**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-KSB**
| o          | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES  EXCHANGE ACT OF 1934**     |       |
|------------|------------------------------------------------------------------------------------------|------------|
|       | ** **                                                                               |       |
|       | **For the fiscal year  ended:** December 31,  2006                                       |       |
|       |                                                                                     |       |
|       | **OR**                                                                                   |       |
|       |                                                                                     |       |
| o          | **TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES  EXCHANGE ACT OF 1934** |       |
| ** ** | ** **                                                                               | ** ** |
| ** ** | **For  the transition period from: ___ to ____ **                                   | ** ** |

 

**Commission File Number333-128758**

** **

**UTILICRAFT AEROSPACE INDUSTRIES, INC.**

(Name of Small BusinessIssuer in Its Charter)

| **Nevada**                                                      |   | **20-1990623**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **7339  Paeso Del Volcan**                                      |   | ** **                            |
| **Albuquerque,  New Mexico**                                    |   | **87121**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |
|                                                            |   |                                  |

 

Issuer’s telephone number: (866) 843-1348

** **

Securities registered under Section 12(b) of theExchange Act: None.

Securities registered under Section 12(g) of theExchange Act: Common Stock, no par value.

** **

Check whether the issuer is not required to filereports pursuant to Section 13 or 15(d) of the Exchange Act.  o

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  x  No  o

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB.  x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

State issuer’s revenues for its most recent fiscalyear: $-0-

The aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was sold, or the average bid and asked priceof such common equity, as of a specified date within the past 60 days:$13,464,656 as of April 9, 2007.

The number of shares outstanding of each of the issuer’sclasses of common equity, as of the latest practicable date: 214,825,989 commonshares, no par value, outstanding as of April 5, 2007.

Documents Incorporated By Reference:   None.

Transitional Small Business Disclosure Format (checkone):   Yes  o  No  x

 

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**TABLEOF CONTENTS**
| **Part I**    |
|---------------|
| 1.            |   | Description of Business |   | 1 |
| 2.            |   | Description of Property |   | 14 |
| 3.            |   | Legal  Proceedings |   | 15 |
| 4.            |   | Submission of Matters to a Vote of Security Holders |   | 15 |
| **Part II**   |
| 5.            |   | Market for Common Equity and Related Stockholder  Matters and Small Business Issuer Purchases of Equity Securities |   | 15 |
| 6.            |   | Management’s Discussion and Analysis or Plan of  Operation |   | 17 |
| 7.            |   | Financial Statements |   | 23 |
| 8.            |   | Changes In and Disagreements With Accountants on  Accounting and Financial Disclosure |   | 23 |
| 8A.           |   | Controls and Procedures |   | 23 |
| 8B.           |   | Other  Information |   | 24 |
| **Part  III** |
| 9.            |   | Directors and Executive Officers of the Registrant |   | 24 |
| 10.           |   | Executive Compensation |   | 26 |
| 11.           |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters |   | 30 |
| 12.           |   | Certain Relationships and Related Transactions |   | 31 |
| 13.           |   | Exhibits |   | 32 |
| 14.           |   | Principal Accountant Fees and Services |   | 33 |

 

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**PART 1**

**FORWARD-LOOKINGSTATEMENTS**

This annual report onForm 10-KSB includes forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended, which we refer to in this annualreport as the Securities Act, and Section 21E of the Securities Exchange Act of1934, as amended, which we refer to in this annual report as the Exchange Act.Forward-looking statements are not statements of historical fact but ratherreflect our current expectations, estimates and predictions about futureresults and events. These statements may use words such as “anticipate,” “believe,”“estimate,” “expect,” “intend,” “predict,” “project” and similar expressions asthey relate to us or our management. When we make forward-looking statements,we are basing them on our management’s beliefs and assumptions, usinginformation currently available to us. These forward-looking statements aresubject to risks, uncertainties and assumptions, including but not limited to,risks, uncertainties and assumptions discussed in this annual report. Factorsthat can cause or contribute to these differences include those described underthe headings “Risk Factors” and “Management Discussion and Analysis and Plan ofOperation.”

If one or more of theseor other risks or uncertainties materialize, or if our underlying assumptionsprove to be incorrect, actual results may vary materially from what weprojected. Any forward-looking statement you read in this annual reportreflects our current views with respect to future events and is subject tothese and other risks, uncertainties and assumptions relating to ouroperations, results of operations, growth strategy and liquidity. Allsubsequent written and oral forward-looking statements attributable to us orindividuals acting on our behalf are expressly qualified in their entirety bythis paragraph. You should specifically consider the factors identified in thisannual report which would cause actual results to differ before making aninvestment decision. We are under no duty to update any of the forward-lookingstatements after the date of this annual report or to conform these statementsto actual results.

**ITEM 1.DESCRIPTION OF BUSINESS**

**Developmentof Utilicraft Aerospace Industries, Inc.**

UtilicraftAerospace Industries, Inc. is a Nevada corporation that was incorporatedon December 10, 2004.  The Companywas formed to effect a reorganization (the “Reorganization”) of AmericanUtilicraft Corporation (“AMUC”).  TheReorganization was deemed necessary by the AMUC Board of Directors because theyconcluded that the business of AMUC could not be continued by the corporationin its current form due to its inability to facilitate significant investmentto satisfy capital requirements for bringing its products to market.  Among other things, delinquencies anddeficiencies in its public filings under federal securities laws and certainpending litigation were reasons AMUC was unable to facilitate significantinvestment necessary to fund continuing operations.  Upon formation, the Company:  (1) obtained from John Dupont,assignments of patent rights for the design of the FF-1080-300 aircraft, themethod patent for the Express Turn-Around (ETA) electronic freight trackingsystem and for the Automated Flat Rate System (AFRS); (2) entered intoseparate employment agreements with John Dupont, Darby Boland, John Dapogny andKaren Shoemaker; (3) entered into lease agreements for facilities for usein its business operations, including a sublease (which has since beenterminated) from AMUC of facilities located at 554 Briscoe Blvd.,Lawrenceville, Georgia (formerly AMUC headquarters); and (4) recognizedand resolved to honor deferred compensation obligations of AMUC to its officersin the amount of $1,892,108 to effect the Reorganization of AMUC.  In connection with the Reorganization, theCompany has also paid an aggregate of approximately $1,095,077 to AMUC or itscreditors and assumed debt owed by AMUC to an officer of the Companyaggregating approximately $532,000.  AMUCapplied approximately $46,499 of the proceeds from UAI toward settlement ofcertain obligations to persons who serve as officers/directors of the Company,who also served AMUC as officers/directors. The settled AMUC obligations tosuch officers/directors included payroll obligations totaling approximately$36,224 paid to Messrs Dupont, Boland and Dapogny, approximately $775 inaccounts payable paid to Darby Boland, repayment of $7,000 of personal loansfrom John Dupont to AMUC, approximately $1,500 paid to John Dupont in reimbursementfor travel expenses, and a $1,000 payment to Mr. Dupont for research anddevelopment services.

As part of theReorganization, the Company also received preliminary letter agreements fromGlobal Aircraft Group and WSI Hong Kong Ltd. (“WSI”), agreeing that they wouldenter into contracts with the Company for the purchase of aircraft onsubstantially the same terms as those between them and AMUC.  AMUC was in default on those contractsbecause it was unable to meet development and production deadlines for thedelivery of aircraft, which comprised material breaches as disclosed in AMUC’sForm 8-K filed December 16, 2004. Because of delays in arranging funding, the Company never finalizedagreements with either Global or WSI.

To effect theReorganization, the Company executed a Reorganization Agreement with AMUCpursuant to which it issued 111,444,769 shares of its common stock to AMUC tobe distributed as a share dividend to AMUC shareholders on a share-for-sharebasis.  AMUC declared a dividend of theshares of the Company’s common stock to its shareholders on September 22,2005.  Pursuant to the terms of theReorganization Agreement the Company also issued warrants (the “UAI Warrants”)exercisable for the purchase of

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17,287,664 sharesof our common stock to holders of AMUC issued warrants (the “AMUC Warrants”)for the purchase of 17,287,664 shares of AMUC common stock, in the sameproportion and on the same terms as the AMUC Warrants, except that any cashlessexercise rights in the AMUC Warrants were not granted in connection with theUAI Warrants.  As a result of theReorganization, AMUC is currently essentially a “shell” company, with nobusiness and limited assets. Mr. Dupont executed the Reorganization Agreementin his capacity as President on behalf of the Company, and  Mr. Boland executed the ReorganizationAgreement in his capacity as an officer of AMUC on behalf of AMUC.

The reorganizationcould be characterized as a chain of transactions designed to effect anunregistered distribution of the Company’s shares that would not qualify for anexemption under the Securities Act, which may subject the Company to private orregulatory liabilities.  The Companyconsiders the prospects of liability remote, in that there was no considerationpaid for the dividended shares, and it promptly took steps to register anoffering of such shares for resale. Though the Company contends there are exemptions available for the AMUCdividend, in the event that state or federal securities regulators pursueenforcement actions the Company may be limited in its ability to effectsecurities offerings or obtain financing in the future.

Pursuant to theReorganization, the Company’s officers entered into employment agreements withthe Company, which are incorporated as Exhibits to this Registration Statement,and the Company assumed the obligation to pay them compensation deferred onAMUC’s books (see**“**EXECUTIVE COMPENSATION**” section) as well asAMUC’s debt to John Dupont (see**“**CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**”section).  John Dupont and Darby Bolandeach also received 10,000,000 shares of stock in the Company for servicesrendered and their agreement to serve as a directors of the Company.

