
        employment agreement. During January 2006, the Company issued 500 shares
        of its
        Series B Convertible Preferred stock and 125,000 shares of its Series A
        Convertible Preferred stock to the CFO in accordance with this agreement.
        During
        July 2006, the Company was to issue 500 shares of its Series B Convertible
        Preferred stock and 125,000 shares of its Series A Convertible Preferred
        stock
        to the CFO in accordance with this agreement. In lieu this Convertible A
        and B
        Preferred stock, the Company issued 1,250,000 of its Common Stock.
  F-23
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 On
        December 31, 2006, Mr. Chandler’s employment contract expired and he is
        currently an at-will employee.
 
 **Director
        of Government Sales**
 On
        November 4, 2005, the Company executed a one-year employment agreement with
        the
        Director of Government Sales. He will be paid $15,000 per month for January
        and
        February 2006 and then will be paid an annual salary of $150,000 until the
        Company has the RediAlert(TM) or RediDMS(TM) products produced at which time
        his
        annual salary shall be reduced to $125,000. He is also eligible to receive
        sales
        commissions. In addition, the employee is eligible for a bonus of 500,000
        shares
        of the Company’s common stock if the employee exceeds his sales target and is
        employed at the end of the one-year agreement term. In November 2006 this
        contract expired and was not renewed.
 
 **Director
        of Administration**
 In
        accordance with the Director of Administration’s employment agreement, he is
        paid an annual salary of $75,000 and a stock bonus of the Company’s registered
        common stock equal in value to $25,000 within two and one-half months after
        the
        end of each year of employment during which he was employed by the Company.
        The
        employment agreement expires May 21, 2008. At December 31, 2006, the Company
        had
        accrued $25,000 related to the common stock bonus that is to be issued per
        his
        agreement for his 2006 service period.
 
 **(D)
        Leases**
 
 On
        October 15, 2004 the Company signed a lease with Safety Harbor Centre commencing
        December 1, 2004 for five years leasing an office suite at a monthly rental
        of
        $2,814 (plus a pro rata share of common area maintenance and taxes).
 
 Effective
        November 11, 2005, the Company relocated its corporate home office to 600
        NW
        14th Avenue, Suite 100, Portland, Oregon 97209. The Company retains a field
        office in Safety Harbor, Florida. In October 2005, the Company signed a lease
        with Market Place I & II, LLC to lease 7,500 square feet of office space at
        600 NW 14th Avenue, Suite 100, Portland, Oregon 97209 beginning November
        1, 2005
        through December 31, 2010, which lease is renewable for an additional five
        years
        at the option of the Company. The initial monthly base rent is $9,062.50
        for
        December 2005 through October 2007, thereafter the rent increases
        slightly.
  F-24
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 Future
        minimum lease payments under these leases are as follows:
 
 Year
                  Ending December 31,2007
              
              
              152,0002008
              
              
              171,0002009
              
              
              175,0002010
              
              
              143,000$
              641,000
 
 Rental
        expense was $295,863 and $184,600 in 2006 and 2005, respectively, included
        in
        selling, general and administrative on the statement of operations.
 
 **(E)
        Consulting Agreements**
  In
        February 2006, the Company entered into an agreement with a consultant to
        provide research and development services. For these services, the Company
        pays
        a monthly fee of $50,000 over a one-year period. In October 2006 this agreement
        was modified to change the monthly fee to $15,000 and extend the term of
        the
        agreement for a period of one year from the date of the
        modification.
 
 In
        April
        2006, the Company entered into an agreement with a consultant to provide
        research and development services. For these services, the Company pays a
        monthly fee of $15,000 over a one year period. In October 2006 this agreement
        was modified to change the monthly fee to $25,000 and extend the term of
        the
        agreement for a period of one year from the date of the
        modification.
 
 In
        June
        2006, the Company entered into an agreement with a consultant to provide
        sales
        and marketing services. For these services, the Company pays a monthly fee
        of
        $15,000. This agreement was terminated in December 2006
 
 In
        July
        2006, the Company entered into an investor relations agreement for which
        the
        Company agreed to pay monthly fees of $10,000 plus expenses and to grant
        options
        for the purchase of up to 200,000 shares of the Company’s common stock at
        exercise prices ranging from $0.60 to $1.05 per share.
 
 **Note
        7 Stockholders’ Equity**
 
 **(A)
        Convertible Preferred Stock Series A**
 
 The
        Company designated 5,000,000 shares of preferred stock as new Series A
        Convertible Preferred Stock (“Series A”). The Series A is convertible to common
        shares on a four-for-one basis, is due dividends at $0.10 per share as
        authorized by the Board, has a liquidation value of $1.00 per share and has
        equivalent voting rights as common shares on a share for share basis. Once
        the
        Series A shares have been issued, they cannot be reissued.
  F-25
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        the year ended December 31, 2005, the Company converted 1,126,487 shares
        of the
        Company’s Series A convertible preferred stock into 4,505,948 shares of the
        Company’s common stock at the request of certain Series A convertible preferred
        stock holders.
 
 During
        2005, the Company issued 240,000 shares of its Series A convertible preferred
        stock to its CFO in accordance with his employment agreement. The 240,000
        shares
        were valued at $1.00 per share based on contemporaneous cash sales around
        the
        grant date. The total value of these shares of $240,000 is being expensed
        over
        the three-year employment agreement with $80,000 deferred and $160,000 expensed
        as of December 31, 2005.
 
 During
        2005, the Company recorded Series A convertible preferred stock dividends
        of
        $201,895.
 
 During
        2006, the Company issued 250,000 shares of its Series A convertible preferred
        stock to its Chief Financial Officer in accordance with his employment
        agreement. The 250,000 shares of Series A convertible preferred stock were
        valued at $1.00 per share based on contemporaneous cash sales around the
        grant
        date. The value of these shares of $250,000 was expensed over the requisite
        service period through December 2006. During July 2006, the 125,000 shares
        of
        Series A convertible preferred were converted into 625,000 shares of the
        Company’s common stock at the conversion ratio of four common plus one bonus
        share for each share of Series A Preferred. The balance of 125,000 shares
        due
        was issued and immediately converted into 625,000 shares of the Company’s common
        stock using the same conversion ratio and included in the statement of changes
        in stockholders equity in “series A Preferred stock issued for service of
        employees”.
 
