UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   Form 10-KSB/A



(Mark one)

[X]  Annual Report Under Section 13 or 15(d) of The  Securities  Exchange Act of
     1934

For the fiscal year ended December 31, 2006


[_]  Transition Report Under Section 13 or 15(d) of The Securities  Exchange Act
     of 1934

For the transition period from ______________ to _____________



Commission File Number: 0-32379

                            American Ammunition, Inc.
                 ----------------------------------------------
        (Exact name of small business issuer as specified in its charter)

          Nevada                                              91-2021594
--------------------------                            --------------------------
  (State of incorporation)                              (IRS Employer ID Number)

                      3545 NW 71st Street, Miami, FL 33147
                      ------------------------------------
                    (Address of principal executive offices)

                                 (305) 835-7400
                                 --------------
                           (Issuer's telephone number)




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

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






<PAGE>



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



Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of Company's knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [_]

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



The  issuer's  revenues  for the  fiscal  year  ended  December  31,  2006  were
$2,241,399.



The aggregate market value of voting common equity held by  non-affiliates as of
December 31, 2006 was approximately $6,000,000.



As of December 31, 2006, there were 23,007,902 shares of Common Stock issued and
outstanding.



Transitional Small Business Disclosure Format :  Yes [_]   No  [X]








<PAGE>


                            American Ammunition, Inc.

                                Index to Contents

                                                                     Page Number
Part I

Item 1   Description of Business                                              4
Item 2   Description of Property                                             18
Item 3   Legal Proceedings                                                   19
Item 4   Submission of Matters to a Vote of Security Holders                 19

Part II

Item 5   Market for Company's Common Stock and Related Stockholders
         Matters                                                             20
Item 6   Management's Discussion and Analysis or Plan of Operation           22
Item 7   Financial Statements                                                27
Item 8   Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosures                                               27
Item 8A  Controls and Procedures                                             27

Part III

Item 9     Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act                 28
Item 10    Executive Compensation                                            31
Item 11    Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters                                   32
Item 12    Certain Relationships and Related Transactions                    33
Item 13    Exhibits and Reports on 8-K                                       33
Item 14    Principal Accountant Fees and Services                            33

Financials                                                                  F-1

Signatures                                                                   60



                    DESCRIPTION OF CHANGES CAUSING AMENDMENT

This amended filing corrects two inadvertent  clerical  typographical  errors on
the "Year ended  December  31,  2006"  column on the  Statement of Cash Flows as
previously  reported;  specifically,  the net increase in cash  subtotal and the
cash balance at the end of the year total.



<PAGE>


                  CAUTION REGARDING FORWARD-LOOKING INFORMATION

Certain  statements  contained  in  this  annual  filing,   including,   without
limitation, statements containing the words "believes", "anticipates", "expects"
and  words  of  similar  import,  constitute  forward-looking  statements.  Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors that may cause the actual results,  performance or achievements of
the Company,  or industry  results,  to be materially  different from any future
results,   performance   or   achievements   expressed   or   implied   by  such
forward-looking statements.

Such factors include, among others, the following:  international,  national and
local general economic and market conditions:  demographic  changes; the ability
of the Company to sustain,  manage or  forecast  its growth;  the ability of the
Company to successfully make and integrate acquisitions;  raw material costs and
availability;  new product  development and  introduction;  existing  government
regulations  and  changes  in,  or  the  failure  to  comply  with,   government
regulations;  adverse publicity;  competition; the loss of significant customers
or suppliers;  fluctuations  and  difficulty in forecasting  operating  results;
changes in business strategy or development  plans;  business  disruptions;  the
ability  to attract  and  retain  qualified  personnel;  the  ability to protect
technology; and other factors referenced in this and previous filings.

Given  these  uncertainties,  readers  of this Form  10-KSB  and  investors  are
cautioned not to place undue reliance on such  forward-looking  statements.  The
Company  disclaims  any  obligation  to update any such  factors or to  publicly
announce the result of any  revisions to any of the  forward-looking  statements
contained herein to reflect future events or developments.



                                     PART I


Item 1 - Description of Business

     American  Ammunition,  Inc. (the "Company") was incorporated on February 1,
2000  in   accordance   with  the   Laws  of  the   State   of   California   as
FirsTelevision.com.  In 2001, we consummated a reverse  acquisition  transaction
with American Ammunition Inc., a then-privately held Florida  corporation.  Upon
completion of the reverse  acquisition  transaction  with  American  Ammunition,
Inc., we have been engaged in the manufacture and sale of small-arms  ammunition
for the wholesale and governmental markets.

     Effective  January 1,  2006,  we changed  our state of  incorporation  from
California  to  Nevada by means of a merger  with and into a Nevada  corporation
formed  on  December  28,  2005  solely  for  the  purpose  of   effecting   the
re-incorporation.  The  Certificate  of  Incorporation  and Bylaws of the Nevada


                                       4
<PAGE>



Corporation  are the  Certificate of  Incorporation  and Bylaws of the surviving
Nevada Corporation.  There were no changes to the Company's capital structure as
a result of this action.

     On or about  January 9, 2006,  we completed a previously  approved 1 for 20
reverse split of our then issued and outstanding  common stock. This action took
our issued and outstanding  shares from  92,576,839 to 4,629,831.  All share and
per share  amounts  reflect  this action as of the first day of the first period
presented in our financial statements or discussed in our narrative(s).

     We are an  established  small arms munition  manufacturer  with an existing
distribution  network. The small-arms ammunition market is principally dominated
by three domestic and approximately ten international major  manufacturers.  Our
operations  are geared to provide  the  highest  quality  product in  quantities
significant to meet our developed  wholesale and governmental market demands. We
began as an assembler and re-loader of  ammunition in several  calibers.  As our
operations  grew,  our  management  realized that the only way to break into the
industry  was to  become a  vertically  integrated  manufacturer.  Our  founders
invested heavily in research and development, equipment, and technology in prior
years to focus on increasing our market share. Our current product line consists
of various  calibers with varying  projectiles  as follows:  9  millimeter,  .45
automatic, .380 automatic, .32 automatic, .40 Smith and Wesson, 38 Special, .357
Magnum, 30 carbine,  223 Remington,  38 Super, .44 Special,  32 Smith and Wesson
Long,  44 special,  44 Magnum,  .45 Colt and 6.8 SPC. We have  identified  these
products as having the largest  share of the market for the next several  years.
We sell  our  products  to  both  retail  consumers  and  governmental  agencies
domestically  and  principally  to  governmental  agencies  internationally  for
military use.

     During Calendar 2006, 2005, and 2004, our sales were approximately  97.41%,
79.42%,  and 78.06% in domestic markets and  approximately  2.59%,  20.58%,  and
21.94%   internationally,   respectively.   We   continue  to   anticipate   the
international  governmental  portion of our business to grow in future  periods;
however,  we do not anticipate our international  business to outpace or outgrow
our domestic sales.

     Our principal executive offices are located at 3545 NW 71st Street,  Miami,
Florida 33147 and our telephone number is (305) 835-7400.

Equipment and Production Line Capabilities

     We own all the  equipment  necessary to take the raw  material,  consisting
primarily of brass,  lead, primer and powder, to the finished product,  a loaded
round of ammunition. The process of manufacturing diverse calibers of ammunition
is  extremely  complex  and  requires  very tight  tolerances  to be  maintained
throughout  the process.  Our  technology  and equipment  enable us to produce a
large  variety  of  handgun  and rifle  ammunition.  We have a machine  shop and
maintain our own testing and quality assurance equipment and program. Ammunition
is a performance-based  product.  Therefore,  after the manufacturing process is


                                       5
<PAGE>



complete,  the ammunition must comply with specific  protocols such as velocity,
accuracy,  and  pressure.  We purchase raw  materials in bulk and strive to take
advantage  of  prepayment  discounts  to  produce  significant  savings  in  the
manufacturing  process.  There are and have been  instances  when discounts have
been and may be missed due to cash flow  restrictions.  We  continue to evaluate
the addition of several products to our existing production lines, including the
addition of high speed  projectile  forming  machines to supplement the existing
casting machines.  This addition would  effectively  double or triple projectile
production capacity, while improving projectile quality and performance. We also
are making  provisions to increase other aspects of production  capacity,  which
would  complement  long  term  goals  of  both  production  volume  and  product
diversity.

     In prior years,  we acquired  equipment which will allowed us to expand our
production  capacity  in areas  which they have  traditionally  been slower than
other areas of our manufacturing process. The acquisition of additional presses,
for example,  has helped us to balance out our assembly line process so that all
portions of our  projectiles  are  manufactured in time with each other. We hope
this will cut our  manufacturing  and labor costs and as a result,  make us more
efficient at producing small arms ammunition.

Business Strategy

     We are an autonomous  manufacturer  of ammunition,  with the technology and
equipment to take advantage of the growing  small-arms  ammunition  market.  The
barrier to entry into the ammunition market is extremely high,  however,  we are
an established small arms munitions manufacturer,  with an existing distribution
network.  We  manufacture  our ammunition  utilizing  purchased raw materials to
fabricate  the  necessary  components  in  our  own  production   facility.   In
management's opinion, the consumer and governmental  ammunition market has grown
each  year and it  appears  that  supply is not  keeping  up with  demand,  thus
allowing for companies like American  Ammunition to make a significant impact in
sales through our dealer  direct  program,  established  in the first quarter of
2004,  and our  historically  strong  relationships  with  various  domestic and
foreign governmental agencies.

     We continue to seek the  necessary  working  capital to allow us to enlarge
our operations to take advantage of our technological capacities,  equipment and
the existing marketplace.

Marketing and Sales Distribution

     In first quarter 2004, we launched our Dealer Direct Program.  In doing so,
we completely revamped the way we distribute and sell our products domestically.
This program  allowed us to eliminate the "middle man"  distributor  by offering
our products directly to and soliciting orders directly from the 66,000 licensed


                                       6
<PAGE>



dealers  in the United  States.  In doing  this,  we may offer our  products  to
dealers  cheaper than dealers  would  otherwise  obtain them from  distributors,
while increasing our profit margins as well. It also eliminates a second freight
charge from the distributor to the dealer,  as product is shipped  directly from
our facility to the ultimate seller of our products.

     Our marketing  strategy consists of several key features to attract dealers
directly to our company,  rather than to a distributor.  First,  we are offering
"net 60" day credit terms to smaller dealers,  who would ordinarily be forced to
pay for product up front.  We have developed a screening  process for qualifying
these smaller dealers on an individual  basis.  Although  offering net 60 credit
terms to  dealers  results  in  increased  risk to our  company  in our  account
receivables as compared to payment in advance, we have exponentially diversified
our  receivables  (and therefore our credit risk) from 13 main  distributors  to
potentially thousands of individual dealers. Secondly, we now offer free freight
(shipping) to dealers on certain  orders that exceed a specified  dollar volume.
Shipping of small arms  ammunition  has always been a large  portion of the cost
passed to consumers as the product is considered "dense" by shipping  companies,
such as UPS, and requires extra care in shipping. We have determined that we can
ship our products at a reduced  rate in quantity and can offer free  shipping as
an incentive on qualified  orders.  As previously  explained,  a second  freight
charge  has  also  been  avoided  by  eliminating  the   distributor   from  the
transaction.  Additionally,  our increasing automation and dealer direct program
have  considerably  sped up the time we take to provide a dealer  with  demanded
product. Our management has become aware of an unfulfilled need of dealers to be
provided with almost instant  gratification when demand at retail establishments
increases.  Many dealers have communicated with our company  complaining that we
took their  distributors too long to provide them with additional product supply
when demand dictated. We believe that our new distribution strategy complimented
with  recent  automation  has cut the  time it  takes a dealer  to  receive  our
products by more than half.  We only  recently  upgraded  our website to include
e-commerce  capacity,  wherein licensed dealers who are pre-registered  with our
company can order online  direct from us. Sales in this manner have been slow to
develop,  primarily due to the documentation  requirements for pre-qualification
of dealers;  however,  management is hopeful that our dealers will begin to take
advantage of the ease of use and time savings related to placing orders directly
via electronic means. We anticipate  further  automation in the way in which our
qualified dealers place product orders from our company.  We plan to continue to
aggressively  pursue new customers  through  promotions,  advertising  and trade
shows. We intend to solicit  original  equipment  manufacturer  subcontract work
from the three major domestic manufacturers; seek additional means of commercial
distribution;  seek further Department of Defense and other governmental  agency
contracts and new  relationships;  contracts;  solicit further export sales and,
potentially, develop relationships with various mass merchandisers/chain stores.



                                       7
<PAGE>



Pricing and Value

     We have been able to price our products competitively at a price lower than
any of the three major domestic manufacturers:  Remington,  ATK, and Winchester.
We strive to  capitalize  on the fact that  these  three  competitors  have very
large. corporate  infrastructures and, in management's opinion, have to pay much
higher labor costs to their manufacturing  plant personnel.  We believe that our
production cost structure and,  accordingly,  our pricing  strategy  permits our
customers  to purchase  our product and sell it at a retail  price that is lower
than competitive distribution channels for our competitors' products.

Advertising & Promotion

     We intend to gear our advertising towards magazine and print media, focused
on the gun and ammunition,  handgun and shooting  markets.  We believe that such
advertising will result in greater name recognition among individual  consumers.
Currently,  our sales are generated with very little  advertising and we believe
that advertising could significantly improve retail/mass  merchandiser sales and
increase market share.

Status of Publicly Announced Products and Services Israeli Military  Industries,
Ltd

     We have  developed a relationship  with Israeli  Military  Industries  Ltd.
("IMI"),  whereby we work  together on  individual  projects.  To date,  we have
primarily  focused  their  cooperation  on federal  contracts  and on our dealer
direct  program.  In such contracts,  projectiles  manufactured by IMI have been
assembled by our company under IMI's strict quality  control  requirements.  The
joint venture has benefited our company in several ways. First and foremost, IMI
has a distinct  following as a result of offering very high quality  products of
the course of many  years.  Associating  our name with IMI's  history  has added
value to our brand and reputation in the small arms ammunition industry. Second,
IMI manufactures different calibers and products than us, thereby increasing the
catalogue  of  items  we may  offer  to our  dealers.  IMI  produces  commercial
ammunition,  similar  to  our  company.  However,  we  also  specialize  in  the
production of law enforcement and military grade ammunition,  which we currently
do not have the production capability to produce on our own. Lastly, on past and
current cooperation  initiatives,  IMI has shipped projectiles and materials for
future assembly on a consignment basis, thereby saving us the time value of such
costs  were we to have  produced  such  items or  purchased  such raw  materials
ourselves.  During  2005,  we saw a  downturn  in this  relationship  and we are
focusing more on internally  developed and manufactured  products.  During 2006,
the   relationship   continued  to  take  a  downturn  and  we  terminated   the
relationship.  We are now  focusing  totally on more  internally  developed  and
manufactured products.


                                       8
<PAGE>



Triton

     On February 10, 2004, we executed a non-binding letter of intent to acquire
the assets of Triton Ammunition Corporation ("Triton").  This transaction closed
on October 19,  2004,  with the  issuance  of  1,111,112  shares of  restricted,
unregistered common stock valued at $500,000.

     The assets acquired consisted of various pieces of manufacturing machinery,
raw materials and finished inventory and various  intellectual  property rights.
Triton  conveyed  the sole usage  patent right  agreements  and various  related
licenses for the Hi-Vel and Quik-Shok lines of ammunition.

     The  allocation  of  the  purchase  price  was  as  follows:  Manufacturing
equipment -  approximately  $134,000;  Raw  materials  and finished  inventory -
approximately $89,500; and Patents and a Covenant not-to-compete - approximately
$276,500.    As   the    assigned    patents,    related    licenses   and   the
covenant-not-to-compete  have a combined  remaining  life and/or initial term of
approximately  5 years,  the Company will amortize the  approximate  $276,500 to
operations  over a  60-month  period,  commencing  on the  closing  date  of the
acquisition transaction.

     The  acquisition of certain Triton  specialty  ammunition  will allow us to
offer an increased product line to our dealers.

ECO-AMMOTM

     We are  now  manufacturing  and  distributing  ECO-AMMO(TM).  This  product
utilizes a lead-free  projectile with reduced lead pollutants sometimes referred
to  as  "green"  ammo.   ECO-AMMO(TM)  is  ideal  for  indoor  ranges  since  it
disintegrates  upon  impact  and,  therefore,  does not  ricochet.  We have been
acquiring  and  developing  technology to market this  environmentally  friendly
ammunition for some time.  The advent of the dealer direct  program  enables the
product to be  distributed at a lower cost and should open up the market to more
consumers.

Frangible Aircraft Bullet

     We were  assigned a serial  number  (60/325,046)  from the U.S.  Patent and
Trademark Office for our provisional  patent  application filed on September 26,
2001 for a  projectile  that  will not  pierce  an  aircraft  fuselage  but will
penetrate human soft tissue. The product has been specifically  designed for use
inside  the  cabin  of  a  commercial  aircraft;  however,  we  have  additional
applications for use in other environments with similar containment issues, such
as security at nuclear power plants, hazardous materials storage facilities, and
for consumer home defense.  We departed  completely from standard ballistics for
the design of this  projectile to meet what American  Ammunition  perceives as a
growing and unfilled  need.  Two of the basic design  criteria in ballistics are
penetration and expansion of the projectile.  In this design,  these two factors


                                       9
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have been  controlled to meet the specific  requirements  of weapons  discharged
inside  a  confined  space  while  ensuring  the  integrity  of the  surrounding
environment.  This design is a new concept in close quarter ammunition: a bullet
capable of incapacitating an assailant without damaging  surrounding  structure.
Design and material selection allows for the inverted expansion and aft internal
collapse of the projectile mass. Our initial  testing,  using test sections of a
commercial  airliner  fuselage,  has revealed that upon impact with the aircraft
fuselage,  the bullet  internally  collapses;  therefore  not  allowing  for the
transfer of kinetic energy  forward or penetration  above that required for soft
tissue  penetration.  Further,  our testing  has been  successful  in  ballistic
testing  using both  ordinance  gelatin  and  bovine  tissue.  This  performance
criterion is accomplished without sacrificing the standard velocity and accuracy
of the caliber  being used.  A video of those tests can be viewed on our website
at www.a-  merc.com in the New Product  Section.  We believe that these research
and  development  efforts  will  provide a new product to the public  safety and
security marketplace.