At the time of theReorganization, AMUC was party to litigation concerning the exercise ofwarrants issued to an underwriter in its 2001 securities offering styled *Schwartz Private Equity Group, LLC v. AmericanUtilicraft Corp.,* State Court of Fulton County Georgia No.04VS074071A.  Schwartz claims that it wasentitled to exercise warrants for AMUC shares during 2002 and 2003, but wasrefused; Schwartz provided notice that it would exercise warrants but nevertendered payments therefor.  Since AMUCanswered Schwartz’ original petition, Schwartz has not pursued the litigation,and there are no outstanding discovery requests or scheduling orders.

**BusinessOverview**

The Company isengaged in the development and marketing of a freight forwarding aircraft, andcertain information systems relating to the operation and function of theaircraft and freight management.  Thegoal of the Company is to implement solutions to the problem of decliningcapacity in the short haul (or feeder) route segments of the air cargo hub andspoke system.

The result of theCompany’s efforts and research and development is a complete system fortransporting air freight, centered around a new air vehicle specificallydesigned for medium range route segments, the FF-1080-300 Freight Feederaircraft (the “FF-1080-300”).  TheFF-1080-300 is designed to be capable of economically carrying standardindustry air containers on short-to-medium range/medium density routes fromairports with runways as short as 3,500 feet.

The Company hasobtained assignment of rights to three (3) U.S. patents from one of theCompany’s founders, John Dupont.  Onepatent is for the design of the FF-1080-300 aircraft.  Another is a method patent that incorporatesthe design in an integrated air cargo information system for the freight feedmarket, the Express Turn-Around (ETA) electronic freight tracking system.  The third patent is for the Automated FlatRate System (AFRS). The AFRS system computes the most economical performancecurve for each route segment based on the change in aircraft gross weight on thesegment.  The AFRS system reduces pilotworkload and assures that the FF-1080-300 is operated with optimal fuelefficiency.

The Company hasobtained arrangements (sometimes referred to herein as “Risk Sharing Agreements”)with a number of experienced companies that provide aviation products andservices necessary for the production of the FF-1080-300.  Most of the Risk Sharing Agreements areinformal oral and in some cases preliminary written commitments.  Though we have obtained a definitive writtenagreement with one supplier, binding written agreements with most of the supplycompanies have not yet been obtained. See “**Suppliers and Materials**”below.** **These suppliers will provide, and have provided, productsand/or services at no cost or at the manufacturer’s lowest direct costs forboth the Pre-Production prototype FF-1080-300 aircraft and the ConformityAircraft.** **With respect to no-cost products, we obtain those onessentially a consignment basis, permitting us to use the products on ouraircraft without an up-front payment. However, if we remove the equipment from the aircraft, we must returnsuch equipment to the manufacturer.  Thewillingness of these companies to share the risk to bring the FF-1080-300 tomarket, indicates their belief in the potential of the aircraft and theirdesire to participate in the program. The understandings reached with these companies have enhanced thetechnical capability and operational value of the FF-1080-300, as well asassured the success of the development and production program.

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**OurProducts**

The FF-1080-300 isdesigned to be capable of economically carrying standard industry aircontainers on short-to-medium range/medium-density routes from feeder airportswith runways as short as 3,500 feet, opening up thousands of additionalairports in gear, turboprop aircraft specifically designed as a commercialutility air-freight transport system using off-the-shelf systems and designstandards.  The FF-1080-300 is designedto satisfy an industry-recognized need to cost-effectively feed containerizedair cargo to the major hubs of the scheduled passenger carriers and theovernight express airlines.  The aircraftis also designed for Short Take-Off and Landing (STOL) capability.  This feature would make the FF-1080-300 theonly****short-haul, heavy-liftcontainerized feeder aircraft capable of cost-effectively transporting tenrevenue (air freight) tons over 1,000 miles, or eight tons over 1,500 miles,from airfields with less than 3,500 feet of runway, expanding air cargocapacity to many smaller cities and airports worldwide.

The Company hasobtained assignment of patent rights to an integrated air cargo electronicinformation system for the freight feed market, the “Express Turn-Around” (ETA)electronic freight tracking system. Embodied in the design of the FF-1080-300, the ETA is a completelyautomatic freight management and control system.  This patented system, which integratescurrently available components, automatically accumulates and transmitsreal-time information on cargo handled by the aircraft to the carrier’saircraft dispatch and freight management center.  The cargo containers (LD-3’s and various maindeck containers) are identified by bar codes on the side of the container.  The codes are read by bar code readersinstalled on both sides of each cargo door as the containers are moved on andoff the FF-1080-300 aircraft.  As thecontainers are loaded, they are automatically weighed.  The identification and weight of individualcontainers are stored in a portable central processing unit (CPU) located on boardthe aircraft, which also records and stores each container’s on-load/off-loadstatus, specific aircraft identification, date, time and place by means of theaircraft’s Global Positioning System (GPS) navigation system.  This stored information is transmitted to theoperator’s control center by means of a data communications system whichtransmits automatically.  This managementinformation system reduces station workload at remote locations, allowspre-planning at the hub for rapid freight transfer, provides real timeinformation on specific shipments in the hub feed route segments, and operateswithout any work or activation by the pilot or ground employees.

The ETA system hasnot been developed by the Company as of yet for commercial application, andthere is no budget for such development. As time and funding permits, the Company plans to seek assistance from asubcontractor to develop and manufacture the required components at a laterdate.  We are currently testing equipmentprovided by AirCell, Inc., a leading manufacturer of air-to-groundcommunications systems, who has consigned an equipment package to the Companyfor integration and testing purposes. AirCell’s Iridium system has been installed in the Company’s testaircraft.

The Company has obtainedassignment of patent rights for the Automated Flat Rate System (AFRS).  The AFRS system computes the most economicalperformance curve for each route segment based on the change in aircraft grossweight on the segment.  The AFRS systemreduces pilot workload and assures that the FF-1080-300 is operated with thehighest fuel efficiency, which can save fleet operators millions of dollars onan annual basis.  The AFRS is designed toautomatically reset the flat engine power rate setting of the engine or enginesof an aircraft relevant to the actual operational gross weight prior toflight.  For example, if a fully loadedaircraft has a gross weight of 68,000 lbs., and requires 4,200 shaft horsepower (SHP) per each of its two engines, the AFRS will set the flat rate ofboth engines at 4,200 SHP.  If, however,on the next flight the aircraft unloads cargo and now only has a operationalgross weight of 50,000 lbs., and only requires 3,500 SHP per engine, the AFRSwill reset the flat rate to 3,500 SHP per engine prior to flight.  This results in a substantial savings in fueland less wear and tear on the engines resulting in less maintenance and longerengine life.

The AFRSautomatically receives the aircraft weight data from a commercial weight andbalance system installed on the aircraft. The information is digital and is interpreted by the AFRS software. TheAFRS also receives temperature and air density digital data from the aircraftair-data system.  The AFRS informationfor engine operation is displayed to the pilot as a reference bug on the engineinstrument panel and guides him as to the necessary settings to maintain theadjusted flat rate.  However, should thepilot need the remaining unused engine****theremaining power is available by simply advancing the throttles forward, as innormal flight operation.

The AFRStechnology is patented, but there has been no manufacture or commercialapplication of any product based on the patent. As time and funding permits, we intend to hire a software development companyto integrate the software into other commercially available hardware.  We have not developed a budget for thisintegration process.  AFRS is not vitalto the completion of the aircraft, but once developed may be offered as anoption.

**TheMarket**

The FF-1080-300was designed to target the growing distribution requirement for more shipmentswith in-transit visibility and containerization delivered as close as possibleto its end destination.  This marketniche includes the freight feed operations of the overnight/two day expressairlines, the airline freight feeder market, the world postal services,manufacturing just-in-time inventory and fulfillment, the combinationpassenger/cargo airlines, and the international airlines.

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Our initial targetclient base consists of international and domestic****freight carriers and U.S. passenger airlines seeking toexpand their freight services.  The majorfreight carriers include Federal Express, United Parcel Service, EmeryWorldwide, Airborne Express, DHL, and TNT. The major U.S. passenger airlines include American Airlines, ContinentalAirlines, Delta Airlines, Northwest Airlines, Southwest Airlines, UnitedAirlines and US Air.

Our secondarytarget market includes major international passenger airlines seeking to expandfreight operations.  Such airlines wouldinclude British Airways, Lufthansa, Japan Airlines, Air France, All NipponAirways, Alitalia and KLM Royal Dutch Airlines.

We believe thatthe passenger airlines may eventually purchase FF-1080-300s because of theexpanding market opportunities for same-day, overnight, and international cargoservices, and to keep their operations viable by removing freight from thescheduled passenger airlines and place such freight in a more cost-effectivetransport system.  The FF-1080-300 is anappropriately sized freight feeder aircraft for both the hub feeder role andthe stand-alone regional express service.

The cargo that theFF-1080-300 is designed to carry is standard industry air containers containinga variety of packages including commercial shipments ranging from e-commerceretailer shipments directly to customers to manufacturing supply chainoperations.

The Companybelieves that the high speed, high frequency, and high volume required bydeveloping distribution system needs will be best accomplished by using theFF-1080-300 aircraft.  The FF-1080-300 isan all-cargo aircraft that is designed specifically for hub-and-spoke cargooperations.  We believe that theFF-1080-300 will contribute to the development of regional hub-and-spoke cargooperations in the same way that passenger turboprop aircraft were used to buildthe passenger hub-and-spoke systems.  TheFF-1080-300 will be able to fly to smaller cities and airports that are locatedcloser to origin/destination points.  TheFF-1080-300 is designed to have lower acquisition and operating costs thanolder generation turboprop aircraft, such as the DeHavilland Dash 8,Aerospatiale ATR 42 and 72, the Saab 340, the Embraer EM 120 and the Dornier328, while still providing the speed needed to create high-performance,fast-delivery shipping.  Our goal is toprovide airlines the critical flexibility needed to move air cargo to morecities, more frequently, in manageable and trackable containerized units.