 During
        2006, the Company converted 24,000 shares of Series A convertible preferred
        stock into 96,000 shares of the Company’s common stock at the request of certain
        Series A convertible preferred stock holders.
 
 During
        2006, the Company converted 1,896,175 shares of the Company’s Series A
        convertible preferred stock into 9,480,875 shares of the Company’s common stock
        at the request of certain Series A convertible preferred stock holders. The
        conversion ratio was four common shares plus one common bonus share for each
        share of Series A Preferred. The Company also converted accrued dividends
        of
        approximately $167,405 into 837,023 shares of the Company’s common stock at a
        per share price of $0.20 for those shareholders who elected to convert accrued
        dividends to common shares.
 
 During
        2006, the Company recorded Series A convertible preferred stock dividends
        of
        $49,801.
 
 **(B)
        Convertible Preferred Stock Series B**
 
 On
        February 3, 2004, the Company’s board of directors designated 30,000 shares of
        preferred stock as Series B Convertible Preferred Stock (“Series B”). The Series
        B is convertible to common shares on a one thousand-for-one ratio, is due
        dividends at $1 per share, payable quarterly, as authorized by the Board
        and the
        dividends are cumulative. Series B has a liquidation value of $240 per share
        and
        has voting rights of one thousand votes per Series B share. Once the Series
        B
        shares have been issued, they cannot be reissued. On the Balance Sheet, the
        shares issued are higher than the shares outstanding due to the conversion
        of
        the Series B to common stock.
  F-26
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        2006, the Company issued 1,000 shares of Series B convertible preferred stock
        to
        its Chief Financial Officer in accordance with his employment agreement.
        The
        1,000 shares of Series B convertible preferred stock were valued at $270
        per
        share based on contemporaneous cash sales around the grant date. The value
        of
        these shares of $270,000 was expensed over the requisite service period.
        During
        2006, 500 shares of Series B convertible preferred were converted into 625,000
        shares of the Company’s common stock at the conversion ratio of 1,000
        common shares plus 250 common bonus shares for each share of Series B
        Preferred. The balance of 500 shares due was issued and immediately converted
        into 625,000 shares of the Company’s common stock using the same conversion
        ratio and included in the statement of changes in stockholders equity in
“Series
        B Preferred stock issued for services of employee”..
  During
        2006, the Company recorded and paid Series B convertible preferred stock
        dividends of $125 and reversed prior accrued dividends payable of $17,900
        per
        agreement with the Series B stockholders due to the conversion of the preferred
        stock for a net effect of $17,776.
 
 **(C)
        Common Stock Dividend Restrictions**
 
 There
        is
        a restriction on the common stock dividends as any cumulative preferred stock
        dividends are required to be paid prior to any common stock dividends being
        paid. Also, the retained earnings of the Company would be restricted upon
        an
        involuntary liquidation by the cumulative unpaid preferred dividends to the
        preferred stockholders and for the $1 per share Series A and $240 per share
        Series B liquidation preferences.
  **(D)
        Common Stock Issuances**
 
 During
        April 2005, the landlord who had held 200,000 shares of the Company’s common
        stock which were held contingent on payment of the rent returned the shares
        to
        the Company and the shares were cancelled. These shares had properly not
        been
        included as outstanding shares in the Company’s financial statements since they
        were contingently returnable as collateral shares, therefore there was no
        financial accounting effect of this transaction.
 
 During
        2005, warrants and options were exercised to purchase 605,000 of the Company’s
        common stock. The Company received $161,750 of proceeds from these exercises
        of
        warrants and options.
 
 During
        2005, the Company issued 200,000 shares of its common stock that it had recorded
        an accrued liability of $54,000 for at December 31, 2004.
  F-27
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        2005, the Company issued 28,751 shares of its common stock to an employee
        in
        accordance with his employment agreement. These shares were valued at $25,000
        using a thirty-day average price at December 31, 2004, in accordance with
        the
        employee’s employment agreement.
 
 During
        2005, the current Director of Government Sales and previous CEO/President
        received an additional 2.1 million shares of the Company’s common stock and the
        vehicle allowance was increased. Also, the current Director of Government
        Sales
        and previous CEO/President relinquished certain rights he had to revenue
        which
        he had previously been entitled to per his contract. The 2.1 million shares
        were
        valued at $0.27 per share totaling $567,000 based on contemporaneous cash
        sales
        and will be recorded as compensation expense over the remaining term of his
        employment agreement. During November 2005, this employee returned 1,500,000
        of
        the shares of stock as a new employment agreement was entered into. The Company
        paid him a nominal $15,000 for those shares. $390,000 of the previous
        compensation recorded was reversed and $177,000 total compensation expense
        was
        recorded for the shares issued to this employee during 2005.
 
 The
        current CEO was to receive 1.5 million shares of Company stock in accordance
        with his initial employment agreement entered into in early 2005, plus
        additional stock awards throughout his employment agreement. The total value
        of
        the awards as measured on the grant date was $1,350,000 based on a $0.27
        per
        share contemporaneous cash sales price of which $961,875 was recorded as
        compensation expense during 2005. The shares were never issued and during
        December 2005, the Company entered into a new agreement which replaced the
        prior
        agreement and eliminated any stock awards. In accordance with APB 25 and
        related
        interpretations, the $961,875 of compensation expense for the stock was
        reversed.
 
 During
        the third quarter of 2005, the Company issued 7,500 shares of its common
        stock
        for the purchase of the website, www.onscreentechnologies.com .
        These
        shares were valued at $3,000 using the quoted market price on the date of
        grant
        and were recorded as administrative expenses during 2005.
 
 During
        the year ended 2005, the Company granted 150,000 shares of its common stock
        for
        investor relation services. These shares were valued at $30,000 based upon
        the
        quoted market price of the stock on the date of grant and were recorded as
        administrative expenses during 2005.
 