Industrial Plating Enterprise Company

     Industrial  Plating  Enterprise Company (IPE), a wholly owned subsidiary of
the Company,  is a high volume "barrel plating" facility currently  operating at
below  50.0% of its  designed  capacity.  IPE is meeting  all of our  projectile
plating needs at this time. As our projectile plating requirement grows, IPE has
the surplus capacity to increase  production to meet that need. IPE's innovative
hazardous materials and hazardous waste management and treatment system is fully
capable  of  meeting  increased  production  requirements.  IPE  management  has
attempted  to add  additional  metal and  coating  processes  to  diversify  its
services  to the  parent  company  as well as  offering  its  services  to other
industries, to generate additional revenue. To date, the company has been unable
to accomplish this objective.  Also the market has changed and third parties are
offering  the same or similar  services  and  products  to the company at a cost
competitive  with  the  cost  to  the  company   manufacturing   such  products.
Considering  increase  costs of the company,  and  competitive  pricing of third
parties in the market,  the company is  evaluating  whether to continue  the IPE
operation or whether to acquire such  services  and  products  from  competitive
third  parties.  The company  anticipates a final  evaluation and decision on or
before June 30, 2007.

Competition

     The market for small arms  ammunition is extremely  competitive.  Companies
such as  Remington,  Federal  and  Winchester  are  all  better  equipped,  more
experienced and better financed than us. For years, the large manufacturers have
supplied the component parts of the  manufacturing  process to smaller companies
to assemble and distribute.  A company making its own components can produce and


                                       10
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market a quality lower cost product.  This concept,  coupled with technology and
progressive and  environmentally  sound  manufacturing  practices (i.e. cans and
recycled  plastic  packaging),  has  resulted in a quality,  affordable  product
reaching the marketplace.

     Management  undertook a study of the  production  process and our equipment
utilization  during  December 2004 and the first quarter of 2005. As a result of
this study,  our  management  continues  to believe  that we can our  production
capacity  through the renovation and  restructuring  of our plant flow utilizing
our existing equipment and increasing only labor,  material and other incidental
costs.

Sources and Availability of Raw Materials

     We manufacture our ammunition by creating most of the components ourselves.
The materials  needed to produce our  ammunition  products are widely  available
from numerous third parties.  While we believe that no critical shortages of our
key raw material components, such as brass, lead and powder. We are cognizant of
recent press related to the  availability of lead as no new mines have opened in
many  years  due to  environmental  regulations.  We have  experienced  limited,
infrequent delays in receiving lead;  however,  we have always been able to meet
our production requirements from our normal sources.  Current demand for our raw
material  components  in the domestic  and  international  markets,  principally
driven by  international  military  conflicts,  may work to our advantage in our
contracts  and  relationships  with various  domestic  and foreign  governmental
agencies.  However,  we cannot state with any certainty  that any  disruption of
supply may or may not occur.

Research and Development

     We believe that  research  and  development  is an important  factor in our
future  growth.  The small arms  ammunition  industry  is closely  linked to the
latest  technological  advances.  Therefore,  we must continually  invest in the
technology to provide the best quality  product to the public and to effectively
compete with other companies in the industry.  No assurance can be made that the
Company will have sufficient  funds to purchase  technological  advances as they
become available.

Patents, Copyrights and Trademarks

     We intend to protect  our  original  intellectual  property  with  patents,
copyrights  and/or  trademarks  as  appropriate.  Our head  stamp  "A-MERC " was
registered as a trademark on May 10,1994.




                                       11
<PAGE>



     We were  assigned a serial  number  (60/325,046)  from the U.S.  Patent and
Trademark Office for our provisional  patent  application filed on September 26,
2001 for a bullet that will not pierce an aircraft  fuselage but will  penetrate
human soft tissue.

     Our October 2004 acquisition of certain  intellectual  technology  property
from Triton  Ammunition  Corporation  included the  assignment  of the following
patents  related  to  the  design  and   manufacture  of  certain   fragmentable
projectiles:  4,836,110, dated June 6, 1989; 4,882,822, dated November 28, 1989;
and 4,947,755, dated August 8, 1990.

Governmental Regulation

     In accordance  with the  provisions of Title 1, Gun Control Act of 1968, we
are required to be licensed to import  firearms and  manufacture  ammunition for
firearms.  Such  licensing  is subject to  limitations  in Chapter 44, Title 18,
United  States Code.  In the event such licenses are not renewed for any reason,
we would have to cease our operations. In accordance with these requirements, we
carry two licenses  issued by the  Department  of  Treasury,  Bureau of Alcohol,
Tobacco and Firearms: * License No.  1-59-025-06-9D 69152 for "06 - Manufacturer
of  Ammunition  for  Firearms",  which license  expires on April 1, 2009;  and *
License  No.   1-59-025-08-9D-69454  for  "08-Importer  of  Firearm  other  than
Destructive  Devices",  which license expires on April 1, 2009. We are not aware
of any other license requirements or government regulation at a state or federal
level specific to their business and believe that we are in full compliance with
our existing licenses.

Effect of Probable Governmental Regulation on the Business

     We are not aware of any pending  legislation at either the State or Federal
level that would change the  requirements  under which it is licensed and is not
aware of any  reason  why the  existing  licenses  cannot  be  renewed  at their
expiration  dates.  There  can be no  assurance  that  legislation  will  not be
proposed  and  enacted at some time in the future  that would  preclude  us from
continuing our operations.  Should such legislation be enacted, and should we be
precluded from  continuing our  operations,  it would have a materially  adverse
effect upon our business and future.

Cost and Effects of Compliance with Environmental Laws

     As a  manufacturer,  we are  subject to general  Local,  State and  Federal
regulations  governing  environmental  concerns.  We believe that we have always
been and continue to be in compliance  with all such laws.  Special  precautions
have been taken us to ensure that adequate ventilation exists for the portion of
our  operations  that utilize lead and/or  brass.  Additionally,  our  gunpowder
supply is humidity and  temperature  controlled in a secure and  environmentally
controlled facility


                                       12
<PAGE>



Employees

     At December 31, 2006, we employ approximately forty-five (45) persons. None
of our  employees  are  represented  by a labor union for purposes of collective
bargaining. We consider our relations with our employees to be excellent. We may
employ  additional  personnel,  as necessary,  to  accommodate  future sales and
production  requirements  and believe that an ample  supply of  qualified  labor
exists in our geographic area to facilitate any required growth.

Risk Factors

     An  investment  in our common  stock has a high degree of risk.  Before you
invest you should carefully consider the risks and uncertainties described below
and the other  information  in this  prospectus.  If any of the following  risks
actually occur, our business, operating results and financial condition could be
harmed and the value of our stock  could go down.  This means you could lose all
or a part of your investment.

1. RISKS RELATING TO OUR BUSINESS:

     We may never become  profitable and continue as a going concern  because we
have had losses since our inception. We may never become profitable and continue
as a going concern  because we have  incurred  losses and  experienced  negative
operating cash flow since our formation. We have incurred losses and experienced
negative  operating  cash flow since our  formation.  For our fiscal years ended
December  31,  2006,  2005  and  2004,  we  had  a  net  loss  of  approximately
$(8,100,057),  $(5,941,669), and $(3,361,000),  respectively. We may continue to
incur  significant  operating  expenses  as we  maintain  our  current  line  of
small-arms  ammunition and continue  research and development  toward  improving
projectile  quality  and  performance.  We  cannot  estimate  exactly  when  our
operating expenses will not outpace revenues and result in significant losses in
the near term. We may never be able to reduce these  losses,  which will require
us to seek additional debt or equity  financing.  If such financing is available
you may experience significant additional dilution.

2. THERE MAY EXIST AN UNCERTAINTY AS TO OUR CONTINUATION AS A GOING CONCERN:

     Our audited  financial  statements  for the fiscal years ended December 31,
2006,   2005  and  2004  reflect  an   accumulated   deficit  of   approximately
$(34,150,000),  $(25,990,000)  and  $(19,990,000)  since our inception,  working
capital of approximately  $684,000,  $(885,000) and $872,000,  and stockholders'
equity of approximately $424,000,  $762,400 and $4,385,000. Our auditor issued a
going concern  opinion on our financial  statements  for the year ended December
31, 2006 and 2005. Our ultimate  survivability  is dependent upon our being able
to  generate  sufficient  cash  flows  from  operations  to  support  its  daily
operations  as  well  as  provide   sufficient   resources  to  retire  existing
liabilities  and obligations on a timely basis. We anticipate that our available


                                       13
<PAGE>



cash and future commitments for equity placements will be sufficient to meet our
operating  expenses and capital  expenditures  through  2007.  If we continue to
incur  operating  losses,  we may  not  be  able  to  fund  continuing  business
operations,  which could lead to the limitation or closure of some or all of our
operations.

3. WE MAY HAVE TO CURTAIL OUR BUSINESS IF WE CANNOT FIND ADEQUATE FUNDING:

     We currently have no legally binding  commitments with any third parties to
obtain any material amount of additional equity or debt financing. We need funds
and may not be able to obtain any additional  financing in the amounts or at the
times that we may require the financing or, if we do obtain any financing,  that
it would be on acceptable terms because of the following:

     *    we have no assets to pledge as security for the loan; and
     *    we are in poor  financial  condition  where we maybe  viewed as a high
          market risk

     As a  result,  we  may  not  have  adequate  capital  to  implement  future
expansions,  maintain our current  levels of  operation  or to pursue  strategic
acquisitions. Our failure to obtain sufficient additional financing could result
in the delay or  abandonment  of some or all of our  development,  expansion and
expenditures, which could harm our business and the value of our common stock.

     Our  competitive  position  may be  harmed if we fail to  respond  to rapid
changes in the market for small arms ammunition.

     Our  competitive  position  may be  harmed if we fail to  respond  to rapid
changes in the market for small arms ammunition.  Our future success will depend
significantly  on our ability to develop and market new products  that keep pace
with technological developments and evolving industry standards for hand gun and
rifle  ammunition.  Our delay or failure  to  develop  or acquire  technological
improvements,  adapt our  products to  technological  changes or provide  higher
quality  product  lines  that  appeals  to our  customers  may  cause us to lose
customers  and may prevent us from  generating  revenue  which could  ultimately
cause us to cease operations.

     Our revenues may decrease from  production  delays due to fire or explosive
incidents.  Our  revenues  may decrease  from  production  delays due to fire or
explosive  incidents.  Our ammunition  products,  involve the manufacture and/or
handling of a variety of explosive and flammable  materials.  This manufacturing
and/or  handling  may result in  incidents  that will  temporarily  shut down or
otherwise disrupt our manufacturing,  causing production delays and resulting in
liability for workplace  injuries and  fatalities.  We cannot assure you that we


                                       14
<PAGE>



will not  experience  these  types of  incidents  in the  future  or that  these
incidents will not result in production delays, which can lead to a reduction in
revenues.

     We may incur substantial costs in complying with environmental laws and may
be  subject  to  substantial  liability  resulting  from  the  use of  hazardous
substances or required cleanup of contaminated  sites. Our operations and use of
real property are subject to a number of federal,  state and local environmental
laws and regulations which, among other things,  require us to obtain permits to
operate and to install  pollution control equipment and regulate the generation,
storage, handling, transportation, treatment and disposal of hazardous and solid
wastes.  Our  operations,  as well as historical  operations at our sites,  also
subject us to  liability  for the cleanup of releases of  hazardous  substances.
Environmental  laws and regulations  change  frequently,  and it is difficult to
predict whether and to what extent we may be subject to liability for compliance
with environmental laws and regulations.

     Our  business  operations  will  be  harmed  if we  are  unable  to  obtain
additional  funding.  We do not know if additional  financing  will be available
when needed, or if it is available, if it will be available on acceptable terms.
Insufficient funds may prevent us from implementing our business strategy or may
require us to delay, scale back or eliminate certain contracts for the provision
of our technology and products.

     Our competitors may  misappropriate  our  intellectual  property because we
have only one trademark and five patents.

     We attempt to protect our limited  proprietary  property through trademark,
trade secret,  nondisclosure  and  confidentiality  measures.  Such protections,
however, may not preclude competitors from developing similar technologies.  Any
inability  to  adequately  protect  our  proprietary  technology  could harm our
ability to compete.

     Our  future  success  and  ability  to  compete  depends  in part  upon our
proprietary  technology  and our  trademark,  which we attempt to protect with a
combination  of  trademark  and   confidentiality   procedures  and  contractual
provisions.  These legal  protections  afford only  limited  protection  and are
time-consuming  and expensive to obtain and/or  maintain.  Further,  despite our
efforts,  we may be unable to prevent  third  parties  from  infringing  upon or
misappropriating our intellectual property.

4. RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:

     There are a large number of shares  underlying our  convertible  debentures
and warrants  that may be available for future sale and the sale of these shares
may depress the market price of our common stock.


                                       15
<PAGE>



5. RISKS RELATING TO OUR COMMON STOCK:

     If We Fail to Remain  Current on Our  Reporting  Requirements,  We Could be
Removed  From  the  OTC  Bulletin   Board  Which  Would  Limit  the  Ability  of
Broker-Dealers  to Sell Our Securities and the Ability of  Stockholders  to Sell
Their Securities in the Secondary Market.

     Companies  trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports  under  Section 13, in order to maintain  price
quotation  privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements,  we could be removed from the OTC Bulletin Board. As
a result,  the market liquidity for our securities  could be severely  adversely
affected by limiting the ability of  broker-dealers  to sell our  securities and
the ability of stockholders to sell their securities in the secondary market.

     Our directors and executive officers  beneficially own approximately 0.048%
of our stock;  their interests could conflict with yours;  significant  sales of
stock held by them could have a negative effect on our stock price; stockholders
may be unable to exercise control.

     As of December 31,  2006,  our  executive  officers  and  directors,  which
primarily include the Fernandez family, beneficially own approximately 0.048% of
our common stock.  As a result,  our executive  officers and directors will have
significant influence to:

     *    elect or defeat the election of our directors;
     *    amend or prevent amendment of our articles of incorporation or bylaws;
     *    effect  or  prevent  a  merger,  sale of  assets  or  other  corporate
          transaction; and
     *    control the outcome of any other matte  submitted to the  stockholders
          for vote.

     As a result of their  ownership and positions,  our directors and executive
officers collectively are able to significantly  influence all matters requiring
stockholder  approval,  including  the  election of  directors  and  approval of
significant corporate transactions. In addition, sales of significant amounts of
shares held by our directors and  executive  officers,  or the prospect of these
sales, could adversely affect the market price of our common stock. Management's
stock  ownership may discourage a potential  acquirer from making a tender offer
or otherwise  attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders  from realizing a premium over our stock
price.



                                       16
<PAGE>



6. OUR COMMON  STOCK IS SUBJECT  TO THE "PENNY  STOCK"  RULES OF THE SEC AND THE
TRADING MARKET IN OUR  SECURITIES IS LIMITED,  WHICH MAKES  TRANSACTIONS  IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.

     The  Securities  and  Exchange  Commission  has  adopted  Rule 15g-9  which
establishes the definition of a "penny stock," for the purposes  relevant to us,
as any equity  security  that has a market price of less than $5.00 per share or
with an  exercise  price of less  than  $5.00  per  share,  subject  to  certain
exceptions.  For any  transaction  involving a penny stock,  unless exempt,  the
rules require:

     *    that a broker or dealer approve a person's account for transactions in
          penny stocks; and
     *    the broker or dealer receive from the investor a written  agreement to
          the transaction,  setting forth the identity and quantity of the penny
          stock to be purchased

     In order to approve a person's  account for  transactions  in penny stocks,
the broker or dealer must:

     *    obtain financial  information and investment  experience objectives of
          the person; and
     *    make a reasonable  determination that the transactions in penny stocks
          are suitable for that person and the person has  sufficient  knowledge
          and  experience in financial  matters to be capable of evaluating  the
          risks of transactions in penny stocks.

     The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure  schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:

     *    sets  forth  the  basis  on  which  the  broker  or  dealer  made  the
          suitability determination; and
     *    that the broker or dealer  received a signed,  written  agreement from
          the investor prior to the transaction.

     Generally,   brokers  may  be  less  willing  to  execute  transactions  in
securities  subject to the "penny stock" rules.  This may make it more difficult
for  investors  to dispose of our common stock and cause a decline in the market
value of our stock.

     Disclosure also has to be made about the risks of investing in penny stocks
in both public  offerings  and in  secondary  trading and about the  commissions
payable to both the  broker-dealer  and the registered  representative,  current
quotations  for the  securities  and the rights  and  remedies  available  to an
investor  in  cases  of fraud in  penny  stock  transactions.  Finally,  monthly
statements  have to be sent  disclosing  recent price  information for the penny
stock held in the account and information on the limited market in penny stocks.


                                       17
<PAGE>



Item 2 - Description of Property

     We  lease  our  corporate  office  and  manufacturing   facility  from  our
controlling  stockholder under a long-term operating lease agreement.  The lease
requires a monthly payment of approximately  $5,735,  including applicable State
sales taxes. We are responsible for all utilities and maintenance expenses.  The
lease  expires on December 1, 2009 and  contains a clause that upon  expiration,
the Company and the controlling  shareholder shall renegotiate the annual rental
amount.

     Our subsidiary,  IPE, leases its  manufacturing  facility from an unrelated
third-party  under a long-term  operating lease  agreement.  This lease is for a
period of five (5) years and requires  graduated monthly  payments,  changing on
the lease anniversary date,  ranging from approximately  $1,751 to $1,914,  plus
the applicable  sales taxes.  The Company is  responsible  for all utilities and
maintenance  expenses.  The lease expires on June 30, 2007  (including a 120-day
extension  on the term of the lease) and may be renewed for an  additional  five
(5) year term at a rental rate of  approximately  $1,971,  plus applicable sales
taxes  for  the  first  renewal  year  and  3.0%  increase  on  each  succeeding
anniversary date. Total rent expense under this lease was approximately  $23,057
and  $22,176,  respectively,  for each of the years ended  December 31, 2006 and
2005.