The Company’ssales and marketing efforts will primarily consist of direct sales initiativeswith prospective airline customers and large commercial operations that caninfluence the sale of aircraft.  TheCompany’s direct sales efforts will entail the preparation of aircraft routeand market analysis, and aircraft cost and benefit analysis, in conjunctionwith customer airline planning teams.  Ascustomer sales initiatives approach the decision-making stage, the sales effortwill focus on the development of sales contracts and aircraft financingsupport.  The marketing and sales effortalso consists of participation in air cargo industry trade shows that includethe National Business Aircraft Association (NBAA) Annual Conference, the RegionalAirline Association Annual Meeting, the National Defense Industry Association(NDIA) symposia, and other U.S. and international trade shows.  These presentations include a display of thefull-scale mockup of the FF-1080-300 and video and graphic presentations of thekey features and operating economics of the FF-1080-300.  Upon completion of the preproductionprototype, trade show presentations and customer sales efforts will alsoinclude flight demonstrations of the FF-1080-300 and the aircraft’ssystems.  Finally, the marketing effortwill be supported by advertising and promotional campaigns appearing in premierworldwide airline industry trade publications. These efforts will emphasize the benefits and features of theFF-1080-300 to air shippers and airline operators as well as to companies andindustries in need of multiple-stop Just-In-Time shipping to support theirmanufacturing supply chains.

**Competition**

Other companiesthat build small and intermediate-sized aircraft such as Spain’s CASA, Canada’sDeHavilland, Sweden’s Saab, Germany’s Dornier, and the U.S.’s Beechcraft andCessna currently have no products that the Company is aware of with comparativefeatures that would directly compete with the FF-1080-300.  Aerospace (France) and British Aerospace,which build larger jet aircraft, also manufacture intermediate-sized passengeraircraft that are often converted for freight, but we believe that suchaircraft are too large to pose a threat to our targeted market segment.

Light AircraftUnder 20,000 Pounds

Aircraft in thiscategory, such as the Cessna Caravan 208 and the Dornier 228, are small andcannot accommodate the air cargo industry standard containers.  These planes are more suitable for thenon-containerized, overnight small package services in low volume markets.  Federal Express developed a fleet of morethan 250 Cessna 208 aircraft since the early 1980s.** **Other overnightexpress operators****such as****Martinaire, Superior Aviation, AirNetSystems, and Union Flights also fly small fleets of the Cessna 208s, but themajority of the aircraft used by these operators are older corporate executiveor passenger commuter aircraft converted into makeshift freighters.  This class of aircraft does not provideenough capacity per departure to meet increasing shipping demand.  Though established manufacturers of lightaircraft with greater financial resources and brand name recognition couldpotentially enter the market and develop products that compete against ours,there has been no indication that they will do so.

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Intermediate-SizedAircraft

Intermediate-sizedaircraft such as the DeHavilland Dash 8, Aerospatiale ATR42 and 72, Saab 340,Embraer EM120, Dornier 328 and CASA 235 were specifically designed to haulpassengers at high speeds to the major hub airports.  Therefore, their designs cannot be modifiedto accommodate the features needed in a pure freighter aircraft, such as alarger forward side cargo door, high point-load capable floors, cargo netattachments, and a container roller system, and, as a result, they pose littlecompetitive threat to our market segment. The new aircraft in this category, the CASA 235, was designed for dualpassenger and cargo use.  Although theCASA 235 has a rear ramp door, its heavy aircraft empty weight and slow cruisespeed causes a range/payload deficiency in both freight and passengeroperations.  There is no cost-effectivemeans to convert any of these existing aircraft into cargo airplanes which iswhy FAA-compliant cargo modification procedures for these planes have not beendeveloped.  In addition, all of theseaircraft are unable to operate from airfields with runways of 3,500 feet orless because they were designed for high-speed takeoffs from long runways.  For these reasons, current owners of fleetsof these aircraft are presently exploring placing them in Third-World anddeveloping nations as passenger aircraft and parts (scavenged) aircraft inorder to gain some revenue from their use. Though established manufacturers of intermediate-sized aircraft withgreater financial resources and brand name recognition could potentially enterthe market and develop products that compete against ours, there has been noindication that they will do so.

Heavy/LargeAircraft

Several freightcarriers are using Boeing 717, 727s, 737x, and McDonnell Douglas DC9s for feederoperations.  These aircraft can carrycontainers, but they are too large and too costly to operate efficiently in ahub feeder role.  These aircraft cannotbe used to serve small feeder airports because of landing/takeoffrequirements.  They are also noteconomical to operate on the typical feeder stage length of 250 to 500miles.  Though established manufacturersof heavy/large aircraft with greater financial resources and brand namerecognition could potentially enter the market and develop products thatcompete against ours, there has been no indication that they will do so.

Used,Out-Of-Production Aircraft

The backbone ofthe utility/freight feeder fleet to date has been a group of small piston andlight turboprop aircraft.  In themid-1990s, product liability litigation and passenger feeder market demand formuch larger turboprop aircraft resulted in the halt of production of most ofthe popular aircraft used for air cargo operations.  The out-of-production aircraft most commonlyused are the smaller Piper Cherokee Six, Piper Aztec, Piper Navajo, Cessna 400series, the DeHavilland Dash 6 Twin Otter, Beech 99, Beech 1900, and BeechBaron.  Larger aircraft in this categoryare the Convair 580, Convair 660, the Fairchild F27, Shorts 330, Shorts 360, CASA212, and the DeHavilland Dash 7.

With every passingyear, fewer of these aircraft are available for the utility market due to theincreasing fleet age and the difficulty of getting parts and other productsupport.  Even when spare parts areavailable, the older designs of these aircraft make them unattractive freighthaulers.  They are heavy, fuel-intensive,and prone to breakdowns, grounding planes and stranding cargo.  These pose little real threat to theFF-1080-300 purely from an economic standpoint, because they are too small andtoo expensive to operate with modern freight handling systems.

New MarketEntrants

We are currentlyunaware of any other companies with programs competing in this nichemarket.  We have found no evidence of newentrants in the airfreight feeder market, and communications with our potentialsuppliers and industrial partners have confirmed this observation.  The potential market size can, however,support more than one or two producers of this type of aircraft in the futurein a similar way that passenger aircraft demand supports two primary aircraftmanufacturers, Boeing and Airbus.

Our patentprotection for our aircraft design, the ETA system, and the AFRS system willalso help the FF-1080-300 retain a leading market position.

##### Patents and Trademarks

Our performanceand ability to compete depend to a significant degree on our proprietaryknowledge.  In 1992, the U.S. Patent andTrademark Office (“PTO”) issued to John Dupont a method patent for themethod of transporting cargo using freight feeder aircraft with an automatedfreight management system.  In 1993, thePTO issued a design patent to Mr. Dupont for the FF-1080 aircraft, apredecessor aircraft to the FF-1080-300. In 2001, the PTO issued to Mr. Dupont a method patent for theAutomatic Flat Rate Setting System for Freight Feeder Aircraft.  John Dupont, President and CEO of theCompany, executed assignments (the “Assignments”) on December 10, 2004assigning all rights to the three (3) aforementioned patents to theCompany pursuant to the Dupont Employment Agreement.  Each of the Assignments is for termsbeginning on December 10, 2004, and subject to rights of revocation setforth in

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the DupontEmployment Agreement, ending on the expiration of the underlying patents.  The rights granted under the Assignments arerevoked if, except under certain circumstances set forth in the DupontEmployment Agreement, the Company discontinues its start-up efforts, itsdevelopment of the FF-1080 aircraft, the ETA aircraft freight feeder system,its FAA certification of the FF-1080 aircraft, its aircraft manufacturingbusiness or files for bankruptcy.  Copiesof the Assignments and the Dupont Employment Agreement are included as exhibitsto the Company’s registration statement. The method patent for the method of transporting cargo using freightfeeder aircraft with an automated freight management system expiresFebruary 20, 2011, the design patent for the FF-1080 aircraft expiresSeptember 14, 2007, and the patent for the Automatic Flat Rate SettingSystem for Freight Feeder Aircraft expires May 26, 2020.

We havenon-disclosure agreements with all of our employees that provide furtherprotection for our intellectual property.

In considerationof Mr. Dupont’s execution of the Dupont Employment Agreement and theAssignments, the Company entered into a Royalty Agreement (the “RoyaltyAgreement”) with Mr. Dupont on December 10, 2004.  Pursuant to the Royalty Agreement, theCompany has agreed to pay Mr. Dupont royalties in the amount of 3% of theCompany’s gross proceeds on all sales of the FF1080-100, FF1080-200,FF1080-300, and FF1080-500, and all variants and/or future versions or otheraircraft and/or other products which are covered by the patents underlying theAssignments and/or which utilize the trademarks assigned to the Company byMr. Dupont.  Such royalties shall bepaid on the first two thousand (2,000) aircraft sold by the Company.  The aforementioned royalties are payable inaddition to certain royalties provided for in the Dupont Employment Agreementthat may be triggered upon termination/non-renewal of the Dupont EmploymentAgreement.

##### Suppliers and Materials

We are organizedas a system integrator that will enable us to use experienced aviation industryrisk-sharing companies that work on specific tasks on an as-needed basis.  As a system integrator we will build ourproduct by putting together components from different suppliers.  As a system integrator, we will be able todevote time and resources to our final product rather than the individualcomponents which will be or have already been developed by subcontractorsuppliers.  This approach will give usthe flexibility to increase or decrease, as needed, personnel and servicesbased on planned requirements that will result in substantial savings andcontrol of overhead costs. Subcontracting, or “outsourcing,” is a standard industry practice and isused extensively in the aerospace industry.