 During
        the year ended 2005 the Company issued 800,000 shares of its common stock
        to
        several note holders who were eligible to receive 100,000 shares of common
        stock
        based upon the issuance of convertible notes payable which equal or exceed
        $500,000. These shares were valued at $215,275 based upon the allocation
        of the
        $4,000,000 proceeds to debt and equity based upon their fair market values.
 
 The
        intrinsic value related to the convertible feature of the convertible debt
        that
        was issued during 2005 was valued at $1,778,436 and is being amortized over
        the
        three-month term of the notes.
  F-28
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        2006, the Company issued 100,000 shares of its common stock for investor
        relation services. These shares were valued at $20,000 based upon the $ 0.20
        per
        share quoted market price of the stock on the date of grant and were recorded
        as
        administrative expenses during 2006
 
 During
        2006, the Company issued 113,883 shares of its common stock to an employee
        in
        accordance with his employment agreement. These shares were valued at $25,000
        using a thirty-day average price of $0.2195 per share at December 31, 2005,
        in
        accordance with the employee’s employment agreement.
 
 During
        2006, the Company converted $10,300,000 of convertible unsecured notes into
        41,200,000 shares of its common stock at $0.25 per share. Related debt discounts
        of $1,012,102 for convertible debt with no beneficial conversion feature
        at the
        issuance date were charged to additional paid in capital.
 
 During
        2006, warrants for 7,775,000 shares of its common stock at a price of $0.01
        were
        exercised. The Company issued 7,775,000 of these shares.
 
 During
        2006, the Company converted $3,281,000 of convertible unsecured notes into
        11,532,863 shares of its common stock at prices ranging from $0.27 to $0.30
        per
        share.
 
 During
        2006, warrants for 220,858 shares of its common stock at a price of $0.01
        were
        exercised. The Company issued 220,858 of these shares.
 
 During
        2006 warrants for 940,000 shares of the Company’s common stock issued to former
        employees were exercised at a price of $0.01 per share.
 
 During
        2006 the Chief Financial Officer exercised a warrant for 100,000 shares of
        the
        Company’s common stock at a price of $0.25 per share.
 
 During
        2006, the Company issued 500,000 shares of its common stock at $0.20 per
        share
        under its Employee Equity Ownership agreements.
 
 During
        2006 the Company issued 1,828,517 shares of common stock as payment of $526,613
        principal and interest due to a noteholder.
 
 During
        2006, the Company issued 100,000 shares of its common stock for sales and
        marketing services. These shares were valued at $20,000 based on the quoted
        market price of the stock on the date of grant and were recorded as consulting
        expenses during 2006
 
 The
        Company reclassified $469,112 from a liability account based upon employment
        agreements that the requisite service had been performed by January 1, 2006
        when
        the Company implemented SFAS 123(R). It had previously been recorded as accrued
        expenses payable with common stock recorded on the balance sheet. The Company
        also recorded an additional $222,563 of compensation expense for stock that
        is
        to be issued based upon employment agreements that the requisite service
        had
        been performed as of December 31, 2006. The total amount is included in the
        statement of changes in stockholders’ equity in “common stock issued for
        services, and compensation.
  F-29
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        the year ended December 31, 2006, the Company recorded consulting expense
        of
        $340,840 for stock warrants for non-employees to acquire 698,001 shares of
        the
        Company’s common stock. The $340,840 of consulting expense was expensed during
        2006 as the services had been provided. The $340,840 value was based upon
        fair
        market value of the options using the Black Scholes option model.
 
 On
        June
        29, 2006, the Company obtained shareholder approval to increase the number
        of
        authorized common stock shares from 150,000,000 to 200,000,000.
 
 **(E)
        Non-Employee Stock Warrants**
 
 During
        2004 the Company granted warrants to purchase 1,395,736 shares of the Company’s
        common stock to certain service providers at exercise prices ranging from
        $0.25
        to $0.50. These warrants were valued at an aggregate of $707,352 and are
        recognized as consulting expense over the period of each consultant’s agreement.
        These warrants were valued using the Black-Scholes Options Pricing Model
        using
        the following assumptions: expected life of 90 days - 3 years, volatility
        of 79%
        - 309%, zero expected dividends and a discount rate of 0.85% to 2.03%. At
        December 31, 2006, 75,000 of these warrants are outstanding.
 
 During
        2005, the Company granted a warrant to purchase 20,000 shares of its common
        stock for legal services at an exercise price of $0.75. This warrant was
        valued
        at $15,000 using the Black-Scholes option pricing model with a six-month
        expected life, volatility of 73%, zero expected dividends and a discount
        rate of
        2.61% and the $15,000 was charged to administrative expense. This warrant
        was
        exercised during 2005 .
 
 During
        2006 two directors of the Company were granted a total of 200,000 options.
        The
        exercise prices are $0.20 for 100,000 of the options and $0.61 for 100,000
        options. The Company recorded an intrinsic value of $62,000 related to these
        stock options. These warrants were valued using the Black-Scholes Options
        Pricing Model using the following assumptions: expected life of 3 years,
        volatility of 131% - 137%, zero expected dividends and a discount rate of
        4.69%
        to 4.70%.
 
 During
        2006 warrants to purchase 11,222,629 shares of the Company’s common stock were
        granted in connection with the conversion of convertible debt. These warrants
        have an exercise price of $0.01. As of December 31, 2006 7,995,858 shares
        of the
        Company’s common stock have been issued for the exercise of these warrants and
        included in the statement of stockholders equity in “Common stock issued for
        options and warrants exercised in exchange for cash and accrued compensation”.
        These warrants were valued and expensed at $2,117,256 using the Black-Scholes
        Options Pricing Model using the following assumptions: expected life of 3
        years,
        volatility of 99.7% - 151.0%, zero expected dividends and a discount rate
        of
        4.70% to 5.00%.
  F-30
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        2006 the Company granted warrants to purchase 6,800,000 shares of the Company’s
        common stock as part of a settlement agreement with Fusion Three, LLC. These
        shares exercise prices are $0.20 for 5,600,000 shares, $0.35 for 300,000
        shares,
        $0.50 for 300,000 shares, $0.75 for 300,000 shares and $1.00 for 300,000
        shares.
        These warrants were valued at $2,780,000 using the Black-Scholes Options
        Pricing
        Model using the following assumptions: expected life of 1.58 - 3 years,
        volatility of 130.0% - 151.4%, zero expected dividends and a discount rate
        of
        4.86% to 4.88%. A settlement loss of $2,780,000 was recognized.
 