     In May 2004,  we entered into a long-term  lease  agreement for a warehouse
facility in close  proximity to our primary  office and  manufacturing  facility
with an unrelated third-party..  This lease is for a period of two (2) years and
requires payments of approximately  $6,206 per month for the first 12 months and
approximately  $6,393 for the second 12 months,  plus applicable sales taxes. We
are responsible for all utilities and maintenance  expenses.  This lease expired
and was terminated on June 30, 2006,  relieving the company of this  obligation.
Further,  we are responsible for any incremental  real estate taxes and property
insurance  in excess of the amounts  incurred by the  landlord  for the calendar
year immediately preceding the execution of the lease.

Future minimum rental payments on the above leases are as follows:

           Year ended
          December 31,             Amount
          ------------           ----------
              2007                  72,643
              2008                  72,643
              2009                  68,815
              2010                  68,815
                                 ---------
             Totals              $ 137,630
                                 =========


                                       18
<PAGE>



     For the respective years ended December 31, 2006 and 2005, the Company paid
an  aggregate  of  $125,862  and$158,947,  respectively,  for rent  under  these
agreements.


Item 3 - Legal Proceedings

     The Company was a nominal defendant,  stakeholder,  and affected party in a
civil action styled Independent Banker's Bank v. Eduardo A. Godoy, et. al., Case
Number 2003 CA 002466,  currently  pending in the Circuit Court of the Fifteenth
Judicial Circuit In And For Palm Beach County,  Florida. The action was filed by
a creditor  of  shareholders  of the  Company,  and as Issuer of shares to other
Defendants  in the action the  Company is named as a  stakeholder  and  affected
party in the action.  No monetary  claim was asserted in this action against the
Company.  The Company and its counsel were of the opinion that no such  monetary
claims  should be made,  and if made,  were without  merit and  defensible.  The
claims were voluntarily dismissed at the end of 2006.

     From time to time the Company is subject to various legal  proceedings that
are  incidental to the ordinary  conduct of its  business.  The Company does not
consider any such proceedings to date, either  individually or in the aggregate,
to be material to its business or likely to result in a material  adverse effect
on its future operating results, financial condition, or cash flows.


Item 4 - Submission of Matters to a Vote of Security Holders

     On June 27, 2005, pursuant to a Written Consent of Shareholder(s)  Pursuant
to  California  General  Corporation  Law,  shareholders  holding  approximately
69,111,256  shares (or  approximately  61%) of the then  issued and  outstanding
shares  approved  the  merger of an entity to be formed  under  Nevada  Law with
American  Ammunition,  Inc. (a California  corporation)  for the sole purpose of
effecting  the  re-incorporation  and change in  corporate  domicile.  Effective
January 1, 2006,  the  transaction  was effected and since that date the company
has been domiciled in and is a Nevada corporation.







                                       19
<PAGE>



                                     PART II


Item 5 - Market for Company's Common Equity,  Related  Stockholders  Matters and
         Small Business Issuer Purchaser of Equity Securities

Market for Trading

     Our common stock of the Company  currently is quoted on the NASDAQ Over the
Counter  Bulletin Board since October 23, 2001. Our current  symbol,  as changed
for the January 2006 reverse stock split, is "AAMU".  Prior to January 2006, our
common stock traded under symbol "AAMI".  Our common stock, in prior years,  was
approved for trading under the symbol "FBIB";  however, no trades were conducted
using this symbol.

     The ask/high and bid/low  information  for each quarter  since  October 23,
2001 are as follows:

       Quarter                    Ask/High                  Bid/Low
-------------------------------------------------------------------
1/1/2002 - 3/31/2002               0.81                      0.33
4/1/2002 - 6/30/2002               0.65                      0.36
7/1/2002 - 9/30/2002               0.57                      0.31
10/1/2002 - 12/31/2002             0.47                      0.38

1/1/2003 - 3/31/2003               0.78                      0.53
4/1/2003 - 6/30/2003               0.85                      0.42
7/1/2003 - 9/30/2003               0.55                      0.37
10/1/2003 - 12/31/2003             0.42                      0.22

1/1/2004 - 3/31/2004               0.50                      0.27
4/1/2004 - 6/30/2004               0.42                      0.17
7/1/2004 - 9/30/2004               0.27                      0.17
10/1/2004 - 12/31/2004             0.24                      0.15

1/1/2005 - 3/31/2005               0.17                      0.09
4/1/2005 - 6/30/2005               0.14                      0.07
7/1/2005 - 9/30/2005               0.14                      0.08
10/1/2005 - 12/31/2005             0.15                      0.30

1/1/2006 - 3/31/2006               1.18                      0.30
4/1/06 - 6/30/06                   0.40                      0.28
7/1/06 - 9/30/06                   0.80                      0.25
10/1/06 - 12/31/06                 0.65                      0.36




                                       20
<PAGE>



     Please note that  over-the-counter  market  quotations  have been  provided
herein.  The  quotations  reflect  inter-dealer  prices,  without retail markup,
mark-down or commission and may not represent actual transactions.

     As of December 31, 2006, we had  approximately  240 shareholders of record,
exclusive of our stockholders with their holdings in street name.

Common Stock

     The  holders  of the  issued  and  outstanding  shares of common  stock are
entitled to receive dividends when, as and if declared by our Board of Directors
out of any funds lawfully available therefore. The Board of Directors intends to
retain future  earnings to finance the development and expansion of our business
and does not expect to declare any  dividends  in the  foreseeable  future.  The
holders of the common  stock have the  right,  in the event of  liquidation,  to
receive pro rata all assets  remaining after payment of debts and expenses.  The
common stock does not have any  preemptive  rights and does not have  cumulative
voting rights.  The issued and outstanding shares of common stock are fully paid
and nonassessable. Holders of shares of common stock are entitled to vote at all
meetings  of such  shareholders  for the  election  of  directors  and for other
purposes.  Such  holders  have one vote for each  share of common  stock held by
them.

Specific Common Stock Transactions

     The Company satisfied in full its obligations with La Jolla Cove Investors,
Inc.  ("La  Jolla"),  which had been  assigned  to La Terraza  Trading and Asset
Management  Ltd. (La Terraza) on or about  September 13, 2006.  The specifics of
the  transaction  are set out in the section of the 10-KSB  labeled  convertible
debenture and analyzed in detail in the financial statements. As a result of the
transaction,  , the Company has no continuing  obligation  under the convertible
debenture and attached warrant.

Transfer Agent

     Our independent  stock transfer agent for our common and preferred stock is
Atlas Stock Transfer Corporation.  Their mailing address and telephone number is
5899 South State Street, Salt Lake City, Utah 84107; (801) 266-7151.

Reports to Stockholders

     The Company  plans to furnish its  stockholders  with an annual  report for
each fiscal year ending December 31 containing  financial  statements audited by
its  registered  independent  public  accounting  firm. In the event the Company
enters  into a business  combination  with  another  Company,  it is the present
intention of management to continue  furnishing  annual reports to stockholders.


                                       21
<PAGE>



Additionally, the Company may, in its sole discretion, issue unaudited quarterly
or other interim  reports to its  stockholders  when it deems  appropriate.  The
Company intends to maintain compliance with the periodic reporting  requirements
of the Securities Exchange Act of 1934.

Dividend policy

     No dividends  have been paid to date and the  Company's  Board of Directors
does not  anticipate  paying  dividends  in the  foreseeable  future.  It is the
current  policy to retain all  earnings,  if any, to support  future  growth and
expansion.


Item 6 - Management's Discussion and Analysis or Plan of Operation

Caution Regarding Forward-Looking Information

     Certain  statements  contained in this annual  filing,  including,  without
limitation, statements containing the words "believes", "anticipates", "expects"
and  words  of  similar  import,  constitute  forward-looking  statements.  Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors that may cause the actual results,  performance or achievements of
the Company,  or industry  results,  to be materially  different from any future
results,   performance   or   achievements   expressed   or   implied   by  such
forward-looking statements.

     Such factors include, among others, the following: international,  national
and local  general  economic and market  conditions:  demographic  changes;  the
ability of the Company to sustain, manage or forecast its growth; the ability of
the Company to successfully make and integrate acquisitions;  raw material costs
and availability; new product development and introduction;  existing government
regulations  and  changes  in,  or  the  failure  to  comply  with,   government
regulations;  adverse publicity;  competition; the loss of significant customers
or suppliers;  fluctuations  and  difficulty in forecasting  operating  results;
changes in business strategy or development  plans;  business  disruptions;  the
ability  to attract  and  retain  qualified  personnel;  the  ability to protect
technology; and other factors referenced in this and previous filings.

     Given these  uncertainties,  readers of this Form 10-KSB and  investors are
cautioned not to place undue reliance on such  forward-looking  statements.  The
Company  disclaims  any  obligation  to update any such  factors or to  publicly
announce the result of any  revisions to any of the  forward-looking  statements
contained herein to reflect future events or developments.



                                       22
<PAGE>



General

     American  Ammunition,   Inc.  is  a  holding  company  with  two  operating
subsidiaries: F&F Equipment, Inc. and Industrial Plating Enterprise Co.

     F&F  Equipment,  Inc. (F&F) was  incorporated  on October 4, 1983 under the
laws of the  State of  Florida.  F&F was  formed to  engage  principally  in the
"import,  export,  retail & wholesale of firearms equipment,  ammunition & other
devices and for the purpose of transacting any and/or all lawful  business." F&F
conducts   its  business   operations   under  the  assumed  name  of  "American
Ammunition."

     In June 2002, American  Ammunition,  Inc. formed a wholly owned subsidiary,
Industrial  Plating  Enterprise Co. (IPE),  which started production on June 14,
2002.  IPE  is a  fully  licensed  and  approved  electrochemical  metallization
facility with  significant  capacity for  processing  our line of projectiles as
well as other products and services while employing  environmentally sound water
conservation and proven waste treatment techniques.

Results of Operations

Year ended December 31, 2006 compared to Year ended December 31, 2005

     During the year ended  December  31, 2006,  we  experienced  aggregate  net
revenues of approximately $2,241,399, with approximately $556,057 being realized
during the 4th quarter,  as compared to  approximately  $3,243,633  in total net
revenues for the year ended December 31, 2005.

     We experienced costs of goods sold of approximately $3,488,740 for the year
ended  December 31, 2006 as compared to  approximately  $4,592,210  for the year
ended December 31, 2005.

     During 2006 and 2005, we  experienced  negative  trends off of our standard
production  costs for  material  and labor due to  difficulties  in training new
employees, adding new products to our catalog and lower than expected orders due
to  uncontrollable  delays in ordering by various U. S.  Governmental  entities.
Management is of the opinion that the production  labor force is stable and able
to maintain a constant  standard of quality for future  periods.  We  experience
variable  costs in the area of material  consumption  and direct labor.  We have
recognized  depreciation  expense on  production  equipment of  approximately  $
31,024 and $770,000,  respectively,  in the above cost of goods expense  totals.
These  depreciation  levels are  anticipated  to  fluctuate  nominally in future
periods based upon either the full  depreciation of older  equipment  and/or the
addition of new equipment to expand capacity.


                                       23
<PAGE>



     In accordance with Statement of Financial Accounting Standards No. 144, due
to our lack of  profitability  and positive gross margins and the uncertainty of
the receipt of budgeted  orders during future periods,  management  recognized a
4th quarter  adjustment to fully impair the undepreciated  balance on all of our
property and equipment.  This action  resulted in a one-time  non-cash charge to
operations of approximately $2,778,000.

     For the year ended December 31, 2006 and 2005, respectively, we generated a
negative  gross  profit  of   approximately   $(1,247,341)   or  (55.65%),   and
approximately$(1,349,000),  or  (41.58%).  While we have a backlog of orders and
future order  commitments  from  governmental  agencies,  we anticipate  that we
should be able to generate a positive gross profit in future  periods;  however,
there are no guarantees or any certainty that this will occur.

     We experienced  nominal research and development  expenses of approximately
$-0- and  $2,000,  respectively,  during the year ended  December  31,  2006 and
December 31, 2005, principally related to the expansion of our product line.

     During 2006 and 2005, respectively, we experienced charges to operations of
approximately $5,191,533 and $257,213 for compensation expense related to common
stock  issuances at less than "fair  value".  The  calculation  of these charges
result from our issuing  common stock for either cash or services at  valuations
below the closing  quoted  market price of our common stock (as  discounted,  as
applicable)  and either the cash received or the value of the services  provided
to us by third  parties.  Exclusive of the charges  expenses  relating to common
stock issuances,  operating  expenses  decreased by  approximately  $99,000 from
approximately  $1,567,545  for the year ended  December  31, 2005 as compared to
approximately $1,468,534 for the year ended December 31, 2006. .

     We recognized a net loss of approximately  $(8,100,057) and (5,942,000) for
the respective years ended December 31, 2006 and 2005, respectively,  or $(0.96)
and $(1.53) per share.

Liquidity

     As of December 31, 2006 and 2005,  respectively,  we had working capital of
approximately $684,000,  $(885,000) and $872,000. We have used cash in operating
activities of approximately $(1,715,910) and $(1,802,000) during the years ended
December 31, 2006 and 2005, respectively.

     The Company's  improvement  in working  capital is directly  related to the
refinancing of the notes payable to  stockholders  that took the maturity out to
2008, classifying the notes as non-current on the current balance sheet.


                                       24
<PAGE>



Capital Requirements

     During the years ended December 31, 2006 and 2005,  respectively,  we added
approximately  $ 31,024 and $124,000 in new  equipment.  New equipment  added in
2006 includes  machinery and equipment  necessary to expand our rifle  cartridge
making capabilities.

     Depending  on  future  demand  for our  products,  we may  need to  further
increase  our  production  capability  and  management  is of the  opinion  that
adequate  equipment,  either new or used,  will be available to  facilitate  any
future expansion

Convertible Debenture

     On  October  4,  2002,  the  Company  entered  into a  Securities  Purchase
Agreement with La Jolla for the sale of (I) $250,000 in  convertible  debentures
and (ii) warrants to buy  30,000,000  shares of our common  stock.  On March 13,
2003 and May 6, 2003, La Jolla  advanced an aggregate of $350,000 to our company
that such funding was allocated towards the principal balance of our convertible
debentures.

     As of  September  30,  2006,  the  outstanding  balance  on  the  La  Jolla
convertible  debenture has been retired. A recap of the debenture activity is as
follows:

                                                    Debenture      Warrant
                                                  (in dollars)   (in shares)
                                                  -----------   ------------
    Initial amount                                 $  600,000     6,000,000
    2003 redemptions                                 (208,635)   (2,086,350)
    2004 redemptions                                 (125,000)   (1,250,000)
    2005 redemptions                                  (40,000)     (400,000)
    2006 retirement                                  (226,365)   (2,263,650)
                                                   ----------   -----------
    Balances outstanding at September 30, 2006     $        -             -
                                                   ==========   ===========

     In addition to  retiring  the  debenture,  the Company  repaid  $200,000 in
prepaid warrant  exercises and approximately  $158,635 in negotiated  prepayment
and penalty fees for an aggregate payment of $585,000.

     Additionally, the Company recognized a charge to operations,  including the
aforementioned $158,635 cash payment, of approximately $354,450 for the issuance
of 56,003 shares of common stock to La Jolla and the  forgiveness of $175,000 in
monies due from La Jolla for common stock  issued on warrant  exercises in prior
periods.


                                       25
<PAGE>



     On September 13, 2006, La Terraza deposited a total of $2,150,000 in escrow
for the use and benefit of the Company.  The funds were  allocated  and used for
the following:

1.   The sum of  $585,000  was paid to La Jolla to acquire for La Terraza a full
     and  complete  assignment  of any and all of La  Jolla's  right,  title and
     interest  in any and all of the  Company's  indebtedness  to La  Jolla  and
     specifically including La Jolla's rights under the active SB-2 Registration
     Statement for the issuance and registration of securities  thereunder;  the
     consent of the Company to the foregoing subject to the right of the Company
     to prepay  any and all  indebtedness  thereunder  in the  Company's  common
     stock, without penalty, at any time before or after default.

2.   The sum of $275,000 to be used by the Company to redeem and satisfy in full
     the Series E Preferred  Stock  funded by third party  investors on or about
     July 12, 2006, including a prepayment redemption penalty of $25,000.

3.   The sum of $215,000 payable as fees to Capital  Investment  Services,  Inc.
     for locating, negotiating and closing the funding.

4.   The sum of $100,000 to repay in full, without interest, an unsecured bridge
     loan from Investor to the Company dated and funded on August 25, 2006.

5.   The sum of $275,000 released to the Company for working capital.

6.   The balance of  $700,000,  to be retained  in escrow and  disbursed  to the
     Company for payment in  reduction of the  assigned La Jolla  debenture  and
     required  warrant  exercised  thereunder,  until the  debenture and warrant
     obligations  are  satisfied  in full in  accordance  with the  terms of the
     assigned La Jolla documents.

     The  financing  transaction  required  the Company to deposit in escrow for
later  delivery a total of 11,470,000  shares of its common stock (to be held as
unissued and not outstanding) to guarantee availability of stock as required for
the reduction of the  debenture and  satisfaction  of warrant  obligations.  The
agreement also calls for an additional 5,000,000 shares of the restricted common
stock of the  Company to be  deposited  in a separate  escrow to be used for any
other expenses and compensation to third parties that may be agreed upon between
La Terraza and the Company for future  services to advance the overall  business
of the Company.  In addition,  the Company granted La Terraza a total of 600,000
warrants  exercisable at the lesser of $0.1875 per share or the average  closing
price per share for the common  stock  during the twelve (12) month period prior
to the date of exercise. These warrants are exercisable at any time on or before
five (5) years from July 24,  2006.  All shares  required to be  deposited  into
escrow  were in fact  deposited  on  September  26, 2006 as  required,  and were
released to La Terraza on December 27, 2006, along with an additional  5,333,335
shares for additional gross proceeds of $1,000,000,  which satisfied in full any
and all debenture and related obligations,  the entire transaction  effective as
of September 13, 2006.