We have haddiscussions with companies that have provided oral commitments (and in  the case of Metalcraft Technologies, Inc., awritten commitment), to enter into arrangements with us to produce apre-production prototype aircraft.  Withthe exception of our agreement with Metalcraft Technologies, Inc., we havenot yet obtained final binding agreements on acceptable terms with thecompanies who have provided such commitments. Our intention is to structure these arrangements to provide productsand/or services to us on favorable pricing terms for both the pre-productionprototype aircraft and the conformity aircraft in exchange for our agreement tocontinue using these products and/or services in the aircraft we willeventually produce for commercial sale. We believe the willingness of these companies to share the risk to bringthe FF-1080-300 to market and their high degree of interest in participating inthe program indicates their belief in the potential of the aircraft.  The understandings reached with thesecompanies have enhanced the technical capability and operational value of theFF-1080-300, as well as assured the success of the development and productionprogram.

We have enteredinto a Purchase Agreement Dated March 18, 2005, An Aircraft Sub-AssemblyManufacturing Agreement Between Utilicraft Aerospace Industries, Inc. andMetalcraft Technologies, Inc. (the “Metalcraft Agreement’).  Pursuant to the Metalcraft Agreement, we havecontracted with Metalcraft Technologies, Inc. of Cedar City, Utah, tobuild the Forward, Center and Aft fuselage and empennage (tail) assemblies forthe FF-1080-300 at their facilities and to provide these subassemblies for thePre-Production Prototype and Conformity Prototype at a reduced price.  Metalcraft will also provide these assembliesfor production aircraft. The Metalcraft Agreement provides that we will includeMetalcraft’s assemblies on the FF-1080-300 for a term of 6 years.

Though we arereliant upon Metalcraft for manufacture of a large portion of the FF-1080-300aircraft, there are numerous other qualified subassembly fabrication andmanufacturing companies with necessary experience and FAA certifications, bothin the U.S. and in foreign countries that could be utilized if Metalcraft isunable or unwilling to perform under the Metalcraft Agreement. In the eventMetalcraft should be unable or unwilling to perform under its agreement,management expects it could find a suitable alternative supplier in 60 days orless.

We plan tosubcontract wing assembly production, aircraft completions, e.g.,exterior/interior paint, cockpit interior, avionics/electronics, cargo-bayinteriors, roller-floor handling systems, and installation of other buyerfurnished equipment.  We are currently indiscussions with the following potential suppliers of FF-1080-300 components:  Shaw Aero Devices, Inc. (fuel systems),AAR Advanced Structures (cargo roller floors), Thales, Inc. (electricalpower systems), Pratt & Whitney (turboprop engines), Hi-TempInsulation, Inc. (insulation), Securaplane Technologies, Inc. (smokeand fire detection equipment), BF Goodrich Aerospace (air

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data systems),Lord Corporation (engine mount systems), General Electrodynamics Corporation(weight and balance systems), Hamilton Standard (propellers), IPECO (crewseats), Michelin Aerospace (tires), Dunlop Aerospace (wheel, brake, andlanding-gear integration) and M7 Aerospace (wing assemblies).  As of the date of this annual report, we havenot begun serious negotiation or reached final agreements with any of theforegoing potential suppliers.  Webelieve that the participation of these companies would enhance the technicalcapability and operational value of the FF-1080-300, in addition tocontributing to the likelihood of the success of the development and productionprogram.

Dependence on aFew Major Customers

Since theFF-1080-300 is still under development, the Company’s sales and marketingefforts have only yielded preliminary agreements with a few potentialcustomers.  The following is a summary ofthe current status of our arrangements with potential customers.

We have entered into aLetter of Intent to Purchase One-Hundred (100) FF-1080-300 Aircraft betweenBenin Airlines SA  (“Benin”) and theCompany dated December 2, 2005 (the “Benin LOI”).  The Benin LOI sets forth the preliminaryterms of an arrangement between the Company and Benin pursuant to which Beninintends to purchase one hundred FF-1080-300 aircraft and an option to purchasean additional one hundred aircraft. Benin intends to operate, resell or lease the Aircraft in accordancewith an Aircraft Purchase Agreement, Distributorship Agreement, and AircraftProduction Rights Agreement to be negotiated and executed within ninety days ofthe date of the Benin LOI unless extended by agreement of the parties.  The Aircraft Purchase Agreement,Distributorship Agreement, and Aircraft Production Rights Agreement have notyet been finalized or executed.  TheBenin LOI also sets forth the intention of the Company to grant Benin exclusivedistributorship rights to market, sell, and support the Africa and specificMiddle East markets, including United Arab Emirates, Saudi Arabia, Oman, Qatar,Kuwait, Jordan, Baharain, Lebanon, and excluding any Governments or Nationsthat are considered hostile to the United States of America.  The exclusive rights of Benin will be protectedby negotiation and execution of an Interim Non-Circumvention Agreementdetailing the areas of mutual interest of the parties and setting out therights of each party with respect to marketing and distribution therein.  The Company has further agreed to grant Beninan exclusive right to select final assembly facilities for any aircraftpurchased for a period of 25 years.  TheCompany has further agreed to build and certify an Extended Range (ER) versionof the FF-1080-300 aircraft and offer this version to Benin at no extracost.  The Benin LOI sets the purchaseprice at $13,500,000 USD per Aircraft delivered, plus applicable taxes, dutiesand other expenses.  At Benin’s option,the Company will either deliver the Aircraft fully assembled or will deliversubassemblies “kitted” for final assembly at facilities designated by Beninwith final cost of assembly of the kitted aircraft to be borne by theCompany.  Benin is to be responsible forshipping costs and insuring “kitted” subassemblies.  The Company has agreed to pay a 20%commission to Benin or any sales agent specified by Benin on each deliveredAircraft.  The Benin LOI specifies thatdelivery schedules are to be negotiated and included in the Aircraft PurchaseAgreement.  Benin has agreed to providethe Company with a “good faith” deposit of $5,000,000 USD in the form of aLetter of Credit, to be kept in escrow until the Aircraft are being producedand to be applied to the purchase price as provided for in the AircraftPurchase Agreement.  The Benin LOIprohibits us from drawing on the Letter of Credit until after we certify toBenin that we have commenced construction of the aircraft covered by theAircraft Purchase Agreement.  The BeninLOI is also conditioned upon John Dupont and his management team, remaining inmajority ownership or control of the Company and the President DirectorGeneral, and Executive Director of Benin remaining in majority ownership orcontrol of Benin.

As part of theReorganization, the Company received preliminary letter agreements from GlobalAircraft Group and WSI Hong Kong Ltd., agreeing that they would enter intocontracts with the Company for the purchase of aircraft on substantially thesame terms as those between them and AMUC. Definitive agreements have not yet been executed.  The preliminary agreements are merely letteragreements that state the intentions and commitments of the parties to enterinto similar contracts and agreements with the Company on substantially thesame terms and conditions as are reflected in the AMUC contracts andagreements.  The Company has not placedany emphasis on the preliminary agreements yet since there is no assurance thatdefinitive agreements will be reached on terms acceptable to the parties.

Research and Development

The Company is inthe final definition stage of the prototype engineering, and computeraerodynamic testing. We have spent **$**439,753for engineering, research and development for the period from December 10,2004 (inception) through December 31 2006. Analytical Models, Inc. (“AMI”) hasconstructed a digitized and physical wind tunnel model and will commenceaeronautical and analytical testing once financing for the balance of $236,096for such services is arranged.  We expectthat AMI will require a deposit of $100,000 to commence testing work, with thebalance paid over the test period.  Wehave also contracted with D3 Technologies, Inc. (“D3”) to provide structuralanalysis and design integration, some of which will be reliant on completion ofAMI’s wind tunnel testing. The services provided by D3 will total approximately$137,750, of which we have already paid $52,563. The balance that will be owedto D3 will be paid out over the remainder of the test cycle.  Upon completion of the work to be performedby AMI and D3, we will have an engineering report on a final Outside Mold Line(the outside surface commonly referred to as the “OML”), and can

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then concludeprototype construction.**** We have an agreement with MetalcraftTechnologies, Inc., to build the prototype fuselage and empennage. Metalcraft has constructed soft tooling but has delayed further workpending funding at our request.  We arecurrently negotiating with another manufacturer for prototype and final wingdevelopment and fabrication  We alsoexpect to enter into additional contracts with AMI, D3 and others foradditional analytical and test work and structural and manufacturing analysis,including a finite stress analysis, in connection with the certificationprocess.

**GovernmentApprovals and Regulation**

Federal Regulation

We are subject toregulations promulgated by the FAA with respect to safety requirements for andcertification of aircraft. The FF-1080-300 prototype is a pre-certified,non-production aircraft that will be built under the regulations forexperimental aircraft. The FAA regulates experimental aircraft primarily by aphilosophy of protecting the citizens on the ground, rather than by attemptingto enforce any particular code of airworthiness on the airplane, such as isdone for all FAA “certified” airplanes. An experimental airplane has a set ofFAA-issued operating limitations which must be carried in the aircraft whenflying, which limit the airplane from doing some things which a certifiedairplane can do. Such limitations usually include a geographic limit (50 milesfrom the home airport and away from populated areas, busy airports, andcongested airways). Night and instrument flight are usually restricted in theearly days of an experimental airplane’s life. As experience is gained and thesystems of a new airplane are developed, these limitations are relaxed to allowfurther expansion and demonstration of the capabilities of the airplane.Certifying the airplane for use in commerce is a different matter, requiring amajor engineering effort to show that the airplane complies with the regulationswhich govern the design and construction of a certified airplane.

The FF-1080-300 isa simple twin-engine, standard configuration, aluminum airframe that requires alow-risk, low-tech FAA certification process. We believe that there are nosystems on the aircraft (such as hydraulic, retractable landing gear,assisted/boosted flight controls, cargo cabin pressurization, emergencyejection egress, crash-worthy/fire retardant passenger seats and passengerenvironmental control systems) that could cause scheduling and approvaldifficulties with the FAA during the flight test and static-test programs.