 During
        2006 the Company granted warrants for 628,001 shares of the Company’s common
        stock to various consultants in exchange for services provided. These warrants
        have exercise prices ranging from $0.01 to $0.33. These warrants were valued
        and
        expensed at $286,640 using the Black-Scholes Options Pricing Model using
        the
        following assumptions: expected life of 1 - 3 years, volatility of 124.2%
        -
        159.5%, zero expected dividends and a discount rate of 4.58% to 5.05%. Warrant
        expense was recognized at date of grant. As of December 31, 2006 100,000
        shares
        of the Company’s common stock has been issued for the exercise of these
        warrants.
 
 During
        2006 the Company granted warrants for 1,600,000 shares of the Company’s common
        stock in payment of financing fees. The exercise price for these warrants
        is
        $0.20. These warrants were valued and expensed at $768,000 using the
        Black-Scholes Options Pricing Model using the following assumptions: expected
        life of 5 years, volatility of 152.2%, zero expected dividends and a discount
        rate of 4.95%. Warrant expense was recognized at date of grant.
 
 During
        2006 the Company granted warrants to purchase 7,040,485 shares of the Company’s
        common stock as part of the purchase of the Waycool patent rights. The warrants
        exercise price is $0.20. These warrants were valued at $3,520,243 using the
        Black-Scholes Options Pricing Model using the following assumptions: expected
        life of 3 years, volatility of 131.4%, zero expected dividends and a discount
        rate of 4.69%. The value of the warrants is included in Technology
        Rights.
 
 A
        summary
        of the warrants issued to non-employees for services as of December 31, 2006
        and
        2005 and changes during the years is presented below:
 
 2006
              
              2005Number
                  of Warrants
              
              Weighted
                  Average Exercise Price
              
              Number
                  of Warrants
              
              Weighted
                  Average Exercise PriceBalance
                  at beginning of period
              
              
              75,000
              
              $
              0.25
              
              
              2,150,000
              
              $
              0.55Granted
              
              
              28,171,115
              
              $
              0.14
              
              
              20,000
              
              $
              0.75Exercised
              
              
              (8,095,858
              )
              $
              0.01
              
              
              (595,000
              )
              $
              0.27Forfeited
              
              
              -
              
              $
              -
              
              
              (1,500,000
              )
              $
              0.69Balance
                  at end of period
              
              
              20,150,257
              
              $
              0.19
              
              
              75,000
              
              $
              0.25Warrants
                  exercisable at end of period
              
              
              20,150,257
              
              $
              0.19
              
              
              75,000
              
              $
              0.25Weighted
                  average fair value of warrants granted during the period
              
              
              
              
              $
              0.37
              
              
              
              
              $
              0.75
  F-31
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        2005, warrants to purchase 1.5 million shares of the Company’s common stock
        expired during the year and are recorded as forfeited in the table
        above.
 
 The
        following table summarizes information about non-employee stock warrants
        outstanding that were issued for services at December 31, 2006:
 
 Warrants
                  Outstanding and ExercisableRange
                  of Exercise Price
              
              Number
                  Outstanding at December 31, 2006
              
              Weighted
                  Average Remaining Contractual Life
              
              Weighted
                  Average Exercise Price$
              0.01
              
              
              4,356,771
              
              
              0.50
                  Years
              
              $
              0.010.20
              
              
              14,340,485
              
              
              1.78
                  Years
              
              
              0.200.25
              
              
              123,001
              
              
              0.01
                  Years
              
              
              0.250.33
                  - 0.35
              
              
              330,000
              
              
              0.04
                  Years
              
              
              0.350.50
                  - 1.00
              
              
              1,000,000
              
              
              0.11
                  Years
              
              
              0.74
 
 **(F)
        Employee Stock Options and Warrants**
 
 On
        January 1, 2006, the Company implemented Statement of Financial Accounting
        Standard 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment” which
        replaced SFAS 123 “Accounting for Stock-Based Compensation” and superseded APB
        Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires
        the fair value of all stock-based employee compensation awarded to employees
        to
        be recorded as an expense over the related vesting period. The statement
        also
        requires the recognition of compensation expense for the fair value of any
        unvested stock option awards outstanding at the date of adoption. During
        2006,
        all employee stock compensation is recorded at fair value using the Black
        Scholes Pricing Model. In adopting SFAS 123(R), the Company used the modified
        prospective application (“MPA”). MPA requires the Company to account for all new
        stock compensation to employees using fair value and for any portion of awards
        prior to January 1, 2006 for which the requisite service has not been rendered
        and the options remain outstanding as of January 1, 2006, the Company recognized
        the compensation cost for that portion of the award the requisite service
        was
        rendered on or after January 1, 2006. The fair value for these awards is
        determined based on the grant-date. As of January 1, 2006, accrued compensation
        payable in common stock of $469,112 previously classified as a liability
        was
        reclassified as equity due to the implementation of SFAS 123(R).
  F-32
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 On
        June
        26, 2000, the Company’s Board of Directors adopted the OnScreen Technologies,
        Inc. 2000 Stock Option Plan (the “Plan”). The Plan provides for the issuance of
        incentive stock options (ISO’s) to any individual who has been employed by the
        Company for a continuous period of at least six months. The Plan also provides
        for the issuance of Non Statutory Options (NSO’s) to any employee who has been
        employed by the Company for a continuous period of at least six months, any
        director, or consultant to the Company. The Company may also issue reload
        options as defined in the plan. The total number of common shares of common
        stock authorized and reserved for issuance under the Plan is 600,000 shares.
        The
        Board shall determine the exercise price per share in the case of an ISO
        at the
        time an option is granted and such price shall be not less than the fair
        market
        value or 110% of fair market value in the case of a ten percent or greater
        stockholder. In the case of an NSO, the exercise price shall not be less
        than
        the fair market value of one share of stock on the date the option is granted.
        Unless otherwise determined by the Board, ISO’s and NSO’s granted under the Plan
        have a maximum duration of 10 years.
 