                                       26
<PAGE>



     As of December 31, 2006, the Company has no continuing obligation under the
convertible debenture and attached warrant.

Continuing Operations

     The Company  intends to continuing  growing its domestic sales base through
the Dealer Direct  program.  It has also begun focusing on certain  distributors
and  catalog  houses  to  augment   domestic  sales.   Management  is  currently
negotiating contracts with several other distributors and retailers. New tooling
and equipment has provided the  opportunity  for  additional,  more  specialized
calibers  that the company  intends to  integrate  into its product  line during
2007. Management continues to work towards more efficient operations,  including
cost savings and additional employee recruitment and training to reduce any down
time  experienced.  The influx of  additional  capital in the 4th  quarter  2006
should allow the Company to make bulk  purchases of raw  materials and supplies,
taking advantage of purchasing discounts.


Item 7 - Index to Financial Statements

     The required financial statements begin on page F-1 of this document.


Item 8 -  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosures

     None


Item 8A - Controls and Procedures

     As required by Rule 13a-15 under the Exchange Act, within the 90 days prior
to the filing date of this report,  the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's  disclosure  controls
and  procedures.  This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive  Officer and the Company's Chief  Financial  Officer.  Based
upon that evaluation,  the Company's  President and Chief Executive  Officer and
the Company's Chief Financial  Officer  concluded that the Company's  disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in other factors,  which could  significantly
affect  internal  controls  subsequent  to the date the Company  carried out its
evaluation.



                                       27
<PAGE>



     Disclosure  controls and procedures are controls and other  procedures that
are  designed to ensure that  information  required to be  disclosed  in Company
reports  filed or  submitted  under the  Exchange  Act is  recorded,  processed,
summarized and reported, within the time periods specified in the Securities and
Exchange  Commission's  rules and  forms.  Disclosure  controls  and  procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information required to be disclosed in Company reports filed under the Exchange
Act is accumulated and communicated to management, including the Company's Chief
Executive  Officer and Chief Financial  Officer as appropriate,  to allow timely
decisions regarding required disclosure.



                                    PART III

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

     The directors and executive officers serving the Company are as follows:

Name                  Age   Position Held and Tenure
--------------------  ---  -------------------------------
J. A. Fernandez, Sr.   68  Chairman of the Board and Director of Sales
Andres F. Fernandez    41  President and Chief Executive Officer
Emilio D. Jara         41  Vice-President of Operations, Secretary and Director
Maria A. Fernandez     48  Director

     All  directors  hold office until the next annual  meeting of the Company's
shareholders and until their successors have been elected and qualify.  Officers
serve at the pleasure of the Board of Directors. The officers and directors will
devote such time and effort to the business and affairs of the Company as may be
necessary  to  perform  their  responsibilities  as  executive  officers  and/or
directors of the Company.

Family Relationships

     J. A. Fernandez, Sr. is the father of Andres Fernandez and Maria Fernandez.
There are no other family relationships  between or among the executive officers
and directors of our company.

Business Experience

     J. A.  Fernandez,  Sr.  currently  serves as the  Chairman of the Board and
Director  or  Sales.  We have  employed  him since our  inception  in 1983.  Mr.
Fernandez is the founder F&F Equipment, which began as a family business, and is
responsible for our sales activities. Mr. Fernandez has over 40 years experience
in diverse  industries  including  aerospace,  advanced  polymer  manufacturing,
munitions,  mining and  processing  of gemstones and metal ores and has utilized
such experience for the growth and  development of the Company.  He is fluent in
Spanish.


                                       28
<PAGE>



     Andres Fernandez currently serves as President and Chief Executive Officer.
Mr.  Fernandez has served in each of these  capacities  since September 2001. He
has been employed by our company for over a decade. Mr. Fernandez is responsible
for day to day  operations.  He  studied  physics  and  calculus  at St.  Thomas
University,  FL and at the  University  of Miami,  FL. He is a  licensed  pilot,
having  graduated from the American  Institute of Aeronautics,  FL, and received
his  certificate  as a private pilot (fixed wing) as well as private  helicopter
(rotary)in 1989. In 1989, Mr.  Fernandez  graduated from the Institute of Public
Service (Pan Am), GA as a tactical rappel instructor. In 1990, he graduated from
Omni Explosives,  TN with a specialty in tactical explosives.  Mr. Fernandez was
certified  by the  Florida  Department  of Law  Enforcement  Academy  in special
operations/entry techniques in 1990. He has served as a tactical advisor to U.S.
Treasury  Department,  Bureau of Alcohol,  Tobacco and  Firearms,  U.S.  Customs
Service and the Florida Department of Law Enforcement.  He has received numerous
commendations  and  letters  of  appreciation.  He also  served  on the Board of
Veterans Affairs (Hialeah, FL) from 1990 to 1991. He is fluent in Spanish.

     Emilio Jara currently  serves as Vice  President of  Operations,  Corporate
Secretary and a Director.  Mr. Jara has served in each of these capacities since
September 2001. He has been employed with our company since 1988. He has been an
integral part of our technological growth. His abilities have contributed to our
research and  development  and  subsequent  increase in the number of production
lines. Mr. Jara is extremely well versed in metallurgical  and ballistic issues.
He studied business administration at Miami- Dade Community College (1984/1985).
In 1989,  he graduated  from the  Institute of Public  Service (Pan Am), GA as a
Tactical Rappel Instructor. In 1990, Mr. Jara graduated from Omni Explosives, TN
with a specialty in Tactical Explosives. He is fluent in Spanish.

     Maria A.  Fernandez  currently  serves as a Director.  Mrs.  Fernandez  has
served as a Director since September 2001. She has been the managing  partner at
Fernandez  Friedman  Grossman & Kohn PLLC, a Louisville,  KY law firm, since May
1998.  Prior to that date,  she was a partner at  Taustine  Post  Sotsky  Berman
Fineman  & Kohn.  She  concentrates  her legal  practice  in the areas of estate
planning,  probate  and  administration.  She  also  practices  in the  areas of
Medicaid  and  disability  planning,   corporate  and  individual  taxation  and
corporate law, with an emphasis in closely held corporations.  She is a graduate
of the University of Miami, FL (Bachelor of Business  Administration  and Master
of Professional  Accounting) and the Brandeis School of Law at the University of
Louisville,  KY. Ms.  Fernandez is licensed to practice in Kentucky and Florida.
She has lectured in the areas of estate planning and probate,  Medicaid planning
and elder law. She is a member of the Louisville, Florida, Kentucky and American
Bar Associations  and is fluent in Spanish.  Ms. Fernandez is the past President
of the Women Lawyers Association of Jefferson County, Kentucky and current Board
Member of the Louisville  Bar  Association.  A Graduate of the Kentucky  Women's
Leadership  Network,  she is active in various civic organizations and is on the
board of several non-profit corporations.


                                       29
<PAGE>



Compliance with Section 16(a) of the Securities Exchange Act

     Section  16(a)  of  the  Securities  Exchange  Act  of  1934  requires  our
directors,  certain officers and persons holding 10% or more of our common stock
to file reports  regarding their ownership and regarding their  acquisitions and
dispositions of the  Registrant's  common stock with the Securities and Exchange
Commission ("SEC").  Such persons are required by SEC regulations to furnish our
company  with copies of all Section  16(a) forms they file.  Based solely upon a
review  of Forms 3 and 4 and  amendments  thereto  furnished  to us  under  Rule
16a-3(d) during fiscal 2003, and certain written  representations from executive
officers and directors,  we are unaware that any required  reports that have not
been timely filed.

Code of Ethics

     We have  adopted a code of ethics that has been filed as an exhibit to this
report.

Committees of the Board of Directors

     We  presently  have  not  established  an  audit  committee,   compensation
committee,  nominating  committee,  an  executive  committee  of  our  board  of
directors, stock plan committee or any other committees. Our Board of Directors,
as defined in Sarbanes-Oxley Act of 2002, is the defacto  composition of any and
all committees.

Terms of Office

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

Conflicts of Interest

     We know of no  identified  or  disclosed  conflicts  of interest  among our
officers or directors and the affairs of the Company.

Indemnification for Securities Act Liabilities

     The Company's By-Laws provide for the  indemnification  of its,  directors,
officers, employees, and agents, under certain circumstances, against attorney's
fees and other expenses  incurred by them in any litigation to which they become
a party  arising  from their  association  with or  activities  on behalf of the
Company.  The Company will also bear the expenses of such  litigation for any of
its directors,  officers,  employees,  or agents,  upon such persons  promise to
repay the Company therefore if it is ultimately  determined that any such person
shall not have been entitled to  indemnification.  This  indemnification  policy
could result in substantial  expenditures by the Company, which it may be unable
to recoup.


                                       30
<PAGE>



Item 10 - Executive Compensation

     The following  summary  compensation  table sets forth the  aggregate  cash
compensation paid or accrued in excess of $100,000 by the Company to each of the
Company's  executive  officers for services  rendered to the Company  during the
Company's  fiscal years ended December 31, 2006,  2005 and 2004 and all plan and
non-plan  compensation  awarded  to,  earned  by or paid to  certain  designated
executive officers.

<TABLE>
<CAPTION>
----------------- ------ ------- ----- -------- -------- ------------ ---------------- ------------ --------
                                                                      Changes in
                                                                      Pension Value
                                                                      and
                                                         Non-equity   Nonqualified
Name and                                                 Incentive    Deferred
Principal                              Stock    Option   Plan         Compensation     All other
position          Year   Salary  Bonus Awards   Awards   Compensation Earnings         Compensation Total
----------------- ------ ------- ----- -------- -------- ------------ ---------------- ------------ --------
<S>               <C>    <C>     <C>   <C>      <C>      <C>          <C>              <C>          <C>
                  2006   104,000 N/A   N/A      N/A      N/A          N/A              N/A          104,000
J. A.             2005   104,000                                                                    104,000
Fernandez, Sr.    2004   104,000                                                                    104,000
Chairman and
Vice President
of Sales

                  2006   132,600 N/A   N/A      N/A      N/A          N/A              N/A          132,600
Andres F.         2005   132,600                                                                    132,600
Fernandez         2004   132,600                                                                    132,600
President and
Chief Executive
Officer
----------------- ------ ------- ----- -------- -------- ------------ ---------------- ------------ --------
</TABLE>

Compensation of Directors

     We have no existing  arrangements  for compensating our directors for their
attendance at meetings of the Board of Directors.  Depending  upon market forces
and  regulatory  mandates,  we may  find it  necessary  to  implement  a  formal
compensation  plan in future periods to obtain and retain  qualified  members of
our Board of Directors.


                                       31
<PAGE>



Item 11 - Security Ownership of Certain Beneficial Owners and Management

     The  following  table  sets  forth,  as of the  date of  this  Registration
Statement, the number of shares of Common Stock owned of record and beneficially
by  executive  officers,  directors  and  persons  who  hold  5% or  more of the
outstanding  Common Stock of the Company.  Also  included are the shares held by
all executive officers and directors as a group.

                                                % of Class
     Name and address                       Beneficially Owned  Number of Shares
--------------------------------------------------------------------------------
Andres F. Fernandez                             0.012%              277,932
J. A. Fernandez, Sr.                            0.026%              605,439
Amelia C. Fernandez                             0.009%*             214,095
Maria A. Fernandez                              0.001%*              13,000

Emilio D. Jara                                  0.000%*               2,713
Capital Investment Services                    24.84%             5,633,335
         Irrevocable Trust Escrow
National Business Investors                     5.511%            1,268,181
RFP Development, LLC                            7.975%            1,835,000
Alistair Tait Snowie                           25.643%            5,900,000

Total securities held by officers               0.048             1,113,179
  and directors as a group (4 people)
--------------
*    Less than 1%

     The contact  address for each of our  officers  and  directors is 3545 N.W.
71st Street, Miami, FL 33147.

     Beneficial  Ownership is  determined  in  accordance  with the rules of the
Securities and Exchange  Commission and generally  includes voting or investment
power with respect to  securities.  Shares of common stock subject to options or
warrants  currently  exercisable or  convertible,  or exercisable or convertible
within 60 days of December 31, 2006 are deemed  outstanding  for  computing  the
percentage  of the person  holding  such  option or  warrant  but are not deemed
outstanding  for computing the percentage of any other person.  J. A. Fernandez,
Sr. is the father of Andres Fernandez and Maria Fernandez.  The table above does
not  include  the  19,225  shares  Maria  Fernandez  holds as a  Trustee  for an
Irrevocable  Trust  in  which  neither  she nor  any of the  other  Officers  or
Directors is the beneficial owner.


                                       32
<PAGE>



Item 12 - Certain Relationships and Related Transactions

     We  lease  our  corporate  office  and  manufacturing   facility  from  our
controlling  stockholder under a long-term operating lease agreement.  The lease
requires a monthly payment of approximately  $5,735,  including applicable State
sales taxes. We are responsible for all utilities and maintenance expenses.  The
lease  expires on December 1, 2009 and  contains a clause that upon  expiration,
the Company and the controlling  shareholder shall renegotiate the annual rental
amount.


Item 13 - Exhibits

31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

33.1  Code of Ethics.


Item 14 - Principal Accountant Fees and Services

     The  Company  paid or accrued the  following  fees in each of the prior two
fiscal years to its principal accountant, S. W. Hatfield, CPA of Dallas, Texas.

                                               Year ended        Year ended
                                               December 31,     December 31,
                                                   2006             2005
                                               -----------      -----------
1.       Audit fees                             $   56,869      $    49,724
2.       Audit-related fees                              -                -
3.       Tax fees                                    3,881            4,972
4.       All other fees                                  -                -
                                               -----------      -----------
   Totals                                      $    60,570      $    57,636
                                               ===========      ===========

     We have  considered  whether the  provision of such  non-audit  services is
compatible with S. W. Hatfield,  CPA maintaining its independence and determined
that these services do not compromise their independence.

     Financial Information System Design and Implementation: S. W. Hatfield, CPA
did not charge the Company any fees for financial  information system design and
implementation fees.

     The Company has no formal  audit  committee.  However,  the entire Board of
Directors (the "Board") is the Company's defacto audit committee. In discharging
its oversight  responsibility  as to the audit process,  the Board obtained from
the independent auditors a formal written statement describing all relationships
between  the  auditors  and  the  Company  that  might  bear  on  the  auditors'


                                       33
<PAGE>



independence  as  required  by  Independence  Standards  Board  Standard  No. 1,
"Independence  Discussions with Audit  Committees." The Board discussed with the
auditors any  relationships  that may impact their objectivity and independence,
including fees for non-audit services,  and satisfied itself as to the auditors'
independence.  The Board also discussed with management,  the internal  auditors
and the independent  auditors the quality and adequacy of the Company's internal
controls.

     The Company's principal accountant, S. W. Hatfield, CPA, did not engage any
other  persons  or  firms  other  than  the  principal  accountant's  full-time,
permanent employees.






                [Balance of this page intentionally left blank.]






                                       34
<PAGE>


                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES

                                    CONTENTS


                                                                           Page

Report of Registered Independent Certified Public Accounting Firm           F-2

Consolidated Financial Statements

   Consolidated Balance Sheets
     as of December 31, 2006 and 2005                                       F-3

   Consolidated Statement of Operations and Comprehensive Loss
     for the years ended December 31, 2006 and 2005                         F-5

   Consolidated Statement of Changes in Stockholders' Equity
     for the years ended December 31, 2006 and 2005                         F-6

   Consolidated Statement of Cash Flows
     for the years ended December 31, 2006 and 2005                         F-7

   Notes to Consolidated Financial Statements                               F-9









                                       F-1
<PAGE>



                        Letterhead of S. W. Hatfield, CPA

        Report of Registered Independent Certified Public Accounting Firm



Board of Directors and Stockholders
American Ammunition, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of  American
Ammunition,  Inc. (a Nevada corporation) and Subsidiaries (Florida corporations)
as of  December  31, 2006 and 2005 and the related  consolidated  statements  of
operations and  comprehensive  loss,  changes in  stockholders'  equity and cash
flows for each of the two years ended December 31, 2006 and 2005,  respectively.
These consolidated  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.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audits included consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
American Ammunition,  Inc. and Subsidiaries as of December 31, 2006 and 2005 and
the results of their  consolidated  operations and  consolidated  cash flows for
each of the two  years  ended  December  31,  2006 and  2005,  respectively,  in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note C to the
consolidated financial statements, the Company experiences negative gross profit
margins,  losses  from  operations  and  negative  cash flows  from  operations.
Further,  liquidity  in prior  periods was provided by equity  securities  sales
related to the redemption of a convertible  debenture and mandatory  exercise of
attached warrants.  During 2006, the Company,  in a new securities  transaction,
retired the outstanding  balance on the convertible  debenture and cancelled the
remaining  attached  warrants.  As a result of this  transaction,  the Company's
"safety net" for future liquidity no longer exists.  These circumstances  create
substantial  doubt about the Company's  ability to continue as a going  concern.
The consolidated  financial statements do not contain any adjustments that might
result from the outcome of these uncertainties.


                                                         /s/ S. W. Hatfield, CPA
                                                       -------------------------
                                                             S. W. HATFIELD, CPA
Dallas, Texas
April 10, 2007


                                       F-2
<PAGE>


<TABLE>
<CAPTION>
                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2006 and 2005


                                                                                December 31,      December 31,
                                                                                   2006               2005
                                                                                -------------   -------------
<S>                                                                             <C>             <C>
                                     ASSETS
Current Assets
   Cash on hand and in bank                                                     $   1,209,116   $     431,050
   Accounts receivable - trade,
     net of allowance for doubtful accounts
      of $-0- and $12,463, respectively                                               396,638         571,427
   Inventory                                                                          510,104         560,090
   Prepaid expenses                                                                    59,059          56,789
                                                                                -------------   -------------
     Total Current Assets                                                           2,174,917       1,619,356
                                                                                -------------   -------------
Property and Equipment - at cost or contributed value
   Manufacturing equipment                                                          7,945,125       8,095,110
   Office furniture and fixtures                                                       71,437          69,889
   Leasehold improvements                                                             184,939         190,277
                                                                                -------------   -------------
                                                                                    8,199,501       8,355,276
   Accumulated depreciation                                                        (5,575,782)     (5,577,447)
   Impairment of recoverability of carrying value                                  (2,623,719)     (2,777,829)
                                                                                -------------   -------------
     Net Property and Equipment                                                             -               -
                                                                                -------------   -------------
Other Assets
   Patents, Trademarks and Noncompetition agreement,
     net of accumulated amortization of approximately
     $119,466 and $64,328, respectively                                               156,224        211,362
   Loan costs and fees, net of accumulated amortization
     of approximately $65,250 and $11,309, respectively                                     -          53,941
   Deposits and other                                                                  83,660          83,660
                                                                                -------------   -------------
     Total Other Assets                                                               239,884         348,963
                                                                                -------------   -------------
TOTAL ASSETS                                                                    $   2,414,801   $   1,968,319
                                                                                =============   =============
</TABLE>


                                  - Continued -


The accompanying notes are an integral part of these consolidated financial
statements.