We will also besubject to governmental regulations applicable to public companies.

FAA TypeCertificate

Type certificationis the process that conforms the FF-1080-300 engineering and flightcharacteristics to FAA requirements.  Thetype certification process legally enables a U.S. manufacturer to mass-produceits aircraft “type,” insuring that each delivered FF-1080-300 meets identicalsafety and performance requirements.  Theregulations governing an FAA Type Certificate for the FF-1080-300 are containedin Federal Aviation Rules (“FAR”) Part 25.  The FARs require that the manufacturerprovide drawings and engineering data for every component of the aircraft.  The engineering data must show precisely whatstresses will be imposed on the component during its operational life.  Its capabilities must exceed these stressesby a minimum of fifty percent.  TheFF-1080-300 is designed with even greater margins of safety and uses as manyproven industry-standard and “off-the-shelf” items as possible for safety, easeof certification and ease of maintenance. The quality of each component must also be shown to be repeatable duringthe manufacturing process, and when the Company buys a part from anothermanufacturer, the part must also be certified by the Company, or qualified****under a specific “Technical Standard Order(TSO)” by the FAA.

We plan to executeFAA Part 25 Certification in two phases. Phase I will include thedevelopment of the certification plan, filing of the certification application,certification of the detailed production engineering, construction of thestatic test articles and the conformity aircraft subassemblies, and initialflight tests using the prototype aircraft. Phase II will include final assemblyof the conformity aircraft, initiation of limited production of the aircraft,certification flight-testing and receipt of final Part 25 Aircraft TypeCertification.

Foreign Laws andRegulations

FAA certificationis recognized as the world-wide standard, and many countries, including thosein which we are currently working, have bi-lateral agreements coordinatingtheir certification requirements with those in the U.S.  While we recognize the necessity ofcountry-by-country compliance, we expect that meeting FAA certification willpermit us to meet or exceed certification requirements in countries withoutbi-lateral agreements.

We plan to beginthe FAA Certification program after completion of the pre-production prototypeaircraft.****Full FAA Part 25Certification of the aircraft (completion of both phases of the FAACertification plan) is expected to take 24 months. Based upon past experienceof the Company’s executives, it is the Company’s opinion that this is areasonable schedule.

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**EMPLOYEES**

As of December 31,2006, we had a total of six employees, all of which are considered full-timeemployees.   We also employ outsideconsultants from time to time to provide various services. None of ouremployees are represented by a labor union. We consider our employee relationsto be good.

**RISKFACTORS**

YOU SHOULD READ THEFOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH OUR FINANCIAL STATEMENTS ANDRELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT.  SOME OF THE INFORMATION CONTAINED IN THISDISCUSSION AND ANALYSIS OR SET FORTH ELSEWHERE IN THIS ANNUAL REPORT, INCLUDINGINFORMATION WITH RESPECT TO OUR PLANS AND STRATEGIES FOR OUR BUSINESS, INCLUDESFORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULDREVIEW THE “RISK FACTORS” SECTION OF THIS REPORT FOR A DISCUSSION OF IMPORTANTFACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE RESULTSDESCRIBED IN OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS CONTAINED IN THISREPORT.  IF ANY OF THE FOLLOWING RISKSACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONSCOULD SUFFER.

**RisksRelating to Our Ability to Continue**

Our independentregistered public accounting firm’s report, dated April 23, 2007, includesan explanatory paragraph expressing substantial doubt as to our ability tocontinue as a going concern, due to our working capital deficit at December 31,2006.  The Company hassuffered losses from operations and has a working capital deficiency that raisesubstantial doubt about its ability to continue as a going concern. Sinceinception (December 10, 2004) and through December 31, 2006, the Companyhas a loss from operations of approximately $8,600,000.  The loss is largely attributable to thereorganization costs associated with AMUC and the costs of sustaining acorporate infrastructure and the related overhead deemed necessary to supportthe Company’s operations while raising capital to develop a prototype of theaircraft described above.  There can beno assurance that management’s efforts to adequately capitalize the Companywill be successful.  In light of theCompany’s current financial position and the uncertainty of raising sufficientcapital to achieve its goals, its viability as a going concern is uncertain.

**RisksRelating to Our Business**

The Company has a limitedoperating history for investors to analyze and draw conclusions regarding ourpotential future performance. The Company was formed in December of 2004 and, therefore, has a limitedhistory of operations.  As a result,prospective investors will have little information to use in which to analyzethe prior performance of the Company.

Since the Companywas incorporated to effect a reorganization (the “Reorganization”) of AmericanUtilicraft Corporation (“AMUC”), it is possible that we may be deemed an “alterego” of AMUC thereby subjecting the Company to the liabilities of AMUC.  Though the Company acquired no assets of AMUCin connection with the Reorganization and paid debts owed by AMUC to trade andother creditors, it is possible that a claimant may seek to hold us responsiblefor any outstanding known or unknown AMUC liabilities under an alter egotheory. Facts that could augment an alter ego claim against the Company includethe following: (1) the Company and AMUC share the same officers and directors;(2) the Company was created to solve problems in obtaining necessary financingfor development and marketing of the Company’s products due to AMUC’sdelinquencies and deficiencies in its public filings under federal securitieslaws and certain pending litigation against AMUC; and (3) the fact that theCompany effectively adopted the business of AMUC by virtue of theReorganization.  AMUC liabilities includenot only liabilities that would be apparent from its balance sheet but couldalso include latent liabilities that could exist or might arise as a result ofthe fact that AMUC was delinquent and deficient in its reporting obligations.

The distributionof Company shares as part of the reorganization may not qualify for anexemption from the registration requirements of the Securities Act of 1933, andmay subject the Company to sanctions.  Inorder to effect the reorganization, the company issued shares to AMUC, whichAMUC then distributed as a dividend to its shareholders.  Although AMUC’s shareholders retained theirAMUC shares and gave no additional consideration for their Company shares, thedistribution effected by the dividend could be deemed an unregistereddistribution that would not qualify for an exemption from the registrationrequirements of the Securities Act of 1933. In that case, the Company could be subject to a range of administrative,civil or criminal sanctions from the regulatory bodies of the various states orthe Securities and Exchange Commission. Such sanctions could limit the Company’s ability to engage in futuresecurities offerings or otherwise obtain third-party financing for itsactivities.  The Company could also besubject to private causes of action for damages or rescission from itsshareholders.

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The Company is inthe development stage and has sustained losses which we expect to continue intothe future. There is no assurance our future operations will result inprofitable revenues. If we cannot generate sufficient revenues to operateprofitably, we may suspend or cease operations.  Our activities have been primarily directedtowards research and development and administrative activities.  The Company may experience many of theproblems, delays and expenses encountered by early stage businesses, some ofwhich are beyond the Company’s control.

The Company hasincurred losses since formation, resulting in accumulated deficits.  The Company has incurred net losses fromoperations of approximately $8,600,000 from inception through December 31,2006.  Because of our losses fromoperations and our working capital deficiency, our independent registeredpublic accounting firm has expressed substantial doubt about our ability to continueas a going concern.  The Company expectsto incur additional operating losses and negative cash flow in the futureunless and until it is able to generate operating revenues from the sale of itsproducts sufficient to support expenditures. There is no assurance that the Company will be able to bring itsproducts to the market, that sales of the Company’s products will ever generatesufficient revenues to fund its continuing operations, that the Company willgenerate positive cash flow from operations or that the Company will attain andthereafter sustain profitability in any future period.

Our operatingexpenses will increase in order to fund product prototype development,completion of the Federal Aviation Administration (“FAA”) certificationprocess, sales and marketing efforts, and increased administrative resources inanticipation of future growth.  We anticipate that over the next three years,we will need approximately $71,000,000 to fund our operating and developmentexpenses, which include the costs of two prototype aircraft, one of which is aconformity aircraft, and the FAA certification process.  In addition, over the next three years weanticipate that we will also need approximately $6,000,000 to undertake plannedsales and marketing efforts and approximately $12,000,000 to expand ouradministrative resources.  Of the amountset forth above, we anticipate that we will require approximately $15,000,000for prototype construction and administrative expenses during the next 12months.  We have entered into an AmendedMaster Financing Agreement (referred to herein as the “PacifiCorp Agreement”)with PacifiCorp Funding Partners Trust (“PacifiCorp”), effectiveSeptember 12, 2005, under which PacifiCorp has agreed to potentiallyprovide between $40,000,000 and $80,000,000 in financing through the exerciseof warrants for purchase of our shares. We have received $1,195,439 in net proceeds from the PacifiCorpAgreement as of December 31, 2006. The proceeds are from the exercise ofwarrants for the purchase of 2,502,960 shares that the Company is obligated toissue upon receipt of a validly executed Notice of Exercise but has not issuedas of the date of this Annual report. There is no assurance that PacifiCorpwill provide the $40,000,000 minimum financing pursuant to the PacifiCorp Agreement.  See discussion of the PacifiCorp Agreementset forth in the “**Liquidity and FutureCapital Requirements**” section below.  We intend to undertake sales and marketingefforts that will consist primarily of direct solicitation of potentialcustomers, participation in air cargo industry trade shows, and advertising andpromotional campaigns in airline industry trade publications.  We intend to rely upon subcontractors withengineering, manufacturing and assembly expertise to limit the necessity ofincreasing our administrative and other skilled personnel; failure or inabilityof any of these subcontractors to meet the Company’s  development and other needs could have anadverse impact on our ability to timely complete the prototype and commencecommercial manufacturing.  We alsoanticipate the need for additional financing in the future in order to fundcontinued research and development and to respond to competitive pressures.