 On
        August
        25, 2005, the Board of Directors approved the 2005 Equity Incentive Plan
        (“2005
        Plan”) for 2,000,000 shares of the Company’s common stock. The 2005 Plan
        provides for the issuance of stock options to attract, retain and motivate
        employees, to encourage employees, directors and independent contractors
        to
        acquire an equity interest in the Company, to make monetary payments to certain
        employees based upon the value of the Company’s stock and provide employees,
        directors and independent contractors with an incentive to maximize the success
        of the Company and to further the interest of the shareholders. The 2005
        Plan
        provides for the issuance of Incentive Stock Options and Non Statutory Options.
        The Administrator of the plan shall determine the exercise price per share
        at
        the time an option is granted but the exercise price shall not be less than
        the
        fair market value on the date the options is granted. Stock options granted
        under the 2005 Plan have a maximum duration of 10 years. At December 31,
        2006,
        there were 1,737,500 shares available under the 2005 Stock Plan.
 
 During
        2005, the Company repriced options to a former employee to purchase 1,050,000
        shares of its common stock that previously had exercise prices ranging from
        $0.25 to $0.35 per share to an exercise price of $0.20 per share. The Company
        recorded $38,500 of compensation expense and additional paid-in-capital related
        to this transaction. During 2006 500,000 of these options were exercised
        and
        550,000 were forfeited.
 
 During
        2005, the Company granted stock options to various employees to purchase
        182,500
        shares of its common stock after vesting periods that range from immediately
        to
        1 year. The exercise prices range from $0.25 to $1.00 and the fair value
        of the
        Company’s stock ranged from $0.27 to $0.32 based on contemporaneous cash sales
        if there were any or the quoted market value of the Company’s common stock on
        the dates of grant. The Company recorded an intrinsic value of $150 related
        to
        these stock options.
 
 During
        2005, the Company granted stock options from the 2005 Plan to various employees
        to purchase 265,000 shares of its common stock vesting periods that range
        from
        immediately to two years. The exercise prices are $0.25 and the quoted market
        value of the Company’s common stock ranged from $0.21 to $0.25 on the dates of
        grant. The intrinsic value of these grants was -0-, therefore no expense
        was
        recognized related to these stock options.
  F-33
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        2005, a member of the Board of Directors was granted a three-year warrant
        to
        purchase 100,000 shares of the Company’s common stock with an exercise price of
        $0.75 for services provided. The exercise price exceeded the fair value of
        common stock based on contemporaneous common stock cash sales during 2004;
        therefore no compensation expense was recorded as there was no intrinsic
        value.
 
 During
        2005, the Chief Executive Officer was granted a five-year warrant to purchase
        2,000,000 shares of the Company’s common stock with an exercise price of $0.01
        for services provided. The Company recorded an intrinsic value of $400,000
        related to these stock options as the quoted market value of the Company’s
        common stock of $0.21 on the date of grant exceeded the exercise price of
        $0.01.
 
 During
        2006 two directors of the Company were granted a total of 200,000 options
        at an
        exercise price of $0.20. The Company expensed the fair market value of $32,000
        related to these stock options. These warrants were valued at $32,000 using
        the
        Black-Scholes Options Pricing Model using the following assumptions: expected
        life of 3 years, volatility of 136.7%, zero expected dividends and a discount
        rate of 4.69%. Warrant expense was recognized at date of grant.
 
 During
        2006, the Chief Executive Officer was granted a five-year warrant to purchase
        5,040,485 shares of the Company’s common stock with an exercise price of $0.01
        for services provided. These shares were not vested at the time the Chief
        Executive Officer left the Company and have been forfeited. No value was
        recorded for these shares
 
 During
        2006 the Company granted stock options from the 2005 Plan to various employees
        to purchase 455,000 shares of its common stock with vesting periods that
        range
        from 18 months to two years. The exercise prices range from $0.35 to $0.63
        based
        on the quoted market value of the Company’s common stock on the dates of grant.
        The fair market value of these stock options is being amortized over the
        life of
        the option. Amortization expense of $47,661 was recognized in 2006. These
        warrants were valued using the Black-Scholes Options Pricing Model using
        the
        following assumptions: expected life of 3 - 5 years, volatility of 138.8%
        -
        185.2%, zero expected dividends and a discount rate of 4.71% to
        5.12%.
 
 During
        2006 six employees were granted a total of 3,062,000 options with an exercise
        price of $0.01 and various vesting dates. As of December 31, 2006 1,056,000
        of
        these options had been forfeited and 940,000 had been exercised. As of December
        716,000 of these options are fully vested. The remaining 350,000 options
        are
        unvested as of December 31, 2006. The Company expensed the fair market value
        of
        $1,010,400 related to the remaining vested stock options. These warrants
        were
        valued using the Black-Scholes Options Pricing Model using the following
        assumptions: expected life of 1 - 3 years, volatility of 130.3% - 163.1%,
        zero
        expected dividends and a discount rate of 4.79% to 5.22%.
 
 During
        2006, the Company recorded compensation expense of $1,090,061 for stock options
        that the requisite service was performed during the year ended December 31,
        2006. The compensation expense is recorded over the vesting period based
        upon
        fair market value of the options using the Black Scholes option model in
        accordance with SFAS 123(R) as discussed in section (I) - Employee Stock
        Options
        and Warrants.
  F-34
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 A
        summary
        of the warrants and options issued to employees as of December 31, 2006 and
        2005
        and changes during the year are presented below:
 
 2006
              
              2005Number
                  of Warrants and Options
              
              Weighted
                  Average Exercise Price
              
              Number
                  of Warrants and Options
              
              Weighted
                  Average Exercise PriceBalance
                  at beginning of period
              
              
              6,112,500
              
              $
              0.19
              
              
              5,810,000
              
              $
              0.28Granted
              
              
              8,757,485
              
              
              0.04
              
              
              2,547,500
              
              
              0.12Exercised
              
              
              (1,540,000
              )
              
              0.08
              
              
              (10,000
              )
              
              0.30Expired
              
              
              (1,433,750
              )
              
              0.31
              
              
              (100,000
              )
              
              0.25Forfeited
              
              
              (6,432,735
              )
              
              0.03
              
              
              (2,135,000
              )
              
              0.28Balance
                  at end of period
              
              
              5,463,500
              
              $
              0.14
              
              
              6,112,500
              
              $
              0.19Warrants
                  and options exercisable at end of period
              
              
              4,978,500
              
              $
              0.14
              
              
              5,961,250
              
              $
              0.19
 
 A
        summary
        of nonvested warrants and options issued to employees as of December 31,
        2006 is
        presented below.
 