                                       F-3
<PAGE>


<TABLE>
<CAPTION>
                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS - CONTINUED
                           December 31, 2006 and 2005


                                                                                December 31,      December 31,
                                                                                   2006               2005
                                                                                -------------   -------------
<S>                                                                             <C>             <C>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Notes payable to shareholders                                                $           -   $     975,000
   Working capital advance                                                                  -         150,000
   Customer deposits                                                                  189,840         232,690
   Accounts payable - trade                                                           735,261         846,618
   Accrued salaries and wages                                                         414,164         245,929
   Federal excise taxes payable                                                        45,806               -
   Accrued interest payable                                                            34,787          26,388
   Accrued dividends payable                                                           70,636          27,729
                                                                                -------------   -------------
     Total Current Liabilities                                                      1,490,494       2,504,354

Long-Term Liabilities
   Notes payable to shareholders                                                    1,075,000               -
   Federal excise taxes payable                                                       273,000               -
                                                                                -------------   -------------
     Total Liabilities                                                              2,838,494       2,504,354
                                                                                -------------   -------------

Commitments and Contingencies

Mandatory Convertible Debenture                                                             -         226,365
                                                                                -------------   -------------

Stockholders' Equity
   Preferred stock - $0.001 par value
     20,000,000 shares authorized.
         1,795,320 shares allocated to Series A
         91,700 shares allocated to Series B
         1,905,882 shares allocated to Series C
         100,000 shares allocated to Series E                                           2,004           1,991
   Common stock - $0.001 par value.
     300,000,000 shares authorized.
     23,007,902 and 4,173,378 shares issued and outstanding                            23,008           4,173
   Additional paid-in capital                                                      33,701,314       25,394,233
   Accumulated deficit                                                            (34,150,019)      (25,987,797)
                                                                                -------------   -------------
                                                                                     (423,693)       (587,400)
   Stock subscription receivable                                                            -        (175,000)
                                                                                -------------   -------------
   Total Stockholders' Equity                                                        (423,693)       (762,400)
                                                                                -------------   -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $   2,414,801   $   1,968,319
                                                                                =============   =============
</TABLE>


                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-4
<PAGE>


<TABLE>
<CAPTION>
                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                     Years ended December 31, 2006 and 2005

                                                                                Year ended        Year ended
                                                                                December 31,      December 31,
                                                                                   2006               2005
                                                                                -------------   -------------
<S>                                                                             <C>             <C>

Revenues                                                                        $   2,241,399   $   3,243,633
                                                                                -------------   -------------
Cost of Sales
   Materials                                                                       1,680,755        2,001,076
   Direct Labor                                                                       894,381       1,193,259
   Other direct costs and expenses                                                    412,650         627,813
   Federal Excise taxes                                                               469,930               -
   Depreciation                                                                        31,024         770,062
                                                                                -------------   -------------
     Total Cost of Sales                                                            3,488,740       4,592,210
                                                                                -------------   -------------
Gross Profit                                                                       (1,247,341)     (1,348,577)
                                                                                -------------   -------------
Operating Expenses
   Research and development expenses                                                       -            2,251
   Marketing and promotion expenses                                                  109,976          184,566
   Salaries, wages and related expenses                                              529,512          583,000
   Other operating expenses                                                          608,095          681,969
   Bad debt expense                                                                   12,089           12,463
   Interest expense                                                                  153,724           42,467
   Depreciation expense                                                                    -            5,691
   Amortization of intangibles                                                         55,138          55,138
   Consulting expense related to common stock
     issuances at less than "fair value"                                            5,191,533         257,213
                                                                                -------------   -------------
     Total Operating Expenses                                                       6,660,067       1,824,758
                                                                                -------------   -------------
Loss from Operations                                                               (7,907,408)     (3,173,335)

Other Income (Expense)
   Other income (expense)                                                             186,801          9,495
   Prepayment penalty on Series E redemption                                          (25,000)             -
   Settlement fees on debenture restructuring and retirement                         (354,450)             -
   Impairment charge against carrying value of property and equipment                       -      (2,777,829)
                                                                                -------------   -------------
Loss before Income Taxes                                                           (8,100,057)     (5,941,669)

Provision for Income Taxes                                                                  -               -
                                                                                -------------   -------------
Net Loss                                                                           (8,100,057)     (5,941,669)

Other Comprehensive Income                                                                  -               -
                                                                                -------------   -------------
Comprehensive Loss                                                                 (8,100,057)     (5,941,669)
Preferred Stock Dividends                                                             (62,165)        (56,253)
                                                                                -------------   -------------
Net Loss available to Common Shareholders                                       $  (8,162,222)  $  (5,997,922)
                                                                                =============   =============
Loss per weighted-average share of common stock outstanding,
   computed on net loss - basic and fully diluted                               $       (0.96)  $       (1.53)
                                                                                =============   =============
Weighted-average number of common shares outstanding                                8,524,241       3,907,499
                                                                                =============   =============
</TABLE>

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-5
<PAGE>


<TABLE>
<CAPTION>
                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                     Years ended December 31, 2006 and 2005

                                            Mandatory Convertible
                                             Preferred Stock          Common Stock      Additional
                                           ---------------------    -------------------    paid-in     Accumulated
                                             Shares     Amount      Shares      Amount    capital        deficit        Total
                                          ---------------------------------------------------------------------------------------
<S>                                       <C>           <C>         <C>           <C>      <C>          <C>            <C>

Balances at January 1, 2005                 2,009,582  $    2,010     3,743,516 $  3,743   $ 24,543,820 $(19,989,875)  $ 4,559,698

Conversion of preferred stock
   into common stock                          (18,340)        (19)       66,810       67            (47)           -             -
Issuance of common stock for
 Cash                                               -           -       293,603      294        476,312            -       436,607
  Consulting expense for value of common
  stock sold at less than "fair value"              -           -             -                 257,213            -       257,213
  Less cost of capital                              -           -             -                 (10,000)           -       (10,000)
 Loan fees and costs                                -           -        37,500       38         65,212            -        65,250
 Employee bonus                                     -           -         8,334        8         17,325            -        17,333
 Payment of preferred stock dividends               -           -        23,615       24         44,400            -        44,424
Dividends declared on preferred stock               -           -             -        -              -      (56,253)      (56,253)
Net loss for the year                               -           -             -        -              -   (5,941,669)   (5,941,669)
                                          ----------------------------------------------------------------------------------------
Balances at December 31, 2005               1,991,242       1,991     4,173,378    4,173     25,394,235  (25,987,797)     (587,398)

Conversion of preferred stock
   into common stock                          (36,680)        (37)      831,412      831           (794)           -             -
Issuance of preferred stock for cash          100,000         100             -        -        499,900            -       500,000
Cash redemption of preferred stock            (50,000)        (50)            -        -       (249,950)           -      (250,000)
Issuance of common stock for
   Cash for retirement of convertible
     debenture, working capital advances
     and settlement of stock subscription
     receivable                                     -           -    16,859,338   16,859      3,161,702             -    3,178,561
   Employee bonus                                   -           -        41,666       42         17,458             -       17,500
   Payment of preferred stock dividends             -           -        50,135       50         19,127             -       19,177
   Payment of accrued interest payable and
     reimbursement of expenses paid by
     shareholder                                    -           -     1,051,973    1,052         83,106             -       84,158
Cost of capital for preferred and common
     stock sales                                    -           -             -        -       (415,000)            -     (415,000)
Consulting expense for value of common
     stock issued at less than "fair value"         -           -             -        -      5,191,531             -    5,191,531
Dividends declared on preferred stock               -           -             -        -              -       (62,165)     (62,165)
Net loss for the year                               -           -             -        -              -    (8,100,057)  (8,100,057)
                                          ----------------------------------------------------------------------------------------
Balances at December 31, 2006               2,004,562  $    2,004    23,007,902 $ 23,008   $ 33,701,314  $(34,150,019) $  (423,693)
                                          ========================================================================================
</TABLE>

Stock  subscription  receivable at December 31, 2006 and 2005,  respectively was
$-0- and $175,000.

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-6
<PAGE>


<TABLE>
<CAPTION>
                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Years ended December 31, 2006 and 2005

                                                                                Year ended        Year ended
                                                                                December 31,      December 31,
                                                                                   2006               2005
                                                                                -------------   -------------
<S>                                                                             <C>             <C>
Cash flows from operating activities
   Net loss for the year                                                        $  (8,100,057)  $  (5,941,669)
   Adjustments to reconcile net loss to net
     cash provided by operating activities
       Depreciation and amortization                                                  140,103         842,200
       Bad debt expense                                                                12,089          12,463
       Payment of expenses with common stock                                          412,732          17,333
       Consulting expense related to common stock issuances
         at less than "fair value"                                                  5,191,533         257,213
       (Increase) Decrease in
         Accounts receivable                                                          162,700          55,554
         Inventory                                                                     49,986         352,334
         Prepaid expenses, deposits and other                                          (2,270)          2,057
       Increase (Decrease) in
         Accounts payable and other accrued liabilities                               207,448         (90,269)
         Accrued payroll payable                                                      168,235         109,959
         Accrued interest payable                                                      84,441          11,388
         Customer deposits                                                            (42,850)       (208,216)
                                                                                -------------   -------------
Net cash provided by (used in) operating activities                                (1,715,910)     (1,801,824)
                                                                                -------------   -------------
Cash flows from investing activities
   Purchase of property and equipment                                                 (31,024)       (124,198)
                                                                                -------------   -------------
Net cash used in investing activities                                                 (31,024)       (124,198)
                                                                                -------------   -------------
Cash flows from financing activities
   Proceeds from loans from stockholders                                              100,000         975,000
   Cash paid to retire convertible debenture                                         (585,000)              -
   Cash received on working capital advances                                        2,200,000         150,000
   Cash received on sale of preferred stock                                           500,000               -
   Cash paid to retire preferred stock                                               (275,000)
   Cash received on issuance of mandatory convertible debenture                             -         436,607
   Cash received on sale of common stock                                            1,000,000               -
   Cash paid to acquire capital                                                      (415,000)        (10,000)
                                                                                -------------   -------------
Net cash provided by financing activities                                           2,525,000       1,551,607
                                                                                -------------   -------------
INCREASE (DECREASE) IN CASH                                                           778,066        (374,415)

Cash at beginning of year                                                             431,050         805,465
                                                                                -------------   -------------
Cash at end of year                                                             $   1,209,116   $     431,050
                                                                                =============   =============
Supplemental disclosure of interest and income taxes paid
     Interest paid for the period                                               $      34,227   $      19,770
                                                                                =============   =============
     Income taxes paid for the period                                           $           -   $           -
                                                                                =============   =============
Supplemental disclosure of non-cash investing and financing activities
     Conversion of working capital advances into common stock                   $   2,200,000   $      40,000
                                                                                =============   =============
     Payment of accrued dividends on preferred
       stock with common stock                                                  $      19,177   $      44,424
                                                                                =============   =============
</TABLE>

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-7
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2005


Note A - Organization and Description of Business

American Ammunition,  Inc. (AAI or Company) was incorporated on February 1, 2000
in accordance with the Laws of the State of California. The Company functions as
a holding company providing  management  oversight services to it's wholly-owned
operating  subsidiaries;  F&F Equipment,  Inc. and Industrial Plating Enterprise
Co.

F&F Equipment,  Inc.(F&F) was incorporated on October 4, 1983 in accordance with
the Laws of the State of Florida. F&F is engaged in the design,  manufacture and
international  sales of small arms  ammunition.  F&F has  conducted its business
operations under the assumed name of "American Ammunition" since its inception.

Industrial  Plating  Enterprise Co. (IPE),  which was incorporated and commenced
production on June 14, 2002.  IPE is a fully  licensed and approved state of the
art electrochemical  metallization facility for processing the Company's line of
small arms  projectiles as well as other  products and services while  employing
environmentally  sound water conservation and proven waste treatment techniques.
The facility meets or exceeds all current environmental  requirements and enjoys
the "conditionally exempt small quantity generator" status for State and Federal
regulations.  All  activities of IPE since it's inception have been dedicated to
the needs and demands of F&F.

On January 9, 2006,  by written  consent in lieu of  meeting,  a majority of the
Company's  stockholders  approved a  recommendation  by the  Company's  Board of
Directors  to effect a one share for twenty  shares  reverse  stock split of our
common stock,  par value $.001 per share,  with fractional  shares rounded up to
the nearest whole share.  The reverse split became  effective on that date. As a
result of the reverse split,  the total number of issued and outstanding  shares
of the Company's  common stock  decreased  from  92,576,839 to  4,629,381shares,
after giving effect to rounding for fractional shares. The effect of this action
is reflected in the  Company's  financial  statements as of the first day of the
first period presented.


Note B - Preparation of Financial Statements

The  Company and its  subsidiaries  follow the accrual  basis of  accounting  in
accordance with accounting principles generally accepted in the United States of
America and have adopted a year-end of December 31 for all entities.

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.

Management further acknowledges that it is solely responsible for adopting sound
accounting  practices,   establishing  and  maintaining  a  system  of  internal
accounting  control and preventing and detecting  fraud. The Company's system of
internal  accounting  control is designed to assure,  among other items, that 1)
recorded  transactions  are valid; 2) valid  transactions  are recorded;  and 3)
transactions  are  recorded in the proper  period in a timely  manner to produce
financial  statements which present fairly the financial  condition,  results of
operations  and cash  flows of the  Company  for the  respective  periods  being
presented

For  segment  reporting  purposes,  the Company  operated  in only one  industry
segment during the periods represented in the accompanying  financial statements
and makes all  operating  decisions and  allocates  resources  based on the best
benefit to the Company as a whole.

The  accompanying  consolidated  financial  statements  contain the  accounts of
American Ammunition, Inc. and its wholly-owned subsidiaries, F&F Equipment, Inc.
and Industrial Plating Enterprise Co. All significant intercompany  transactions
have been eliminated.  The consolidated entities are collectively referred to as
"Company".



                                       F-8

<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note C - Going Concern Uncertainty

The  Company  continues  to  experience   fluctuating   periodic  revenues,   as
demonstrated  in Note P. The  Company's  operations  consistently  demonstrate a
negative  cash  flow  position  as  evidenced  by net  cash  used  in  operating
activities   of   approximately    $(1,716,000),    $(1,802,000),    $(649,000),
$(2,918,000),  $(1,236,000)  and  $(1,100,000)  for each of the respective years
ended December 31, 2006, 2005, 2004, 2003, 2002 and 2001.

The  Company has  sustained  liquidity  through  the sale of equity  securities,
restricted  and  unrestricted,  domestically  and in  international  markets and
significant  working  capital  advances  have been made by members of management
and/or  existing  shareholders.  Future  liquidity may be dependent  upon future
offerings of debt and/or equity securities; however, the availability of further
liquidity from these sources is uncertain.

The Company's continued  existence is principally  dependent upon its ability to
generate  sufficient cash flows from operations to support its daily  operations
on a timely basis. There is no assurance that the Company will be able to obtain
raw materials in sufficient quantity, due to its financial condition,  to ensure
success of its business plan.  Further the ability to obtain additional  funding
through the sales of additional  equity  securities  or, that such  funding,  if
available,  will be obtained on terms  favorable to or affordable by the Company
is uncertain.

The Company  anticipates  that  additional  working capital will be necessary to
support and preserve the integrity of the corporate entity. However, there is no
assurance  that the Company will be able to obtain  additional  funding  through
either bank lines-of-credit or the sale of additional equity securities or, that
such funding, if available, will be obtained on terms favorable to or affordable
by the Company.

If no additional  operating  capital is received  during the next twelve months,
the  Company  will be forced  to rely on  existing  cash in the  bank,  the cash
generated  from  operating  activities  and/or  additional  funds  loaned by the
Company's  management  and/or  shareholders  to preserve  the  integrity  of the
corporate  entity.  In the event, the Company is unable to acquire advances from
management and/or  significant  stockholders,  the Company's ongoing  operations
would be  negatively  impacted to the point that all  operating  activities  are
ceased.

While the Company is of the opinion that good faith  estimates of the  Company's
ability to secure additional  capital in the future to reach our goals have been
made, there is no guarantee that the Company will receive  sufficient funding to
sustain operations or implement any future business plan steps.


Note D - Summary of Significant Accounting Policies

1.   Cash and cash equivalents

     For  Statement of Cash Flows  purposes,  the Company  considers all cash on
     hand  and  in  banks,  certificates  of  deposit  and  other  highly-liquid
     investments with maturities of three months or less, when purchased,  to be
     cash and cash equivalents.

     Cash  overdraft  positions may occur from time to time due to the timing of
     making bank deposits and releasing checks, in accordance with the Company's
     cash management policies.

2.   Accounts receivable and Revenue Recognition

     In the normal course of business,  the Company extends  unsecured credit to
     virtually  all of its  customers  which are located  throughout  the United
     States.  Because of the credit risk  involved,  management  has provided an
     allowance for doubtful accounts which reflects its opinion of amounts which
     will   eventually   become   uncollectible.   In  the  event  of   complete
     non-performance, the maximum exposure to the Company is the recorded amount
     of trade  accounts  receivable  shown on the  balance  sheet at the date of
     non-performance.