Risks inherent inthe manufacturing business could slow growth of the Company.  Risks inherent to our business include, butare not limited to, delays in testing and development of our new products,unexpected high manufacturing and marketing costs, uncertain market acceptance,limited capital and other unforeseen difficulties.  The Company believes we have properlyidentified the risks in the environment in which we operate and plan toimplement strategies to effectively reduce the financial impact of these risks.

The loss of John Dupont(“Dupont”), the founder, president, chief executive officer, and designer ofour products, would deprive the Company of valuable contributions from thedesigner/developer of our products. We depend heavily on the contributions and efforts of Mr. Dupontwho has over 35 years of experience in the aviation industry and has developedand designed our key products, i.e., the FF-1080-300 aircraft, the ExpressTurn-Around (ETA) electronic freight tracking system, and the Automated FlatRate System (AFRS).  Rights to the patentson our key products were assigned to the Company pursuant to Mr. Dupont’sEmployment Agreement — John J. Dupont (the “Dupont Employment Agreement”) datedDecember 10, 2004.  His departurewould deprive the Company of substantial experience, capability and vision,which we need to successfully complete and market the FF-1080-300aircraft.  Moreover, the rights to thepatents are revoked if, except under certain circumstances, the Companydiscontinues its start-up efforts, it’s development of the products, its FAAcertification of the FF-1080 aircraft, its aircraft manufacturing business orfiles for bankruptcy.  Under suchcircumstances the patent rights relating to all of our current key productswill transfer back to Mr. Dupont. The Dupont Employment Agreement furtherprovides that in the event it expires without renewal, or is terminated for anyreason except one that would cause revocation of the patent assignments, theCompany may continue the development, manufacture and sale of the products onlysubject to the payment to Dupont of royalties equal to three percent (3%) ofthe gross sales of products. If the aforementioned termination/non-renewalroyalty provisions are triggered, such royalties would be payable in additionto 3% royalties due on the first 2,000 aircraft sold by UAI, as provided for inour separate Royalty Agreement with Mr. Dupont. Our Dupont Employment Agreement provides that he will remain in ouremploy until December 10, 2009. However, we have no assurance that

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Mr. Dupont willremain in our employ.  We intend to obtainkey man insurance on the life of Mr. Dupont.  Furthermore, although the loss ofMr. Dupont would adversely affect our ability to succeed, his employmentagreement imposes certain burdens on the Company because it does not obligatehim to devote his full time and efforts to the Company until we have obtained “majorstart-up financing” of approximately $20,000,000.

Mr. Dupont, in hiscapacity as President and CEO could discontinue start-up efforts of the Companyeffecting the revocation of the patent assignments for our key products therebyeffectively terminating the business operations of the Company. Pursuantto the Dupont Employment Agreement, if the Company shall discontinue start-upefforts, and/or its development of the FF-1080 aircraft and/or the ETA aircraftfreight feeder system, and/or its FAA certification of the FF-1080 aircraft,and/or its aircraft manufacturing business, and/or files chapter 11 or 7bankruptcy, all patents, and all licenses, manufacturing rights, marketingrights, design rights, and rights of any other kind, which may have beengranted or assigned to the Company by Dupont, are revoked and Dupont shall bepermitted to practice the inventions and associated trademarks and exercise allother intellectual property rights covered by such grants or assignmentswithout interference by the Company, and title to all engineering, engineeringdrawings, designs and technical data of any type, including, but not limitedto, computer-aided design and engineering data and software, shall transfer toDupont or his heirs or assigns. Loss of such rights would effectively terminatethe business of the Company.

Since the Companycannot begin to generate revenues until development of our FF-1080-300 aircraftis completed, management of growth and product development schedules arecrucial to the survival of the Company.  If we do not successfully manage futuregrowth, with resulting increases in operating, administrative, financial,accounting and personnel systems, our ability to complete production of theFF-1080-300 aircraft according to our current schedule, may be adverselyaffected.  We may encounter obstaclessuch as product supplier delays, design and engineering difficulties, and FAAcertification delays or denials, in completing construction of the FF-1080-300aircraft, which would further delay our ability to begin generating revenue andrequire us to incur additional expenses.

Our technologiesand products are in various stages of development, which could be subject todelays.  TheFF-1080-300 aircraft, which will initially be our key product, is still in thedevelopmental stage and has not yet been constructed.  We anticipate that it will be at least twoyears before the FF-1080-300 is ready to be marketed.  We may experience product design andengineering difficulties as we embark on the construction of what until now hasonly existed as a paper design.  Inparticular, the aircraft may fail to meet certain design performancespecifications.  We may also experiencedelays in constructing the FF-1080-300 due to the failure by any manufacturingentity we have contracted with for such purposes.  Finally, the FAA may delay certification ofthe FF-1080-300 or may determine that it will not grant certification of theFF-1080-300 at all.  Such factors are notwithin our control.  The occurrence ofany of these eventualities would further delay our ability to begin generatingrevenue and require us to incur additional unplanned expenses which wouldadversely impact our business.

Most of the otherestablished aerospace companies have greater capital resources, moresignificant research and development programs and facilities, and greaterexperience in the production, marketing and distribution of aerospace productsthan we do.  Althoughwe have not identified any other companies that are producing or arecontemplating production of aircraft that we believe would be directlycompetitive with the FF-1080-300, our ability to compete effectively would beadversely affected if one of the more established companies, such as Boeing andAirbus, that can devote significant resources to the development, sale andmarketing of its products attempts to compete with us.

The FF-1080-300aircraft may not achieve market acceptance due to miscalculations of marketdemand or profitability of the product.  International and domestic terrorism hasgreatly impacted the commercial aviation industry, including the freightforwarding business segment.  Concerns ofinsurers of freight forwarding businesses could have an impact on the marketfor the FF-1080-300 aircraft.

We may not be ableto conclude agreements on satisfactory terms with the manufacturers andsuppliers that we need to complete construction of the FF-1080-300 aircraft,which would further delay our ability to begin generating revenue and requireus to incur additional expenses.  We currently have risk sharing arrangementswith partners who have agreed to provide products and/or services at no cost orat the manufacturer’s lowest direct costs for both the pre-production prototypeaircraft and the Conformity Aircraft (i.e. aircraft conformed to FAArequirements).  Although we have receivedoral and in some cases preliminary written commitments (the “Risk SharingAgreements”) from various manufacturers and suppliers that we need to completethe construction of the FF-1080-300 aircraft, we may not be able to concludefinal binding agreements on acceptable terms with companies that have providedsuch commitments.  If agreements cannotbe concluded on acceptable terms, we could be required to locate alternativeFAA-certified sources with capacity sufficient to meet our needs, who canproduce subassemblies of acceptable quality, provide acceptable manufacturingyields and deliver products to us on time, which would result in further delaysto our production schedule.  Such failurecould also require us to spend more than we had anticipated in constructing theFF-1080-300 aircraft, since the preliminary Risk Sharing Agreements anticipatefavorable pricing terms.

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We have contractedwith only one major supplier, Metalcraft Technologies, Inc., to build theForward, Center and Aft fuselage and empennage assemblies for our FF-1080-300aircraft.  See “**Suppliers and Materials**”section below.** **If Metalcraft Technologies, Inc.experiences delays in production, it will delay our productionschedule given our reliance upon one supplier for such a large percentageof the FF-1080-300 aircraft subassembly components.  Furthermore, in the event that MetalcraftTechnologies, Inc. becomes unable to produce the required subassemblies,we would be forced to locate alternative FAA-certified sources with capacitysufficient to meet our needs, who can produce subassemblies of acceptablequality, provide acceptable manufacturing yields and deliver products to us ontime, which would result in further delays to our production schedule.

Our successdepends significantly upon proprietary technology which may be difficult andcostly to protect.  Werely on a combination of patent and trade secret laws, licensing agreements,non-disclosure agreements and other contractual provisions to establish,maintain and protect our proprietary rights, all of which afford only limitedprotection.  Our limited ability toprotect our intellectual property rights may adversely affect our ability tocompete.  We have obtained assignment ofa method patent for the method of transporting cargo using freight feederaircraft with an automated freight management system, which expiresFebruary 20, 2011, a design patent for the FF-1080 aircraft, which expiresSeptember 14, 2007, and a patent for the Automatic Flat Rate SettingSystem for Freight Feeder Aircraft, which expires May 26, 2020.  We have nondisclosure agreements with all ofour employees.  Despite our efforts toprotect our proprietary rights, unauthorized parties may attempt to infringeaspects of our products or services or to obtain and use information that weregard as proprietary.

We intend tomarket and sell our products to foreign customers and the Company will besubject to risks inherent in international operations.  Such risks could include work stoppages,transportation delays and interruptions, political instability or conflictbetween countries in which we may do business, foreign currency fluctuations,economic disruption, the imposition of tariffs and import and export controls,changes in governmental policies (including United States trade policy) andother factors, including other foreign laws and regulations, which couldadversely affect our business.  Withrespect to international sales that are determined in U.S. dollars, an increasein the value of the U.S. dollar relative to foreign currencies could increasethe effective price of, and reduce demand for, our products relative tocompetitive products priced in the local currency.  While we have not yet been affected by any ofthe foregoing, these international trade factors may, under certaincircumstances, materially and adversely impact demand for our products or ourability to sell our products in particular countries or deliver our products ina timely manner or at a competitive price, which in turn may have an adverseimpact on our relationships with our customers. Our international sales efforts will be world-wide, and we aredeveloping contacts in India, Africa and Europe.  We will be subject to certificationregulations and applicable import restrictions in each country into which wesell aircraft, as are other domestic and international manufacturers.

We currently haveonly one independent director which limits the board of directors’ ability toassure investors that that decisions are made on a disinterested basis.  Edward F. Eaton is the only independentdirector currently serving on our board of directors.