 **Weighted****Average****Grant****Date****Nonvested
                  Shares**
              
              **Shares**
              
              **Fair
                  Value**Nonvested
                  at January 1, 2006
              
              
              151,250
              
              
              0.23Granted
              
              
              8,757,485
              
              
              0.36Vested
              
              
              (1,991,000
              )
              
              0.55Forfeited
              
              
              (6,432,735
              )
              
              0.3Nonvested
                  at December 31, 2006
              
              
              485,000
              
              
              0.45
 
 The
        weighted average fair value of warrants and options granted during the periods
        are as follows:
  F-35
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
   2006
                  
                  
                  2005Exercise
                    price lower than the market
                    price
                  
                  $
                  0.36
                  
                  $
                  0.21Exercise
                    price equaled the market
                    price
                  
                  $
                  0.52
                  
                  $
                  0.19Exercise
                    price exceeded the market
                    price
                  
                  $
                  0.16
                  
                  $
                  0.19
 
 The
        fair
        value of warrants granted during 2006 was estimated on the dates of the grants
        using the following approximate assumptions: dividend yield of 0%, expected
        volatilities of 130% - 202%, risk-free interest rates of 4.41% - 5.52%, and
        expected lives of 1 year to - 5 years.
 
 The
        fair
        value of warrants granted during 2005 was estimated on the dates of the grants
        using the following approximate assumptions: dividend yield of 0%, expected
        volatilities of 145% - 205%, risk-free interest rates of 3.72% - 4.46%, and
        expected lives of 3 months to - 5 years.
 
 The
        following table summarizes information about employee stock warrants and
        options
        outstanding at December 31, 2006:
 
 Warrants
                  and Options Outstanding
              
              Warrants
                  and Options ExercisableRange
                of Exercise Price
              
              Number
                  Outstanding at December 31, 2006
              
              Weighted
                  Average Remaining Contractual Life
              
              Weighted
                  Average Exercise Price
              
              Number
                  Exercisable at December 31, 2006
              
              Weighted
                  Average Exercise Price$
              0.01
              
              
              3,066,000
              
              
              2.65
                  Years
              
              $
              0.01
              
              
              2,716,000
              
              $
              0.010.20
                  - 0.25
              
              
              2,060,000
              
              
              1.02
                  Years
              
              
              0.25
              
              
              2,035,000
              
              
              0.240.35
                  - 0.50
              
              
              55,000
              
              
              0.06
                  Years
              
              
              0.42
              
              
              35,000
              
              
              0.440.55
                  - 0.75
              
              
              282,500
              
              
              0.24
                  Years
              
              
              0.66
              
              
              192,500
              
              
              0.615,463,500
              
              
              3.98
                  Years
              
              $
              0.14
              
              
              4,978,500
              
              $
              0.14
 
 **NOTE
        8 DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS**
 
 On
        January 1, 2006, the Company implemented SFAS No. 155, “Accounting for Certain
        Hybrid Financial Instruments”. This statement allows the Company to elect fair
        value measurement of hybrid financial instruments on an instrument-by instrument
        basis in cases in which a derivative would otherwise have to be bifurcated.
 
 The
        Company does not use derivative financial instruments to hedge exposures
        to cash
        flow or market risks. However the promissory note entered into during the
        second
        quarter with a shareholder had an embedded conversion option to purchase
        the
        Company’s stock, with the number of shares indexed to the Company’s future stock
        price. Accordingly, the embedded conversion option qualified during the second
        quarter of 2006 as a derivative. This promissory note was amended on September
        28, 2006 to include a conversion to equity floor price per share of $0.20
        resulting in the promissory note no longer qualifying as a derivative financial
        instrument.
  F-36
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 If
        any of
        the derivatives could potentially result in the Company’s having indeterminable
        shares (i.e. from a conversion price that is indexed to the Company’s stock
        price), then, per the Emerging Issues Task Force (“EITF”) 00-19 Accounting for
        Derivative Financial Instruments Indexed to and Potentially Settled in, a
        Company’s own Stock the Company is required to classify all outstanding
        non-employee warrants or options at fair value as a derivative liability.
        The
        initial entry to record the derivative liability for these outstanding warrants
        is a reclassification from additional paid-in-capital of the fair value of
        the
        warrants as of the reclassification date (May 15, 2006). The reclassification
        value was $9,442,121 at May 15, 2006. During the period of derivative
        classification certain warrants were exercised resulting in a reclassification
        of $55,000 from liability to equity. At each subsequent reporting period,
        the
        Company continues to record these instruments at fair value as a derivative
        liability with any difference recorded as a change in the fair value of warrant
        liability under other income or expense in the Statement of Operations until
        such time as the Company no longer has an instrument with indeterminate shares.
        As of the nine months ended September 30, 2006, the Company no longer had
        any
        instruments with indeterminate shares. For the year ended December 31, 2006,
        a
        change in the fair value of warrant liability under other income and expense
        of
        $3,718,543 was recorded for derivative liabilities. As of September 28, 2006
        the
        balance of the warrant liability of $5,668,578 was reclassified to equity.
        The
        fair value was computed at June 30 2006 and at September 28, 2006 using the
        Black-Scholes option pricing model with the following assumptions:
 
 June
                  30, 2006
              
              September
                  28, 2006Expected
                  Volatility (based on historical volatility)
              
              
              120.7
              %
              
              122.7
              %Expected
                  Term (based on weighted average contractual term of
                  warrants)
              