                                       F-9
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note D - Summary of Significant Accounting Policies - Continued

2.   Accounts receivable and Revenue Recognition - continued

     The Company ships all product on an FOB-Plant,  "as-is" basis. Accordingly,
     revenue  is  recognized  by the  Company  at the point at which an order is
     shipped at a fixed price,  collection is reasonably assured and the Company
     has no remaining  performance  obligations related to the sale. The Company
     sells all  products  with "no right of  return"  by the  purchaser  for any
     factor other than defects in the product's production.

     On rare  occasion,  the Company may elect to accept  product  returns  from
     customers on a  case-by-case  basis to offset unpaid  accounts  receivable.
     These  situations  are a "last case"  scenario and are  initiated by senior
     management through negotiations with the respective customer.

3.   Inventory

     Inventory  consists of raw  materials,  work-in-process  and finished goods
     related to the production and sale of small arms  ammunition.  Inventory is
     valued at the lower of cost or market using the first-in, first-out method.

     In November 2004,  Financial  Accounting  Standards  Board ("FASB")  issued
     Statement  of  Financial  Accounting   Standards   ("Statement")  No.  151,
     "Inventory  Costs - an amendment of  Accounting  Research  Bulletin No. 43,
     Chapter 4."  Statement  No. 151 requires  that  abnormal  amounts of costs,
     including  idle facility  expense,  freight,  handling  costs and spoilage,
     should be  recognized as current  period  charges.  The  provisions of this
     Statement became effective for inventory costs incurred during fiscal years
     beginning after June 15, 2005. Statement No. 151 was adopted the Company on
     January 1, 2006.  There was no material impact  resulting from the adoption
     of Statement No. 151 on the Company's financial statements.

4.   Property, plant and equipment

     Property and  equipment are recorded at  historical  cost.  These costs are
     depreciated over the estimated useful lives of the individual  assets using
     the straight-line method, generally three to ten years.

     Gains and losses from  disposition of property and equipment are recognized
     as incurred and are included in operations.

     In accordance  with  Statement of Financial  Accounting  Standards No. 144,
     "Accounting  for the  Impairment  or Disposal of  Long-Lived  Assets",  the
     Company  follows the policy of evaluating  all property and equipment as of
     the end of each reporting  quarter.  At December 31, 2005,  pursuant to the
     requirements of this accounting standard, management recorded an impairment
     for the future recoverability of these assets of approximately $2,777,829.

5.   Income Taxes

     The Company uses the asset and liability  method of  accounting  for income
     taxes.  At December 31, 2005 and 2004,  the deferred tax asset and deferred
     tax  liability  accounts,  as  recorded  when  material  to  the  financial
     statements,  are entirely the result of  temporary  differences.  Temporary
     differences   represent  differences  in  the  recognition  of  assets  and
     liabilities for tax and financial reporting purposes, primarily accumulated
     depreciation and amortization, allowance for doubtful accounts and vacation
     accruals.

     As of December 31, 2006 and 2005,  the  deferred  tax asset  related to the
     Company's net operating loss  carryforward is fully reserved.  In the event
     that these  carryforwards were not fully utilized,  they began to expire in
     2005.

6.   Earnings (loss) per share

     Basic  earnings  (loss) per share is computed  by  dividing  the net income
     (loss) available to common shareholders by the  weighted-average  number of
     common shares  outstanding  during the respective  period  presented in our
     accompanying financial statements.


                                      F-10
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note D - Summary of Significant Accounting Policies - Continued

6.   Earnings (loss) per share - continued

     Fully diluted earnings (loss) per share is computed similar to basic income
     (loss) per share  except that the  denominator  is increased to include the
     number of common  stock  equivalents  (primarily  outstanding  options  and
     warrants).

     Common  stock  equivalents  represent  the  dilutive  effect of the assumed
     exercise of the outstanding stock options and warrants,  using the treasury
     stock method, at either the beginning of the respective period presented or
     the date of  issuance,  whichever  is later,  and only if the common  stock
     equivalents  are  considered  dilutive  based upon the Company's net income
     (loss) position at the calculation date.

     As of December 31, 2006 and 2005, and subsequent  thereto,  the Company had
     no options outstanding.  The outstanding  warrants,  mandatory  convertible
     preferred stock and mandatory convertible  debentures are anti-dilutive due
     to the Company's net operating loss position.

7.   Advertising costs

     The Company does not conduct any direct  response  advertising  activities.
     For non-direct response advertising, the Company charges the costs of these
     efforts  to  operations  at the  first  time  the  related  advertising  is
     published.

8.   Pending and/or New Accounting Pronouncements

     The Company is of the opinion that any pending  accounting  pronouncements,
     either in the adoption  phase or not yet  required to be adopted,  will not
     have a significant impact on the Company's financial position or results of
     operations.


Note E - Fair Value of Financial Instruments

The carrying amount of cash,  accounts  receivable,  accounts  payable and notes
payable, as applicable,  approximates fair value due to the short term nature of
these items  and/or the current  interest  rates  payable in relation to current
market conditions.

Interest  rate risk is the risk  that the  Company's  earnings  are  subject  to
fluctuations  in interest  rates on either  investments  or on debt and is fully
dependent  upon  the  volatility  of  these  rates.  The  Company  does  not use
derivative instruments to moderate its exposure to interest rate risk, if any.

Financial  risk  is  the  risk  that  the  Company's  earnings  are  subject  to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the  volatility  of  these  rates.  The  company  does  not use  derivative
instruments to moderate its exposure to financial risk, if any.


Note F - Concentrations of Credit Risk

The  Company  maintains  its cash  accounts in a single  financial  institutions
subject  to  insurance   coverage  issued  by  the  Federal  Deposit   Insurance
Corporation  (FDIC).  Under FDIC rules,  the Company  and its  subsidiaries  are
entitled to aggregate  coverage of $100,000 per account type per separate  legal
entity per financial institution.

During the period ended  December  31, 2006 and 2005 and the periods  subsequent
thereto,  respectively,  the various operating companies  maintained deposits in
this  financial  institution  with credit risk  exposures in excess of statutory
FDIC coverage.  The Company  incurred no losses  through  December 31, 2006, and
subsequent thereto, as a result of any of these unsecured situations.



                                      F-11
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note G - Inventory

 As of December 31, 2006 and 2005, inventory consisted of the following
components:

                                    December 31,      December 31,
                                        2006               2005
                                   -------------      ------------

         Raw materials                 $375,732           $522,524
         Work in process                119,851             30,103
         Finished goods                  14,521              7,463
                                       --------           --------
         Totals                        $510,104           $560,090
                                       ========           ========


Note H - Property and Equipment

Property and equipment consist of the following components:

                                     December 31,    December 31,    Estimated
                                         2006             2005      useful life
                                     ------------  -------------   ------------

Manufacturing equipment              $  7,944,673  $  8,095,110     3-10 years
Office furniture and fixtures              69,889        69,889     3- 7 years
Leasehold improvements                    184,939       190,277     8-20 years
                                     ------------  ------------
                                        8,199,501     8,355,276
Accumulated depreciation               (5,575,782)   (5,577,447)
Impairment of recoverability
    of carrying value                  (2,623,719)   (2,777,829)
                                     ------------  ------------
Net property and equipment           $          -  $          -
                                     ============  ============

     Total  depreciation  expense  charged  to  operations  for the years  ended
December 31, 2006 and 2005 was approximately $31,024 and$775,753, respectively.

     In accordance  with  Statement of Financial  Accounting  Standards No. 144,
"Accounting  for the Impairment or Disposal of Long-Lived  Assets",  the Company
follows the policy of  evaluating  all property  and  equipment as of the end of
each reporting  quarter.  At December 31, 2005,  pursuant to the requirements of
this  accounting  standard,  management  recorded an  impairment  for the future
recoverability of these assets of approximately $2,777,829.


Note I - Loans from Shareholders

<TABLE>
<CAPTION>
                                                                    December 31,  December 31,
                                                                      2006            2005
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
Four  separate  notes  payable  to three  separate  stockholders.
Interest at 8.0%,  payable monthly.  Principal due at maturity on
December 31, 2008.  Shareholder/lender  has the option to convert
the  principal  amount  into  common  stock of the Company at the
lesser of 66-2/3% of the average closing bid and ask price on the
date of  conversion or $0.08 per share,  whichever is less.  Each
note is unsecured.                                                  $  1,075,000  $    650,000
                                                                    ============  ============
</TABLE>



                                      F-12
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note J - Federal Excise Taxes Payable

On March 29,  2007,  the Company  reached a  settlement  and  executed a Payment
Agreement  with the Department of the Treasury,  Bureau of Alcohol,  Tobacco and
Firearms,  related to a audit of the Company's  Federal Excise Taxes obligation.
The audit commenced during 2006. The Payment  Agreement calls for the Company to
pay an aggregate total of $300,000, plus interest at the statutory rate starting
on March 29, 2007. The payment schedule is as follows:  April 2007 through March
2008 - $3,000 per month;  April 2008 - March 2009 - $4,000 per month;  and April
2009 - March 2013 - $5,000 per month.

This obligation has been fully accrued in the accompanying  financial statements
as of December 31, 2006.


Note K - Convertible Debenture

On October 4, 2002,  the Company  entered into a Securities  Purchase  Agreement
with La Jolla Cove Investors,  Inc. ("La Jolla") for the sale of (I) $250,000 in
convertible  debentures and (ii) warrants to buy 30,000,000 shares of our common
stock.  On March 13, 2003 and May 6, 2003,  La Jolla  advanced an  aggregate  of
$350,000 to our company which such funding was  allocated  towards the principal
balance of our convertible debentures.

As of September 30, 2006, the  outstanding  balance on the La Jolla  convertible
debenture has been retired. A recap of the debenture activity is as follows:

                                                      Debenture     Warrant
                                                    (in dollars)   (in shares)
                                                    -------------------------
       Initial amount                                 $  600,000    6,000,000
       2003 redemptions                                 (208,635)  (2,086,350)
       2004 redemptions                                 (125,000)  (1,250,000)
       2005 redemptions                                  (40,000)    (400,000)
       2006 retirement                                  (226,365)  (2,263,650)
                                                      ----------   ----------
       Balances outstanding at September 30, 2006     $        -            -
                                                      ==========   ==========

In addition to retiring the debenture,  the Company  repaid  $200,000 in prepaid
warrant  exercises  and  approximately  $158,635 in  negotiated  prepayment  and
penalty fees for an aggregate payment of $585,000.

Additionally,  the Company  recognized  a charge to  operations,  including  the
aforementioned $158,635 cash payment, of approximately $354,450 for the issuance
of 56,003 shares of common stock to La Jolla and the  forgiveness of $175,000 in
monies due from La Jolla for common stock  issued on warrant  exercises in prior
periods.

On September 13, 2006, La Terraza Trading and Asset Management Ltd. (La Terraza)
deposited  a total  of  $2,150,000  in  escrow  for the use and  benefit  of the
Company. The funds were allocated and used for the following:

1.   The sum of $585,000 was paid to La Jolla Cove Investors,  Inc. ("La Jolla")
     to acquire for La Terraza a full and complete  assignment of any and all of
     La  Jolla's  right,  title  and  interest  in any and all of the  Company's
     indebtedness to La Jolla and specifically including La Jolla's rights under
     the active SB-2 Registration Statement for the issuance and registration of
     securities thereunder;  the consent of the Company to the foregoing subject
     to the right of the Company to prepay any and all  indebtedness  thereunder
     in the Company's common stock, without penalty, at any time before or after
     default.
2.   The sum of $275,000 to be used by the Company to redeem and satisfy in full
     the Series E Preferred  Stock  funded by third party  investors on or about
     July 12, 2006, including a prepayment redemption penalty of $25,000.
3.   The sum of $215,000 payable as fees to Capital  Investment  Services,  Inc.
     for locating, negotiating and closing the funding.
4.   The sum of $100,000 to repay in full, without interest, an unsecured bridge
     loan from Investor to the Company dated and funded on August 25, 2006.

                                      F-13
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note K - Convertible Debenture - Continued

5.   The sum of $275,000 released to the Company for working capital.
6.   The balance of  $700,000,  to be retained  in escrow and  disbursed  to the
     Company for payment in  reduction of the  assigned La Jolla  debenture  and
     required  warrant  exercised  thereunder,  until the  debenture and warrant
     obligations  are  satisfied  in full in  accordance  with the  terms of the
     assigned La Jolla documents.

The  financing  transaction  required the Company to deposit in escrow for later
delivery  a total  of  11,470,000  shares  of its  common  stock  (to be held as
unissued and not outstanding) to guarantee availability of stock as required for
the reduction of the  debenture and  satisfaction  of warrant  obligations.  The
agreement also calls for an additional 5,000,000 shares of the restricted common
stock of the  Company to be  deposited  in a separate  escrow to be used for any
other expenses and compensation to third parties that may be agreed upon between
La Terraza and the Company for future  services to advance the overall  business
of the Company.  In addition,  the Company granted La Terraza a total of 600,000
warrants  exercisable at the lesser of $0.1875 per share or the average  closing
price per share for the common  stock  during the twelve (12) month period prior
to the date of exercise. These warrants are exercisable at any time on or before
five (5) years from July 24,  2006.  All shares  required to be  deposited  into
escrow were in fact been  deposited on September 26, 2006 as required,  and were
released to La Terraza on December 27, 2006, effective as of September 13, 2006.

Discussion of retired debenture

The  debentures  bore  interest  at 8% and were  scheduled  to mature on June 31
[sic],  2007,  and were  convertible  into the Company's  common  stock,  at the
selling stockholder's  option. The convertible  debentures were convertible into
the number of the Company's shares of common stock equal to the principal amount
of the  debentures  being  converted  multiplied  by 11, less the product of the
conversion price multiplied by 10 times the dollar amount of the debenture.  The
conversion  price for the  convertible  debentures is the lesser of (I) $1.00 or
(ii)  seventy  six percent of the  average of the five  lowest  volume  weighted
average  prices  during the twenty (20)  trading  days prior to the  conversion.
Accordingly,  there is in fact no limit on the  number of shares  into which the
debenture may be converted.  However, in the event that our market price is less
than $0.30 per share,  the Company will have the option to prepay the  debenture
at 125% rather  than have the  debenture  converted.  In  addition,  the selling
stockholder  is  obligated  to  exercise  the  warrant   concurrently  with  the
submission of a conversion notice by the selling stockholder. As of December 31,
2006, the warrant has been  cancelled due to the repayment and final  settlement
on the convertible debenture.

In December 2004, we entered into an addendum to the convertible debenture and
warrant whereby the Company agreed to the following:

     *    the discount multiplier was reduced from eighty percent to seventy six
          percent;
     *    within five  business  days after this  registration  statement  being
          declared  effective,  La  Jolla is  required  to  submit  a  debenture
          conversion  in the  amount of  $10,000  and every  ten  business  days
          thereafter La Jolla shall submit three additional debenture conversion
          in the amount of $10,000 each;
     *    within five  business  days after this  registration  statement  being
          declared effective, La Jolla shall wire $400,000 to us as a prepayment
          towards the exercise of its warrant; and
     *    immediately  following  the  sale of all  shares  held by La  Jolla in
          connection with the debenture  conversions in the aggregate  amount of
          $40,000,  La Jolla shall wire  $275,000 to us as a prepayment  towards
          the exercise of its warrant and shall submit a debenture conversion in
          the amount of $6,250 on the first business day of each month until the
          debenture is no longer outstanding.

In May 2005, we entered into an additional addendum to the convertible debenture
and warrant whereby the Company agreed to the following:

     *    The Company shall deposit 4,000,000 unregistered shares in the name of
          LaJolla with the  Company's  Escrow Agent and,  upon  confirmation  of
          receipt,  LaJolla will wire the Company  $150,000 as an advance on the
          $400,000  amount that LaJolla was  obligated  to fund  pursuant to the
          December 2004 Addendum.  In the event that the Company's  Registration
          Statement  was not  declared  effective  within nine (9) months of the
          date of this Addendum, the 4,000,000 shares in escrow will be released
          to LaJolla and sold by LaJolla  pursuant to Rule 144. If LaJolla sells
          these  shares for net sales  proceeds of more than  $150,000  (without
          interest  accruing on this  amount),  the excess over $150,000 will be
          refunded to the Company.

                                      F-14
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005



Note K - Convertible Debenture - Continued

Discussion of retired debenture - continued

     *    The  maturity  date  of the  convertible  debenture  and  warrant  was
          extended to June 31,  [sic],  2007.  * All other terms and  conditions
          remain in full force and effect.

LaJolla has contractually  agreed to restrict its ability to convert or exercise
its  warrants  and  receive  shares of our common  stock such that the number of
shares of common stock held by them and their  affiliates  after such conversion
or exercise does exceed 4.9% of the then issued and outstanding shares of common
stock.

Due to the  contractually  agreed  mandatory  conversion of this Debenture,  the
Company has  reflected  this  transaction  in its balance sheet as a "mezzanine"
level debt  obligation on its balance  sheet,  between "Total  Liabilities"  and
"Stockholders'  Equity". Upon the respective mandatory  conversion,  the Company
will  relieve  the  respective  portion  of the  Debenture  and the any  related
accrued,  but unpaid interest,  and credit this amount to the respective "common
stock" and "additional  paid-in capital"  accounts in the  stockholder's  equity
section for the par value and excess amount over the par value of the respective
shares issued.

As the warrant is  non-detachable  from the Debenture and requires  simultaneous
exercise upon  conversion of the Debenture,  no value was assigned to the issued
warrant.  Upon exercise of the warrant,  the Company will record the issuance of
the  underlying  shares as a new  issuance  of common  stock on the date of each
respective exercise.

On various dates through  December 31, 2003,  the  Debenture  Holder  elected to
convert an aggregate $208,635, through 24 separate transactions,  in outstanding
Debenture  principal into restricted,  unregistered  common stock. This election
caused the Company to issue 4,561,753 shares of restricted,  unregistered common
stock to the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently  exercised a portion of the outstanding Warrant to
purchase 2,086,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $2,086,350.