The Board ofDirectors has not established independent audit or compensation committees.  The Company does not have a separatelydesignated standing audit committee****.****  The functions of an audit committee arecurrently assumed by our full Board of Directors.  As a result, we do not have a member of ourBoard of Directors that has been designated as an audit committee “financialexpert.”  We also currently do not have acompensation committee of the Board of Directors.  The Board of Directors as a whole determinesexecutive compensation.

The Company did not makeadequate provisions for withholding FICA and other taxes from employeecompensation during 2005 and 2006, and anticipates the total under-fundedobligation, including estimated interest and penalties, to be approximately$354,000, which must be settled as soon as possible with available funds.  There are possible civil and criminalpenalties that may be assessed against the Company and its officers unless thisshortfall is promptly funded, any of which could severely impact the Company’sability to continue in business.

**RisksRelating to Our Current Financing Arrangements**

We currently havelimited net working capital which is insufficient to meet our anticipatedexpenses and cash requirements.  Though the Company may receive up to$28,921,068 in proceeds from the exercise of the warrants for the purchase ofthe 75,869,092 shares outstanding as of December 31, 2006 as set forth below,there can be no assurance that any of the warrants will ever be exercised.  Consequently, we may be unable to fund ouranticipated costs and expenses set forth in this annual report.   We anticipate that over the next threeyears, we will need approximately $89,000,000 to fund our operations.  The PacifiCorp Agreement provides for between$40,000,000 and $80,000,000 in potential financing from the exercise ofwarrants issued to PacifiCorp pursuant to the PacifiCorp Agreement, but we canprovide no assurances that it will be successful in meeting itsobligations.  See discussion of thePacifiCorp Agreement set forth in the **“Liquidityand Future Capital Requirements”** section below.

Efforts to obtainfinancing through the PacifiCorp Agreement may be insufficient to coveranticipated expenses and cash requirements.  We have entered into an Amended Master FinancingAgreement (referred to herein as the “PacifiCorp Agreement”) with PacifiCorpwhereby it has agreed to potentially provide a minimum of $40,000,000 and amaximum of $80,000,000 in financing

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over the course oftwo years through exercise of warrants to purchase our shares.  The PacifiCorp Agreement provides thatPacifiCorp will utilize its best efforts to provide funding but does notobligate PacifiCorp to exercise the warrants provided for therein.  Accordingly, there can be no assurance thatwe will be able to obtain the minimum financing amount anticipated under thePacifiCorp Agreement.  See discussion ofthe PacifiCorp Agreement set forth in the **“Liquidityand Future Capital Requirements”** section below.

Termsof warrants issued under the PacifiCorp Agreement may be renegotiated.  The PacifiCorp Agreement expressly statesthat the parties reserve the right, without obligation, to renegotiate theterms of exercise of the PacifiCorp warrants, whether as to exercise price orperiod, in the event of the establishment and based on the condition (price andvolume) of a public market for our common stock.  Accordingly, investors should note that thereis no assurance that the shares issuable upon exercise of warrants issued underthe PacifiCorp Agreement will be issued for the consideration provided fortherein once a public market for our common stock is established.

Theexercise of outstanding warrants may adversely affect our stock price andstockholders’ percentage ownership.  There are outstanding warrants exercisablefor the purchase of up to 75,869,092****sharesof our common stock, which includes warrants for the purchase of 57,497,040shares issued to PacifiCorp.   All ofthese warrants were issued at exercise prices ranging from $0.10 to $5.00 pershare.  In the future, we may grant morewarrants or options under stock option plans or otherwise. The exercise ofstock options authorized in the future or warrants that are presentlyoutstanding or may be issued in the future will dilute the percentage ownershipof our other stockholders.  PacifiCorp’sexercise of warrants, in addition to its ownership of shares under the MasterFinancing Agreement, could result in its acquiring control of the Company.

In the event thata change of control of the Company should occur, we may be subject to certainconsequences under employment agreements with officers of the Company.  In the event of a change in control, pursuantto his employment agreement, if Mr. Dupont is terminated he will beentitled to:  (1) a lump sum payment often times the amount of annual salary payable prior to the change in control,and ten times the average amount of bonus payments payable (or projected); (2)allowance of surrender of all outstanding stock options with the price to bedetermined by taking the difference between the option price and the price ofthe stock on the date of the change of control or the date of termination,whichever is higher; and (3) all employee benefits in effect and applicable toDupont on the date of the change of control will be retained and paid by theCorporation for Dupont for a period of two years.  Furthermore, pursuant to their employmentagreements, in the event of a change in control, if Darby Boland, RandyMoseley, Thomas Dapogny, Karen Shoemaker, Scott Jacox or Ruben Fragoso areterminated without cause they will each be entitled to a lump sum payment often times the amount of annual salary, allowance of surrender of alloutstanding stock options (on the same terms as applicable to Dupont set forthabove), and employee benefits for a period of two years as well.  Mr. Boland, Mr. Moseley, Mr. Dapogny, Ms.Shoemaker, Mr. Jacox and Mr. Fragoso are officers of the Company.

Our financingefforts remain adversely affected by the current economic environment.  As the Company can currently only survivethrough capital investment, it is likely that we will have to raise additionalcapital through exempt private placements of our common stock until and unlessa new financing program is implemented that will provide sufficient funding.

The lack ofadditional capital could force us to substantially curtail or cease operations.  Further, there can be no assurance that anysuch required capital, if available, will be available on attractive terms orthat such terms will not have a significantly dilutive effect on existingshareholders.  The financial statementsdo not include any adjustments that might result from these uncertainties.

**RisksRelating to Our Common Stock**

Our stock price isvolatile.  The tradingprice of our common stock fluctuates widely and in the future may be subject tosimilar fluctuations in response to quarter-to-quarter variations in ouroperating results, announcements of technological innovations or new productsby us or our competitors, general conditions in the air freight industry inwhich we compete and other events or factors. In addition, in recent years,broad stock market indices, in general, and the securities of airplanemanufacturing  companies, in particular,have experienced substantial price fluctuations. These broad marketfluctuations also may adversely affect the future trading price of our commonstock.

Our stock historicallyhas been thinly traded.  Therefore,shareholders may not be able to sell their shares freely.  The volume of trading in our common stockhistorically has been low and a limited market presently exists for the shares.We have no analyst coverage of our securities. The lack of analyst reportsabout our stock may make it difficult for potential investors to make decisionsabout whether to purchase our stock and may make it less likely that investorswill purchase our stock. We cannot assure you that our trading volume willincrease, or that our historically light trading volume or any trading volumewhatsoever will be sustained in the future. Therefore, we cannot assure youthat our shareholders will be able to sell their shares of our common stock atthe time or at the price that they desire, or at all.

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Shares of our commonstock being offered for sale by selling shareholders are highly speculative andinvolve a high degree of risk.  Only those persons able to lose their entireinvestment should purchase these shares. Before purchasing any of these shares, you should carefully consider thefollowing factors relating to our business and prospects.  You should also understand that this annualreport contains “forward-looking statements.” See “**FORWARD LOOKING STATEMENTS**”section for more information.

Our common stockis subject to regulations of the Securities and Exchange Commission (the “Commission”)relating to the market for penny stocks.  Generally, “penny stock” as defined by thePenny Stock Reform Act, is any equity security not traded on a nationalsecurities exchange or on NASDAQ that has a market price of less than $5.00 pershare.  The penny stock regulationsgenerally require that a disclosure schedule explaining the penny stockmarket and the risks associated therewith be delivered to purchasers of pennystocks and impose various sales practice requirements on broker-dealers whosell penny stocks.  The broker-dealermust make a suitability determination for each purchaser and receive thepurchaser’s written agreement prior to the sale.  In addition, the broker-dealer must makecertain mandated disclosures, including the actual sale or purchase price andactual bid offer quotations, as well as the compensation to be received by thebroker-dealer.  The regulationsapplicable to penny stocks may severely affect the market liquidity for ourcommon stock and could limit your ability to sell the securities.

The sale of material amounts of our common stock by selling shareholders could reduce the price of our common stock and encourage short sales. Sales of a significant number of shares of our common stock in the public market, or the perception that such sales could occur, could harm the market price of the common stock.

The exercise ofoutstanding warrants may adversely affect our stock price and shareholders’percentage ownership. There are outstanding warrants exercisable for the purchase of up to75,869,092 shares of our common stock which includes warrants for the purchaseof up to 10,030,356 shares registered for resale by our warrant holders in anSB-2 registration, and additional outstanding warrants for the purchase of upto 65,838,736 shares which were not registered for resale in the SB-2registration.  It should be noted that wewill be obligated to issue 2,502,960 shares upon execution of a valid Notice ofExercise of warrants issued to PacifiCorp for funds transferred for exercise ofwarrants. Though technically unissued as of the date of this annual report, thewarrants for the aforementioned 2,502,960 shares are considered exercised forpurposes of the numbers in this risk disclosure. Unexercised PacifiCorpwarrants account for 57,497,040 of the 65,838,736 warrant shares that wereregistered for resale in a recent SB-2 registration.  All of these warrants were issued at exerciseprices ranging from $0.10 to $5.00 per share. In the future, we may grant more warrants or options under stock optionplans or otherwise.  The exercise ofstock options authorized in the future or warrants that are presentlyoutstanding or may be issued in the future will dilute the percentage ownershipof our other stockholders.

Our Board ofDirectors has the right to issue up to 25,000,000 shares of preferred stock andto determine the rights, prices, preferences, privileges, and restrictions,including voting rights, of these shares without the approval of ourstockholders.  Any issuanceof preferred shares could be used by our current management to delay, defer orprevent a change in management, which may not be in the best interests of theholders of our common stock.

The price at whichour common stock may trade is likely to be highly volatile.  The price may fluctuate substantially due tofactors such as: actual or anticipated fluctuations in our results ofoperations; changes in or failure by us to meet securities analysts’expectations; announcements of technological innovations; introduction of newproducts by us or our competitors; the terms of new financing arrangementswhich may be dilutive; and general market conditions.