              
              2.5
                  years
              
              
              2.5
                  yearsExpected
                  Dividends
              
              
              0
              
              
              0Discount
                  Rate
              
              
              5.130
              %
              
              4.600
              %
 
 **Note
        9 Related Party Transactions**
 
 On
        February 3, 2004, Fusion Three, LLC (“F3”) and the Company reached a Master
        Settlement and Release Agreement whereby, in consideration for the exchange
        of
        mutual releases and F3 relinquishing any claim to any benefits of the OnScreen
        technology (including license payments), the Company paid $150,000 to F3
        plus an
        annually declining percentage of OnScreen revenue of 5% in 2005 declining
        to 2%
        in 2008 and thereafter. In the event of a change of control of the Company,
        the
        percentage of revenue shall terminate and a single payment shall be made
        to F3
        ranging from 10% of the appraised value of OnScreen if such appraised value
        is
        $100,000,000 or less, 71⁄2% of the appraised value between $100,000,001 and
        $200,000,000, 5% of the appraised value between $200,000,001 and $300,000,000,
        4% of the appraised value between $300,000,001 and $400,000,000, 3% of the
        appraised value between $400,000,001 and $500,000,000, and 2% of any appraised
        value between $500,000,001 and $600,000,000. At the time the Company entered
        into this agreement, the former President of the OnScreen Products Division,
        Stephen K. Velte, was the manager of F3. In May 2006, F3 relinquished all
        of its
        revenue rights.
  F-37
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 On
        January 10, 2005 and February 16, 2005, the inventor/owner of the OnScreen(TM)
        LED technology patent conveyed ownership of the OnScreen(TM), WayCool and
        WayFast patents to CH Capital. Two of the current Board of Directors of the
        Company, Bradley J. Hallock and William J. Clough, have an interest in CH
        Capital. On February 16, 2005, in consideration for the payment of two hundred
        thousand dollars ($200,000), CH Capital conveyed to the Company the OnScreen(TM)
        patent rights. This conveyance now vests in the Company the ownership of
        the
        OnScreen(TM) LED technology patent.
 
 On
        October 4, 2005, the Company paid $50,000 to extend a letter of intent for
        the
        sale and purchase of certain intellectual property. Two of the current Board
        of
        Directors of the Company, Bradley J. Hallock and William J. Clough, has a
        controlling interest in the company (CH Capital) that is selling the
        intellectual property. The letter of intent gives the Company the right to
        acquire the WayCool technology for $800,000 and the issuance of warrants
        to
        acquire five percent of the Company’s fully diluted equity securities after
        giving effect to the Company’s fund raising efforts. The warrants have the same
        pricing and terms issued in connection with the Company’s private equity fund
        raising. On March 24, 2006, CH Capital assigned to the Company all right,
        title
        and interest to the WayCool patent in consideration for $800,000 and a three
        year warrant for 7,040,485 common shares at a per share price of $0.20. The
        $800,000 amount represents reimbursement for the time and money CH Capital
        spent
        acquiring and developing the WayCool technology. This assignment has been
        recorded and is a matter of record with the United States Patent and Trademark
        Office.
  During
        March 2005, the Company executed a $1.5 million unsecured six-month promissory
        note with a related party, CH Capital. The interest rate was 15% per annum.
        Interest only payments were due monthly until maturity of the note when the
        principal was due. Two of the current Company’s Board of Directors, Bradley J.
        Hallock and William J. Clough, has a controlling interest in CH Capital that
        was
        the note holder. The Company paid a $2,500 fee to extend this note to November
        1, 2005. On October 31, 2005, substitute convertible promissory notes totaling
        $1.5 million were executed with terms similar to the convertible promissory
        notes the Company had outstanding. One current Board of Director of the Company,
        Steven S. Hallock, participated in the substitute notes: promissory note
        of
        $1,000,000 held by a trust controlled by the director. The note held by the
        director was converted into common shares during 2006.
 
 February
        16, 2005 the inventor of the OnScreen technology, who licensed to the Company
        the rights of the direct view LED video display technology with angular
        dimension greater than 30 inches, conveyed through a third party corporation,
        all of the inventor’s right, title and interest of the OnScreen
        technology to the Company for $200,000. The Company now owns all patent
        rights to the OnScreen technology unencumbered subject to the rights of F3
        relating to the percentages of revenue from commercialization of the direct
        view
        LED video display technology with angular dimension greater than 30 inches.
        Two
        of the current Board of Directors of the Company, Bradley J. Hallock and
        William
        J. Clough, has an interest in the third party corporation that conveyed these
        rights to the Company.
  F-38
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        the third quarter and fourth quarters of 2005, the Company executed three-month
        convertible promissory notes totaling $3.5 million. One of the note holders
        was
        the COO/CFO, Mark R. Chandler, who had a $100,000 note and another note holder
        is a current Board of Director of the Company, Bradley J. Hallock, who had
        a
        $100,000 note. The Company amended the notes to extend the notes for an
        additional six months. During March 2006, the bid price of the Company’s stock
        exceeded $0.35 per share for five consecutive days and the $100,000 note
        of the
        COO/CFO was converted into 400,000 shares of common stock and the $100,000
        note
        of the director was converted into 400,000 shares of common stock.
 
 During
        the first quarter of 2006, the Company entered into three-month convertible
        promissory notes with several note holders including two current Board of
        Directors of the Company. One director, John P. Rouse, had two notes totaling
        $1,100,000 while the other director, Steven S. Hallock, had a note in the
        amount
        of $250,000. During March 2006, the bid price of the Company’s stock exceeded
        $0.35 per share for five consecutive days and the notes of the director totaling
        $1,100,000 were converted into 4,400,000 shares of common stock and the note
        of
        the director totaling $250,000 was converted into 1,000,000 shares of common
        stock.
 
 Effective
        March 24, 2006, the Company purchased from CH Capital, Inc. all right, title
        and
        interest in and to the WayCool technology, patent application and Letters
        Patent.  CH Capital, Inc. is a related party controlled by a director and
        an officer of the Company.  To acquire this technology, the Company paid
        $800,000 to CH Capital, Inc. and agreed to issue CH Capital, Inc. a three
        year
        warrant to acquire up to 7,040,485 shares of common stock at $0.20 per
        share.  The warrant is valued at $3,520,243   (see Note
        4)
 
 On
        August
        28, 2006 the Company entered into a one-month promissory note for $150,000
        with
        John P. Rouse who is a Board of Director of the Company. Interest on this
        note
        accrued at the rate of 12%. On September 28, 2006 the promissory note was
        extended an additional 30 days with both principal and accrued interest for
        two
        months due October 28, 2006. On November 2, 2006 the Company paid the remaining
        principal and interest due of $153,200 on the promissory note.
 