On various  dates between  January 1, 2004 and December 31, 2004,  the Debenture
Holder   elected  to  convert  an   aggregate   $125,000,   through  6  separate
transactions,  in outstanding  Debenture principal into registered common stock.
This election  caused the Company to issue  4,150,000  shares of common stock to
the  Debenture  Holder.  Additionally,  pursuant  to  the  contract  terms,  the
Debenture Holder concurrently  exercised a portion of the outstanding Warrant to
purchase  1,250,000  shares of the Company's  common stock for gross proceeds of
$1,250,000.  As of December  31, 2004,  an aggregate of 1,000,000  shares of the
Company's  common  stock have been  issued by the  Company and are being held in
escrow by the Company's  counsel  pending receipt of the final $175,000 from the
Debenture Holder. As of December 31, 2005, this amount remains unpaid.

On various dates between June 28, 2005 and August 10, 2005, the Debenture Holder
elected to convert an aggregate  $40,000,  through 4 separate  transactions,  in
outstanding  Debenture  principal into  registered  common stock.  This election
caused the Company to issue  5,872,048  shares of common stock to the  Debenture
Holder.  Additionally,  pursuant to the contract  terms,  the  Debenture  Holder
concurrently  exercised a portion of the outstanding Warrant to purchase 400,000
shares of the Company's common stock for gross proceeds of $400,000.

As of December  31, 2006,  the Company has no  continuing  obligation  under the
convertible debenture and attached warrant.




                (Remainder of this page left blank intentionally)



                                      F-15
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005



Note L - Preferred Stock Transactions

Preferred stock consists of the following as of December 31, 2006 and 2005,
respectively:

<TABLE>
<CAPTION>
                                                     December 31,2006        December 31, 2005
                                                     ----------------        -----------------
                                                     # shares   value     # shares     value
                                                    --------- ---------  ----------  ---------
<S>                                                 <C>       <C>        <C>         <C>
Series A Cumulative Convertible Preferred Stock        12,000 $  60,000      12,000  $  60,000
Series B Cumulative Convertible Preferred Stock        36,680   183,400      73,360    366,800
Series C Convertible Preferred Stock                1,905,882   324,000   1,905,882    324,000
Series E 8% Convertible Preferred Stock                50,000   250,000           -          -
                                                    --------- ---------  ----------  ---------
                                                    2,004,562 $ 817,400   1,991,242  $ 750,800
                                                    ========= =========  ==========  =========
</TABLE>

Series A Convertible Preferred Stock

In September,  October and November 2001, the Company sold an aggregate  222,600
shares of $5.00 Series A Convertible  Preferred Stock (Series A Preferred Stock)
for total  proceeds  of  approximately  $1,113,000  through a Private  Placement
Memorandum.  The Series A Convertible  Preferred  Stock  provides for cumulative
dividends at a rate of 8.0% per year,  payable  quarterly,  in cash or shares of
the  Company's  common stock at the Company's  election.  Each share of Series A
Preferred  Stock is  convertible  into 11 shares of the  Company's  common stock
initially  at any time  after 6 months  of the  date of issue  and  prior to the
notice of redemption  at the option of the holder,  subject to  adjustments  for
customary  anti-dilution events. In December 2001, at the request of the holders
of the Series A Preferred Stock, the Company and the individual holders modified
the holding period for conversion to allow for conversion in December 2001.

In September 2001, the Company's principal stockholder  converted  approximately
$4,007,327 of unsecured  debt and  approximately  $3,546,273  of cumulative  and
unpaid accrued interest into 1,510,710 shares of Series A Preferred Stock.

In  September  2001, a creditor of the Company  agreed to convert  approximately
$10,000 of trade accounts payable into 2,000 shares of Series A Preferred Stock.

In December 2001,  concurrent with a modification in the holding period prior to
conversion,  certain holders of the Series A Preferred Stock orally notified the
Company of their intent to exercise the conversion  features on 1,749,720 issued
and outstanding  shares of Series A Preferred  Stock into  19,246,920  shares of
common  stock prior to December  31,  2001.  Due to the timing of the  requisite
documentation,  the  clerical  activities  related to this  conversion  were not
completed until February 2002.

In conjunction with the Series A Preferred Stock, certain shares were sold after
the Company's common stock was approved for trading by the National  Association
of Securities  Dealers on the OTC Bulletin  Board in October 2001. The shares of
Series A Preferred  Stock sold  subsequent  to this date had an  equivalent  per
share  value of  common  stock  below  the  ending  quoted  market  price of the
Company's common stock on their respective issue dates. This difference  created
a Beneficial  Conversion  Feature  Discount of  approximately  $1,207,993.  This
discount was then  amortized  over the unexpired time period between the date of
issue of the eligible shares and the eligible  conversion date, as amended.  All
of the shares sold  subsequent  to the initial  trading  date were  converted in
December  2001  and,  accordingly,  the  approximate  $1,207,993  in  Beneficial
Conversion Feature Discount was fully amortized to operations.

In December 2002, a holder of 5,000 shares of Series A Preferred Stock exercised
his  conversion  rights and converted  these shares of Series A Preferred  Stock
into 55,000 shares of restricted, unregistered common stock.

In January 2003,  three  separate  holders of 9,000 shares of Series A Preferred
Stock exercised their  conversion  rights and converted these shares of Series A
Preferred stock into 99,000 shares of restricted, unregistered common stock.





                                      F-16
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note L - Preferred Stock Transactions - Continued

Series B Convertible Preferred Stock

In May 2003,  the Company  sold an  aggregate  91,700  shares of $5.00  Series B
Convertible  Preferred  Stock (Series B Preferred  Stock) for total  proceeds of
approximately  $458,500 through a separate  Private  Placement  Memorandum.  The
Series B Convertible Preferred Stock provides for cumulative dividends at a rate
of 8.0% per year, payable  quarterly,  in cash or shares of the Company's common
stock at the  Company's  election.  Each  share of Series B  Preferred  Stock is
convertible  into 11 shares of the Company's  common stock initially at any time
after 6 months of the date of issue and prior to the notice of redemption at the
option of the holder, subject to adjustments for customary anti-dilution events.

In  September  and  December  2004,  respectively,  the  Holders of the Series B
Preferred  Stock exercised  their  conversion  rights and exchanged an aggregate
18,340 shares of Series B Preferred Stock for 66,810  post-reverse  split shares
of restricted, unregistered common stock.

On March 31, June 30,  October 23, and  December  27,  2006,  respectively,  the
holders of the Series B Preferred Stock exercised  their  conversion  rights and
exchanged an aggregate  36,680 shares (9,170 shares per  conversion) of Series B
Preferred Stock for 831,412 shares of restricted, unregistered common stock.

Series C Convertible Preferred Stock

In November  2004,  the Company sold  1,905,882  shares of Series C  Convertible
Preferred  Stock to an  existing  stockholder  and  officer of the  Company in a
private  transaction  pursuant to Section (4)2 of the Securities Act of 1933 for
gross proceeds of approximately $324,000. No underwriter was used in conjunction
with this transaction.

The Series C  Convertible  Preferred  Stock  provides for dividends at a rate of
4.0% per annum,  to be declared  and paid monthly in either cash or stock at the
discretion of the Company.

Each share of Series C  Preferred  Stock is  convertible  at a rate of $0.18 per
share into  1,800,000  shares of the  Company's  common stock at any time at the
option of the holder, subject to adjustments for customary anti-dilution events.

On March 1, 2006, the Company issued a Private Placement  Memorandum offering up
to 200,000  shares of 8%  Convertible  Preferred  Stock at an offering  price of
$5.00 per share on a "best efforts" basis through an unrelated placement agent.

The Series E 8% Convertible Preferred Stock provides for cumulative dividends at
the rate of 8% per  year,  payable  quarterly,  50% in cash and 50% in shares or
100% in cash at the Company's  election.  In the event the Company elects to pay
such dividends in shares of the Company's  Common Stock, the number of shares to
be issued shall be based on the average of the closing  prices of the  Company's
Common Stock, as reported on the NASDAQ Over the Counter Bulletin Board (or such
other  market on which the  Company's  Common  Stock is then  traded) for the 10
consecutive trading days preceding the record date for each such dividend,  with
such record date being the 14th day preceding the end of each calendar quarter.

Each share of Series E Convertible  Preferred  Stock shall be  convertible  into
shares of the Company's Common Stock at any time after March 1, 2007. The number
of  shares to be issued  on a  conversion  shall be based on 80% of the  average
closing price of the Common Stock of the Company;  as reported on the NASDAQ OTC
Bulletin Board (or such other market on which such stock is traded) for ten (!0)
consecutive  trading days preceding the date the Company received notice of such
conversion.  Subject  to  certain  restrictions,  the  Series  E 8%  Convertible
Preferred Stock shall automatically  convert into shares of the Company's Common
Stock upon any of the  following  events:  (I) the sale by the Company of all or
substantially  all of  its  assets;  (ii)  the  consummation  of a  merger  or a
consolidation  in which the  Company is not the  survivor;  or (iii) the sale or
exchange of all or substantially all of the outstanding  shares of the Company's
common  stock  (including  by way of  merger,  consolidation,  or other  similar
action).



                                      F-17
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note L - Preferred Stock Transactions - Continued

Series E 8% Convertible Preferred Stock - continued

In the event of the liquidation,  dissolution or winding up of the Company,  the
holders  of  Series E  Convertible  Preferred  Stock  shall  have a  liquidation
preference  over  holders of common  stock and shares  junior to the Series E 8%
Convertible Preferred Stock equal to $5.50 per share. Additionally,  the Company
shall not impose or allow any additional  liens on it's existing fixed assets in
excess of  $1,000,000;  provided that at such time as total gross  proceeds from
the offering equal or exceed $2,000,000, the Company shall satisfy such existing
liens on its existing  fixed assets and shall not impose or allow any additional
liens on its existing  fixed assets unless  subordinated  to the interest of the
Series E 8%  Convertible  Preferred  Stock,  with such  preference  on the fixed
assets equal to the fixed asset value,  as  determined  in  accordance  with the
United States Generally Accepted Accounting  Principles ("GAAP"), of 150% of the
stated value of the aggregate of the outstanding  shares of Series E Convertible
Preferred  Stock  except for fixed  assets of the  Company  that were  otherwise
purchased pursuant to a security interest.

The Series E 8% Convertible  Preferred Stock shall be redeemable,  at the option
of the  Company,  for  cash in the  amount  of  $5.50  per  share  of  Series  E
Convertible  Preferred  Stock or for  shares of the  Company's  Common  Stock in
accordance with the Conversion  Rate, at any time after March 1, 2007, or in the
event the closing sale price of the Company's  Common Stock,  as reported on the
NASDAQ  Over the  Counter  Bulletin  Board  (or such  other  market on which the
Company's Common Stock is then traded),  is greater than or equal to $7.00 after
March 1, 2007 for any consecutive  five trading days. In addition,  the Series E
8% Convertible Preferred Stock shall be redeemable, at the option of the holder,
at any time for shares of the  Company's  Common  Stock in  accordance  with the
Conversion  Rate.  At any time after March 1, 2007, at the option of the holder,
the Series E 8% Convertible  Preferred Stock shall be redeemable for cash in the
amount of $5.10 per share of Series E Convertible  Preferred Stock or for shares
of the Company's Common Stock in accordance with the Conversion Rate. After such
date, if redemption is for cash,  shares will be redeemed at the rate of 1/10 of
such  aggregate  shares per  quarterly  period for any 10  consecutive  quarters
commencing  after  March 1, 2007.  Any  redemption  by either the Company or the
holder shall be subject to 15 days written notice.

The  Company  warrants  and  agrees  that if,  at any  time  within  the  period
commencing  on the date of the final closing of the Offering and expiring on the
5th  anniversary  of the date thereof,  the Company  should file a  registration
statement with the SEC under the Securities Act (other than in connection with a
merger or other  business  combination  transaction or pursuant to Form S-8), it
will give written  notice at least 30 calendar  days prior to the filing of each
such  registration  statement  to the  holders  of the  Series E 8%  Convertible
Preferred  Stock and the holders of the shares of the Common  Stock  issued upon
the  conversion or  redemption  of the shares of Series E Convertible  Preferred
Stock,  or their permitted  assigns  (Holders) of its intention to do so. If the
Holders  notify the Company  within 30 calendar  days after  receipt of any such
notice of its or their  desire to include any such shares of Common Stock issued
or issuable upon the  conversion  or  redemption of the Series E 8%  Convertible
Preferred Stock in such proposed registration  statement,  the Company shall use
its "best efforts" to have any such shares of Common Stock is issued or issuable
upon the conversion or redemption of the Series E 8% Convertible Preferred Stock
registered under such registration statement.

Notwithstanding  the  foregoing,  the  Company  shall have the right at any time
after it shall  have given  written  notice  (irrespective  of whether a written
request for inclusion of any such securities  shall have been made) to elect not
to file any such proposed registration  statement, or to withdraw the same after
the filing but prior to the effective date thereof. If the managing  underwriter
of an offering to which the above "piggyback registration rights" apply, in good
faith and for valid  business  reasons,  objects to such rights,  such objection
shall  preclude  such  inclusion.  All  expenses  incurred  by  the  Company  in
registration  of the  shares  of  Common  Stock  issued  or  issuable  upon  the
conversion  or  redemption  of The  Series  E 8%  Convertible  Preferred  Stock,
including with out limitation all  registration  and filing fees,  listing fees,
printing  expenses,  fees and  disbursements  of all  independent  accounts,  or
counsel for the Company  and the  expense of any special  audits  incident to or
required  by any  such  registration  and the  expenses  of  complying  with the
securities or blue sky laws of any jurisdiction shall be paid by the Company.




                                      F-18
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note L - Preferred Stock Transactions - Continued

Series E 8% Convertible Preferred Stock - continued

The Company has agreed to pay the Placement Agent a cash commission equal to 10%
of the aggregate Purchase Price of the shares of Series E Convertible  Preferred
Stock sold by the Placement  Agent in the Offering  (Placement  Agent Fee).  The
Company shall also pay the Placement Agent reasonable  expenses  associated with
the Offering,  which expenses shall not exceed $50,000 (Expense  Allowance).  In
addition,  the Company shall issue to the Placement  Agent 500 warrants for each
$50,000 of Series E Convertible  Preferred  Stock sold by the Placement Agent in
the Offering  (Placement Agent Warrants),  each warrant  entitling the holder to
purchase 1 share of the Company's Common Stock at an exercise price of $0.90 per
share exercisable at any time for a period of 3 years from date of issuance.

Upon completion of the Maximum  Offering,  the Company will receive net proceeds
of  approximately  $900,000.00.  The Company intends to use the net proceeds for
potential  acquisitions,   working  capital,   general  corporate  purposes  and
repayment of outstanding debt.

The  Company  and the  Placement  Agent shall have  discretion  to increase  the
Maximum Offering to $2,000,000.00, without notice to investors.

Through  June 30,  2006,  the  Company  sold  100,000  shares in a two  separate
transactions under this Private Placement  Memorandum and has received the gross
sales proceeds of $500,000 and has paid an aggregate of $50,000 to the Placement
Agent for the 10% fees due on these transactions.

On September 13, 2006, the Company  exercised it's repurchase rights and retired
50,000 shares of the Series E 8% Convertible  Preferred  Stock,  including a 10%
prepayment penalty, for $275,000 cash.


Note M - Common Stock Transactions

On January 9, 2006,  by written  consent in lieu of  meeting,  a majority of the
Company's  stockholders  approved a  recommendation  by the  Company's  Board of
Directors  to effect a one share for twenty  shares  reverse  stock split of our
common stock,  par value $.001 per share,  with fractional  shares rounded up to
the nearest whole share.  The reverse split became  effective on that date. As a
result of the reverse split,  the total number of issued and outstanding  shares
of the Company's  common stock  decreased  from  92,576,839 to  4,629,381shares,
after giving effect to rounding for fractional shares. The effect of this action
is reflected in the  Company's  financial  statements as of the first day of the
first period presented.

In  conjunction  with  the  above  discussed  reverse  stock  split,  all  share
references in the following paragraphs reflect the January 9, 2006 reverse split
action.

Calendar 2005 Transactions

On various dates between June 28, 2005 and August 10, 2005, the Debenture Holder
elected to convert an aggregate  $40,000,  through 4 separate  transactions,  in
outstanding  Debenture  principal into  registered  common stock.  This election
caused the  Company to issue  293,602  shares of common  stock to the  Debenture
Holder.  Additionally,  pursuant to the contract  terms,  the  Debenture  Holder
concurrently  exercised a portion of the outstanding Warrant to purchase 400,000
shares of the  Company's  common  stock  for  gross  proceeds  of  $400,000.  In
September and December 2005,respectively,  the Holders of the Series B Preferred
Stock exercised their conversion rights and exchanged an aggregate 18,340 shares
of Series B Preferred Stock for 66,810 shares of restricted, unregistered common
stock.

Jn July 2005, the Company  issued  approximately  8,333 shares of  unregistered,
restricted  common  stock to Paul  Goebel,  the  Company's  former  Director  of
Domestic Sales, as an employee bonus.  These shares were valued at approximately
$17,166,  which  approximated  the market value of the shares on the transaction
date.  The Company  relied upon Section 4(2) of the  Securities  Act of 1933, as
amended,  for an exemption from  registration of these shares and no underwriter
was used in this transaction.

                                      F-19
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note M - Common Stock Transactions

Calendar 2005 Transactions - continued

In  February,  August,  September  and  December  2005,  the  Company  issued an
aggregate 23,615 shares of restricted,  unregistered  common stock in payment of
approximately  $44,124 in accrued dividends payable on the Company's outstanding
Series B Preferred  Stock for the quarters  ended  December 31, 2004,  March 31,
2005, June 30, 2005, September 30, 2005 and December 31, 2005, respectively. The
Company relied upon Section 4(2) of the Securities Act of 1933, as amended,  for
an exemption from  registration  of these shares and no underwriter  was used in
this transaction.

In August,  November  and December  2005,  respectfully,  the Company  issued an
aggregate 37,500 shares of restricted,  unregistered common stock to an existing
shareholder as payment of various fees and costs  associated with the funding of
approximately  $875,000  short-term  working  capital loans to the Company.  The
Company relied upon Section 4(2) of the Securities Act of 1933, as amended,  for
an exemption from  registration  of these shares and no underwriter  was used in
this transaction.