 **Note
        10 Income Taxes**
 
 The
        Company recognized losses for both financial and tax reporting purposes during
        each of the periods in the accompanying statements of operations. Accordingly,
        no provision for income taxes and/or deferred income taxes payable has been
        provided for in the accompanying financial statements.
 
 At
        December 31, 2006, the Company has available net operating loss carry forwards
        of approximately $27 million. These net operating loss carry forwards expire
        in
        various years through the year ending December 31, **** 2026;
        however, because the Company has incurred significant operating losses,
        utilization of the income tax loss carry forwards are not assured. **** As
        a
        result, the non-current deferred income tax asset arising from these net
        operating loss carry forwards and from other temporary differences are not
        recorded in the accompanying balance sheets because we established a valuation
        allowance to fully reserve such assets due to the uncertainty of the Company’s
        realization of this benefit.
  F-39
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 After
        consideration of all the evidence management has determined that a full
        valuation allowance is necessary to reduce the deferred tax assets to the
        amount
        that will more likely than not be realized.
 
 The
        Company’s tax expense differs from the “expected” tax expense for the periods
        ended December 31, 2006 and 2005, computed by applying the Federal Corporate
        tax
        rate of 34% to loss before taxes, as follows:
 
 **2006**
              
              **2005**Computed
                  “expected” tax benefit
              
              $
              (4,912,000
              )
              
              (2,884,000
              )State
                  tax benefit, net of federal effect
              
              
              (629,000
              )
              
              (308,000
              )Change
                  in valuation allowance
              
              
              4,855,000
              
              
              2,399,000Intrinsic
                  value of convertible debt
              
              
              -
              
              
              631,000Equity
                  instruments for services
              
              
              686,000
              
              
              162,000$
              -
              
              $
              -
 
 At
        December 31, 2006, the tax effects of temporary differences that gave rise
        to
        significant portions of deferred tax assets and liabilities are as
        follows:
 
 **2006**Deferred
                  tax assets:Net
                  operating loss carry forwards
              
              $
              10,720,000Warrants
                  issued to employees
              
              
              638,000Accrued
                  expenses payable with common stock
              
              
              173,000Impairment
                  of assets
              
              
              336,000Other
              
              
              26,000Valuation
                  allowance for deferred tax asset
              
              
              (11,893,000
              )Deferred
                  tax liabilities:
              
              
              -Property
                  and equipment depreciation
              
              
              (59,000
              )Valuation
                  allowance for deferred tax asset
              
              
              59,000-$
              -
  F-40
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 **Note
        11 Other Settlements**
 
 During
        2005, the Company reached a settlement with Capitol City Trailers regarding
        the
        use of one of its trucks. The settlement resulted in Capitol City Trailers
        paying $37,500 to the Company over time. At December 31, 2006 and 2005, the
        Company had received $20,833 and $16,667,respectively, which it has recorded
        as
        a settlement gain in the year received. Due to the financial condition of
        Capitol City Trailers, the Company did not record a receivable for the
        settlement amount, but recorded it as a settlement gain when it was
        received.
 
 During
        2006, the Company reached a settlement with Mobil Magic Superscreen regarding
        the construction of a truck. The settlement resulted in the Company recording
        a
        net settlement gain of approximately $280,840. The settlement gain includes
        approximately $150,000 of expenses previously accrued by the Company which
        were
        forgiven, a payment of $50,000, and promissory note of $125,000, less attorney
        fees of approximately $44,160. The promissory note is for 50 monthly payments
        of
        $2,500 beginning September 2006. At December 31, 2006 the balance of the
        note is
        $115,000.
 
 **Note
        12 Concentrations**
 
 During
        2006, 69% of revenues were derived from four customers at 24%, 22%, 12% and
        11%.
        During 2005, 43% of revenues were derived from three customers at 19%, 12%
        and
        12%.
 
 The
        Company’s major products are reliant upon the OnScreen (TM) technology which the Company has purchased the rights to and has applied
        for
        several patents related to this technology.
 
 At
        December 31, 2006, the gross accounts receivable totaled $17,628, 85% was
        due
        from two customers at 57% and 28%.
 
 Currently
        the Company is using one main supplier for its products. To switch to another
        supplier would take lead time for the new supplier to produce our
        products.
 
 **Note
        13 Subsequent Events**
 
 During
        January 2007, the Company entered into unsecured eighteen-month convertible
        promissory notes totaling $127,500. Interest accrues at 12% per annum, payable
        monthly, until the maturity of these notes at which time the principal is
        due.
        The note holder had the right to convert the note to the Company’s common stock
        at the greater of a per share price equal to 80% of the average closing bid
        price of the stock for 10 days preceding the conversion date or $0.20. During
        January 2007, note holders converted $125,000 of the notes into the 578,704
        shares of the Company’s common stock.
 
 During
        February 2007, the Company entered into unsecured eighteen-month convertible
        promissory notes totaling $50,000. Interest accrues at 12% per annum, payable
        monthly, until the maturity of these notes at which time the principal is
        due.
        The note holder has the right to convert the note to the Company’s common stock
        at the greater of a per share price equal to 80% of the average closing bid
        price of the stock for 10 days preceding the conversion date or
        $0.20.
  F-41
 
  **OnScreen
            Technologies, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 
 During
        January 2007 the Company issued 82,938 shares of its Common Stock to an employee
        in accordance with his employment agreement. These shares were valued at
        $25,000
        based on the fair value at date of issuance. This expense was recognized
        in 2006
        as accrued compensation.
 
 During
        January and February 2007 warrants associated with previously converted debt
        for
        239,938 shares of the Company’s Common Stock were exercised at a price of $.01
        per share. The value of these warrants was included in the discount on
        convertible debt during 2006.
 
 During
        February 2007 a shareholder converted 15,000 shares of the Company’s Preferred A
        Stock to 75,000 shares of the Company’s Common Stock.
  F-42