Calendar 2006 Transactions

In  February   2006,  the  Company   issued   approximately   41,666  shares  of
unregistered,  restricted common stock to Paul Goebel, the Company's Director of
Domestic Sales, as an employee bonus.  These shares were valued at approximately
$17,500,  which  approximated  the market value of the shares on the transaction
date.  The Company  relied upon Section 4(2) of the  Securities  Act of 1933, as
amended,  for an exemption from  registration of these shares and no underwriter
was used in this transaction.

In February 2006, the Company issued approximately 226,065 shares of restricted,
unregistered  common  stock,  valued at  approximately  $18,325,  to an existing
stockholder as for payment of accrued  interest  associated  with  approximately
$875,000  short-term  working capital loans to the Company and  reimbursement of
direct public  relation  expenses.  The Company  relied upon Section 4(2) of the
Securities Act of 1933, as amended,  for an exemption from registration of these
shares and no underwriter was used in this  transaction.  As the per share value
of this  transaction  was  substantially  less  than  the  "fair  value"  of the
Company's  common stock,  per the closing price of the Company's common stock on
the transaction date, the Company recognized  "consulting expense related to the
issuance  of  common   stock  at  less  than  "fair  value"  in  the  amount  of
approximately $70,080 on this transaction.

In May 2006,  the Company  issued  approximately  266,511  shares of restricted,
unregistered  common  stock,  valued at  approximately  $21,054,  to an existing
stockholder as for payment of accrued  interest  associated  with  approximately
$975,000  short-term  working capital loans to the Company and  reimbursement of
direct public  relation  expenses.  The Company  relied upon Section 4(2) of the
Securities Act of 1933, as amended,  for an exemption from registration of these
shares and no underwriter was used in this  transaction.  As the per share value
of this  transaction  was  substantially  less  than  the  "fair  value"  of the
Company's  common stock,  per the closing price of the Company's common stock on
the transaction date, the Company recognized  "consulting expense related to the
issuance  of  common   stock  at  less  than  "fair  value"  in  the  amount  of
approximately $69,293 on this transaction.

In  September  2006,  the  Company  issued   approximately   275,229  shares  of
restricted,  unregistered common stock,  valued at approximately  $22,018, to an
existing  stockholder  as  for  payment  of  accrued  interest  associated  with
approximately  $975,000  short-term  working  capital  loans to the  Company and
reimbursement  of direct  public  relation  expenses.  The  Company  relied upon
Section 4(2) of the  Securities  Act of 1933, as amended,  for an exemption from
registration of these shares and no underwriter was used in this transaction. As
the per share value of this  transaction was  substantially  less than the "fair
value" of the  Company's  common  stock,  per the closing price of the Company's
common stock on the transaction date, the Company recognized "consulting expense
related to the  issuance of common stock at less than "fair value" in the amount
of approximately $118,348 on this transaction.



                                      F-20
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note M - Common Stock Transactions

Calendar 2006 Transactions - continued

In December 2006, the Company issued approximately 284,168 shares of restricted,
unregistered  common  stock,  valued at  approximately  $22,733,  to an existing
stockholder as for payment of accrued  interest  associated  with  approximately
$975,000  short-term  working capital loans to the Company and  reimbursement of
direct public  relation  expenses.  The Company  relied upon Section 4(2) of the
Securities Act of 1933, as amended,  for an exemption from registration of these
shares and no underwriter was used in this  transaction.  As the per share value
of this  transaction  was  substantially  less  than  the  "fair  value"  of the
Company's  common stock,  per the closing price of the Company's common stock on
the transaction date, the Company recognized  "consulting expense related to the
issuance  of  common   stock  at  less  than  "fair  value"  in  the  amount  of
approximately $90,934 on this transaction.

On March 31, June 30,  October 23, and  December  27,  2006,  respectively,  the
holders of the Series B Preferred Stock exercised  their  conversion  rights and
exchanged an aggregate  36,680 shares (9,170 shares per  conversion) of Series B
Preferred Stock for 831,412 shares of restricted, unregistered common stock.

On September  13, 2006,  the Company  issued 56,003 shares of common stock to La
Jolla Cove  Investors,  Inc. to complete all  obligations to La Jolla and assign
any  and all of La  Jolla's  right,  title  and  interest  in any and all of the
Company's  indebtedness to La Jolla and specifically including La Jolla's rights
under the active SB-2  Registration  Statement for the issuance and registration
of securities thereunder; the consent of the Company to the foregoing subject to
the right of the Company to prepay any and all  indebtedness  thereunder  in the
Company's common stock,  without penalty, at any time before or after default to
La Terraza Trading and Asset Management, Inc.

In July,  August and October 2006, in three separate  transactions,  the Company
issued an aggregate  50,135 shares of restricted,  unregistered  common stock in
payment of approximately  $19,177 in accrued  dividends payable on the Company's
outstanding  Series B Preferred  Stock for the quarters  ended March 31, June 30
and September30, 2006, respectively. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended,  for an exemption from registration of these
shares and no underwriter was used in this transaction.

On December 27, 2006,  effective  as of September  13, 2006,  the Company and La
Terraza  agreed  that all  pertinent  conditions  had  been met and the  Company
released the aforementioned 11,470,000 shares of common stock issued pursuant to
the  Company's  active  Registration  Statement  on Form SB-2 to La  Terraza  in
exchange for the previous receipt of approximately  $2,150,000 in cash proceeds,
the use of which has previously be discussed. The Company paid placement fees of
approximately  $215,000 in connection with the sale of these  securities and the
retirement  of the La Jolla  convertible  debentures.  As the per share value of
this transaction was  substantially  less than the "fair value" of the Company's
common  stock,  per the  closing  price  of the  Company's  common  stock on the
transaction  date, the Company  recognized  "consulting  expense  related to the
issuance  of  common   stock  at  less  than  "fair  value"  in  the  amount  of
approximately $3,704,810 on this transaction.

On December 27,  2006,  the Company  issued an  additional  5,333,335  shares of
common stock to La Terraza for gross proceeds of approximately  $1,000,000.  The
Company paid placement  fees of  approximately  $100,000 in connection  with the
sale of  these  securities.  As the per  share  value  of this  transaction  was
substantially  less than the "fair value" of the Company's common stock, per the
closing price of the Company's common stock on the transaction date, the Company
recognized  "consulting  expense related to the issuance of common stock at less
than "fair value" in the amount of approximately $1,136,000 on this transaction.


Note N - Stock Warrants

In conjunction with the Company's Private  Placement  Memorandum for the sale of
Series  E  Convertible  Preferred  Stock,  the  Company  agreed  to issue to the
Placement  Agent  warrants to purchase up to 500 shares of the Company's  common
stock for each  $50,000  of Series E  Convertible  Preferred  Stock  sold by the
Placement  Agent  in the  Offering  (Placement  Agent  Warrants),  each  warrant
entitling  the holder to purchase 1 share of the  Company's  Common  Stock at an
exercise  price of $0.90  per  share  exercisable  at any time for a period of 3
years from date of issuance.


                                      F-21
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note N - Stock Warrants - Continued

On September 6, 2006, in conjunction with the $2,150,000 Financing Agreement
with La Terraza, the Company issued warrants to purchase 600,000 shares of
common stock at the lesser of $0.1875 per share or the average closing price per
share for the Company's common stock over the twelve (12) month period prior to
the date of such exercise, with the warrants being exercisable at any time from
the issue date through July 24, 2011. The following table presents warrant
activity through December 31, 2006:

                                                             Weighted
                                                              Average
                                          Number of          Exercise
                                           Shares              Price
                                         -----------       -------------

     Balance at January 1, 2005            2,663,650          $ 1.00
       Issued                                      -               -
       Exercised                             (40,000)         $ 1.00
       Expired                                     -               -
                                         -----------       -------------
     Balance at December 31, 2005          2,263,650          $ 1.00
       Issued
         Placement agent warrants              1,000          $ 0.90
         La Terraza warrants                 600,000          $ 0.1875
       Exercised                                   -               -
       Expired                            (2,263,650)         $ 1.00
                                         -----------       -------------
     Balance at December 31, 2006            601,000          $ 0.1887
                                         ==========        =============


Note O - Rental Commitments

The Company  leases its  corporate  office and  manufacturing  facility from its
controlling  stockholder under a long-term operating lease agreement.  The lease
requires a monthly payment of approximately  $5,735,  including applicable sales
taxes.  The Company is responsible for all utilities and  maintenance  expenses.
The  lease  expires  on  December  1,  2009  and  contains  a clause  that  upon
expiration,  the Company and the controlling  shareholder  shall renegotiate the
annual rental amount.

The  Company's  subsidiary,  IPE,  leases it's  manufacturing  facility  from an
unrelated third-party under a long-term operating lease agreement. This lease is
for a period of five (5) years and requires graduated monthly payments, changing
on the lease anniversary date, ranging from approximately $1,751 to $1,914, plus
the applicable  sales taxes.  The Company is  responsible  for all utilities and
maintenance expenses.  The lease expires on February 28, 2007 and may be renewed
for an additional five (5) year term at a rental rate of  approximately  $1,971,
plus applicable sales taxes for the first renewal year and 3.0% increase on each
succeeding   anniversary   date.   Total  rent  expense  under  this  lease  was
approximately  $23,057  and  22,176,  respectively,  for each of the years ended
December 31, 2006 and 2005.

In May  2004,  the  Company  entered  into a  long-term  lease  agreement  for a
warehouse  facility  adjacent to the Company's  primary office and manufacturing
facility.  This lease was for a period of two (2) years and required payments of
approximately  $6,206 per month for the first 12 months and approximately $6,393
for the  second  12  months,  plus  applicable  sales  taxes.  The  Company  was
responsible  for all utilities and maintenance  expenses.  This lease expired on
May 31,  2006 and the  Company  has no further  responsibility  under this lease
agreement.




                                      F-22
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note O - Rental Commitments - Continued

Future minimum rental payments on the above leases are as follows:

                    Year ended
                   December 31,        Amount
                   ------------      ----------
                       2007          $   72,643
                       2008              68,815
                       2007              68,815
                                     ----------
                      Totals         $  210,273
                                     ==========

For the  respective  years ended December 31, 2006 and 2005, the Company paid an
aggregate of $125,862 and $158,947 in rent under these agreements.


Note P - Income Taxes

The components of income tax (benefit)  expense for the years ended December 31,
2006 and 2005, respectively, are as follows:

                                      Year ended        Year ended
                                      December 31,    December 31,
                                          2006            2005
                                    --------------  ----------------
       Federal:
         Current                          $     -           $    -
         Deferred                               -                -
                                          -------           ------
                                                -                -
                                          -------           ------
       State:
         Current                                -                -
         Deferred                               -                -
                                          -------           ------
                                                -                -
                                          -------           ------
         Total                            $     -           $    -
                                           ======           ======

As of December 31, 2006,  the Company has a net operating loss  carryforward  of
approximately  $14,500,000 to offset future taxable  income.  Subject to current
regulations, components of this carryforward began to expire in 2005. The amount
and  availability  of the net  operating  loss  carryforwards  may be subject to
limitations set forth by the Internal  Revenue Code.  Factors such as the number
of shares ultimately issued within a three year look-back period;  whether there
is a deemed more than 50 percent change in control; the applicable long-term tax
exempt bond rate;  continuity of historical  business;  and subsequent income of
the  Company  all  enter  into  the  annual   computation  of  allowable  annual
utilization of the carryforwards.

The Company's income tax expense (benefit) for the years ended December 31, 2006
and 2005,  respectively,  differed from the statutory federal rate of 34 percent
as follows:

<TABLE>
<CAPTION>
                                                            Year ended        Year ended
                                                           December 31,     December 31,
                                                               2006              2005
                                                           --------------  ----------------
<S>                                                        <C>             <C>
Statutory rate applied to loss before income taxes         $   (2,683,000) $     (2,020,000)
Increase (decrease) in income taxes resulting from:
  State income taxes                                                    -                 -
  Non-deductible items
    Impairment of recoverability of carrying value
     of fixed assets                                                    -           944,000
    Compensation expense related to common
      stock issuances at less than "fair value"                 1,765,000            87,000
    Other, including reserve for deferred tax asset               918,000           989,000
                                                           --------------   ---------------

    Income tax expense                                     $            -   $             -
                                                           ==============   ===============
</TABLE>

                                      F-23
<PAGE>



                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005



Note P - Income Taxes - Continued

Temporary   differences,   consisting   primarily  of  the  net  operating  loss
carryforward and statutory differences in the depreciable lives for property and
equipment,  between the financial  statement  carrying  amounts and tax bases of
assets and  liabilities  give rise to deferred tax assets and  liabilities as of
December 31, 2006 and 2005, respectively:

                                              Year ended        Year ended
                                              December 31,     December 31,
                                                  2006            2005
                                              ------------     ------------
     Deferred tax assets - long-term
       Net operating loss carryforwards       $  4,930,000     $  4,080,000
     Deferred tax liabilities - long-term
       Statutory depreciation differences         (500,000)        (525,000)
                                              ------------     ------------
                                                 4,430,000        3,555,000
     Less valuation allowance                   (4,430,000)      (3,555,000)
                                              ------------     ------------
       Net Deferred Tax Asset                 $          -     $           -
                                              ============     =============

During the years ended December 31, 2006 and 2005,  respectively,  the valuation
allowance increased (decreased) by approximately $875,000 and $1,576,000.


Note Q - Revenue Concentrations

The  Company  sells  to both  commercial  and  governmental  customers,  in both
domestic and foreign  markets.  The following  table shows the  Company's  gross
revenue composition:

                                  Year ended                 Year ended
                                December 31, 2006       December 31, 2005
                                -----------------       -----------------
                              Amount     % of total    Amount    % of total
                             ----------   ----------   ----------  ----------
Domestic
   Commercial
     Customer A              $  713,429     31.83      $  222,272      6.85
     Others                   1,140,334     50.88         958,813     29.56
                             ----------   ----------   ----------  ----------
                              1,853,762     82.71       1,181,085     46.41
                             ----------   ----------   ----------  ----------

   Private Label                268,129     11.96         407,063     12.55
                             ----------   ----------   ----------  ----------

   Governmental
     Customer B                  51,089      2.28         541,392     16.69
     Customer C                       -         -         399,860     12.33
     Others                      10,256      0.46          44,963      1.39
                             ----------   ----------   ----------  ----------
                                 61,345      2.74         986,215     30.41
                             ----------   ----------   ----------  ----------
Foreign
   Governmental
     Customer D                       -            -      644,180     19.86
     Others                      58,163         2.59       25,090      0.77
                             ----------   ----------   ----------  ----------
                                 58,163         2.59      669,270     20.63
                             ----------   ----------   ----------  ----------

     Totals                  $2,241,399       100.00   $3,243,633    100.00
                             ==========   ==========   ==========  ==========




                                      F-24
<PAGE>


                   AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 2006 and 2005


Note R - Selected Financial Data (Unaudited)

The following is a summary of the quarterly  results of operations for the years
ended December 31, 2006 and 2005, respectively.

<TABLE>
<CAPTION>
                              Quarter ended    Quarter ended   Quarter ended    Quarter ended      Year ended
                                March 31,        June 30,      September 30,    December 31,      December 31,
                             --------------- ----------------  -------------    ------------      ------------
<S>                           <C>               <C>            <C>              <C>               <C>
Calendar 2006
   Revenues - net             $      710,111    $    669,386   $     305,805    $    556,057      $  2,241,399
   Gross profit               $     (667,994)   $      4,297   $    (389,262)   $   (194,382)     $ (1,247,341)
   Net earnings after
     provision for
     income taxes             $   (1,108,192)   $   (396,668)  $  (1,179,115)   $ (5,416,082)     $ (8,100,057)
   Basic and fully diluted
     earnings per share       $        (0.26)   $      (0.09)  $       (0.23)   $      (0.31)     $      (0.96)
   Weighted average
     number of shares
     issued and outstanding        4,270,491       4,797,286       5,199,890      17,449,148         8,524,241

Calendar 2005
   Revenues - net             $    1,170,317    $     684,693  $     378,326    $  1,010,297      $  3,243,633
   Gross profit               $     (366,263)   $    (676,300) $    (757,023)   $    451,009      $ (1,348,577)
   Net earnings after
     provision for
     income taxes             $     (786,044)   $  (1,155,474) $  (1,118,089)   $ (2,882,062)     $ (5,941,669)
   Basic and fully diluted
     earnings per share       $        (0.21)   $       (0.32) $       (0.29)   $      (0.70)     $      (1.52)
   Weighted average
     number of shares
     issued and outstanding        3,742,585        3,557,402      3,812,069       4,126,366         3,907,499
</TABLE>





                (Remainder of this page left blank intentionally)



                        (Signatures follow on next page)




                                      F-25
<PAGE>





                                   SIGNATURES

In accord with Section 13 or 15(d) of the  Securities  Act of 1933,  as amended,
the Company  caused  this report to be signed on its behalf by the  undersigned,
thereto duly authorized.

                            American Ammunition, Inc.

Dated: April 30, 2007           By:   /s/ Andres F. Fernandez
       --------------               -----------------------------------
                                     Andres F. Fernandez
                                     President, Chief Executive Officer,
                                     Chief Financial Officer and Director

In accordance with the Securities Exchange Act of 1934, as amended,  this report
has been signed below by the  following  persons on behalf of the Company and in
the capacities and on the date as indicated.


Dated: April 30, 2007           By:   /s/ Andres F. Fernandez
       --------------               -----------------------------------
                                     Andres F. Fernandez
                                     President, Chief Executive Officer,
                                     Chief Financial Officer and Director

Dated: April 30, 2007           By:   /s/ J. A. Fernandez, Sr.
       --------------              ------------------------------------
                                     J. A. Fernandez, Sr.
                                     Chairman, Director of Sales,
                                     and Director

Dated: April 30, 2007           By:   /s/ Emilio D. Jara
       --------------               ------------------------------
                                     Emilio D. Jara.
                                     Vice President - Operations,
                                     Corporate Secretary and Director

Dated: April 30, 2007           By:   /s/ Maria A. Fernandez
       --------------                ----------------------------------
                                     Maria A. Fernandez,
                                     Director


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