**ITEM 2.DESCRIPTION OF PROPERTY**

The Company terminated a sublease agreement with AMUCfor its principal office and hangar facility in Lawrenceville, Georgia, and theproperty has been sold by the owner, terminating AMUC’s lessee liabilities.

The Company has moved operations to the Double EagleII Airport in Albuquerque, New Mexico. We have entered into a Ground Lease with the City of Albuquerque for 10acres located on the Double Eagle II Airport, at a rate of $48,000 per year forthe initial five year period and is adjusted each successive five year periodthroughout the 20 year term based on changes in the fair market value of theland. The City of Albuquerque has agreed to abate certain portions of themonthly rentals until the end of the initial five years of the lease, inJanuary 2010.  The abatement results in 100%of the first year’s rent and 50% of the next four years’ rent to be deferreduntil January 2010, at which time, the abated rent, aggregating $144,000, willbe due and payable.

We have also entered into a Hangar Lease with thecity, subsequently amended by a First Amendment to the Double Eagle II AirportHangar Lease (the original Hangar Lease, as Amended is referred to herein asthe “Amended Hangar Lease”), which provides for a 14,400 square foot hangar ata rate of $3,600 per month.  The AmendedHangar Lease also provides that we will pay certain fees relating tomaintenance, identification badges and refuse containment. The city ofAlbuquerque has reserved the right to adjust the rent annually in an amountequal to 3% of the previous years rent. The term of the Amended Hangar Lease ismonth to month,

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commencing on March 1,2006.  Separately, we are in negotiationswith builders to construct a 30,000 to 40,000 square foot addition to theexisting hangar, and to construct a 15,000 square foot attached office facilityat our expense to complete the Prototype Assembly Facility.  The property is an industrial park space,with runway access.  We also have plansfor a Final Assembly Facility on the lease option property.  The 80,000 sq. ft. hangar-like structure isexpected to be designed to support the planned production rate of eightaircraft per month or 96 aircraft per year. The facility is also expected toinclude 26,000 sq. ft. of office space. A second 100,000 sq. ft. facility may also be constructed to handlefuture increased production rates.  Weintend to perform the final assembly of all of the FF-1080-300 aircraft in NewMexico. Our Quality Assurance flight testing program will be conducted at theplanned facility in New Mexico. Additionally our customer on-site engineering employees will be housedat this facility as well as the final customer flight test and Final Deliveryinspection personnel.

The Company entered intoa Lease Agreement with Plaza II Executive Center, Inc. on July 25,2005. Pursuant to the Lease Agreement the Company leased 1,500 sq. ft. ofoffice space located at 125 Lincoln Avenue, Suite 400, 125 Lincoln Plaza,Santa Fe, New Mexico for an initial term of eight (8) months beginning onAugust 1, 2005 and ending on March 1, 2006. The lease was automaticallyextended pursuant to its terms to July 31, 2006 and was amended on August 1,2006 to again extend the term of the lease to July 31, 2007. Pursuant to theamendment, the monthly rent on the extended lease is $2,420 and the leaseprovides for a minimum $50 monthly support service charge, and a $10 per month,per person, kitchen fee.

**ITEM 3. LEGALPROCEEDINGS**

We are currentlynot a party to any material pending legal proceeding.

The Company did not makeadequate provisions for withholding FICA and other taxes from employee compensationduring 2005 and 2006, and anticipates the total under-funded obligation,including estimated interest and penalties, to be approximately $354,000.  There are possible civil and criminalpenalties that may be assessed against the Company and its officers unless thisshortfall is promptly funded.

**ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

**NONE.**

**PART II**

**ITEM 5.**                    MARKET FORCOMMON EQUITY, RELATED STOCKHOLDERS MATTERS, AND SMALL BUSINESS ISSUERPURCHASES OF EQUITY SECURITIES

Ourcommon stock is traded on the OTC Bulletin Board under the symbol “UITA.” Thefollowing table sets forth the high and low bid information of our common stockon the OTC Bulletin Board for each quarter during the last two fiscal years andthe subsequent interim period, as reported by the OTC Bulletin Board. Thisinformation reflects inter-dealer prices, without retail mark-up, mark-down orcommission and may not represent actual transactions.
| **Year** | ** **     | **Period** | ** ** | **High Bid** | ** ** | **Low Bid** |
|----------|----------------|------------|------------|--------------|------------|-------------|
| 2005     | First Quarter  |       | 0.00       |         | 0.00       |
|     | Second Quarter |       | 0.00       |         | 0.00       |
|     | Third Quarter  |       | 0.00       |         | 0.00       |
|     | Fourth Quarter |       | 0.00       |         | 0.00       |
|     |           |       |       |         |       |
| 2006     | First Quarter  |       | 0.00       |         | 0.00       |
|     | Second Quarter |       | 0.00       |         | 0.00       |
|     | Third Quarter  |       | 0.00       |         | 0.00       |
|     | Fourth Quarter |       | 1.10       |         | 0.82       |
|     |           |       |       |         |       |
| 2007     | First Quarter  |       | 1.00       |         | 0.25       |

 

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As of April 5,2007, we had approximately 460 active stockholders of record of our commonstock pursuant to the records of our transfer agent.** **The number of recordholders was determined from the records of our transfer agent and does notinclude beneficial owners of common stock whose shares are held in the names ofvarious security brokers, dealers, and registered clearing agencies.  The transfer agent of our common stock isSignature Stock Transfer, Inc.

**DIVIDENDPOLICY**

We do not currently payany dividends on our common stock, and we currently intend to retain any futureearnings for use in our business. Any future determination as to the payment ofdividends on our common stock will be at the discretion of our Board ofDirectors and will depend on our earnings, operating and financial condition,capital requirements and other factors deemed relevant by our Board ofDirectors including the General Corporation Law of the State of Nevada, whichprovides that dividends are only payable out of retained earnings or if certainminimum ratios of assets to liabilities are satisfied. The declaration ofdividends on our common stock also may be restricted by the provisions ofcredit agreements that we may enter into from time to time.

**SALES OFUNREGISTERED SECURITIES**

During fiscal 2006, weissued the following securities which were not registered under the SecuritiesAct of 1933, as amended. We did not employ any form of general solicitation oradvertising in connection with the offer and sale of the securities described below.In addition, we believe the purchasers of the securities are “*accredited investors”*  for the purpose of Rule 501 of the SecuritiesAct. For these reasons, among others, the offer and sale of the followingsecurities were made in reliance on the exemption from registration provided bySection 4(2) of the Securities Act or Regulation D promulgated by the SEC underthe Securities Act:

·     During2006, we issued 2,502,960 shares of common stock for the exercise of warrants.We received $1,195,439 in net         proceeds.

**INVESTMENTAGREEMENT WITH EUROPEAN EQUITY GROUP**

We entered into anAmended Master Financing Agreement (referred to herein as the “PacifiCorpAgreement”) Between PacifiCorp Funding Partners Trust****and Utilicraft Aerospace Industries, Inc. effective asof September 12, 2005. Pursuant to the terms of the PacifiCorp Agreement,PacifiCorp Funding Partners Trust****(“PacifiCorp”),a trust formed under the laws of the Republic of Mauritius****has agreed to potentially provide aminimum of $40,000,000 and a maximum of $80,000,000 in financing through theexercise of warrants (the “PacifiCorp Warrants”) granted to PacifiCorp for thepurchase of up to 60,000,000 shares of our common stock.  The PacifiCorp Agreement provides thatPacifiCorp will utilize its best efforts to provide funding but does notobligate PacifiCorp to exercise any of the PacifiCorp Warrants. The PacifiCorpWarrants consist of (1) warrants for the purchase of 20,000,000 shares ofcommon stock at a price of $0.50 per share, exercisable for a period of 360days (the exercise period has been extended by the Company to June 30,2007); (2) warrants for the purchase of 30,000,000 shares of common stockat a price of $1.50 per share, exercisable for a period of 540 days (the exerciseperiod has been extended by the Company to June 30, 2007); and(3) warrants for the purchase of 10,000,000 shares of common stock at aprice of $2.50 per share, exercisable for a period of 720 days.  The PacifiCorp Agreement expressly statesthat the parties reserve the right, without obligation, to renegotiate theterms of exercise of the PacifiCorp Warrants, whether as to exercise price orperiod, in the event of the establishment and based on the condition (price andvolume) of a public market for our common stock. In addition, the Company, JohnDupont and Darby Boland collectively agreed to contribute a total of 80,000,000shares (the “PacifiCorp Shares”) of restricted common stock of the Company toPacifiCorp.  The PacifiCorp Sharesconsist of 60,584,260 shares newly issued by the Company, 11,660,000 sharescontributed and transferred by John Dupont personally, and 7,755,740 sharescontributed and transferred by Darby Boland personally.  The PacifiCorp Trustee is entitled toexercise full voting rights relating to the PacifiCorp Shares.  In the event that PacifiCorp fails toexercise PacifiCorp Warrants sufficient to generate the minimum funding (i.e.,$40,000,000) provided for in the PacifiCorp Agreement within 540 days (theexercise period has been extended by the Company to June 30, 2007) followingexecution, PacifiCorp is obligated to return the PacifiCorp Shares and allunexercised PacifiCorp Warrants for cancellation.  Notwithstanding the foregoing obligation, thePacifiCorp Agreement allows for transfer of the PacifiCorp Shares to thirdparties but provides that any transfer during the period the PacifiCorpAgreement is in effect requires a counter-party signature from an Officer ofthe Company.  No security interest in thePacifiCorp Shares is reserved pursuant to the PacifiCorp Agreement, and absentany subsequent agreement between the parties with respect to resale of thePacifiCorp shares, the Company retains no right to demand return of the sharesfrom a third party in the event PacifiCorp defaults on its obligations.  None of the PacifiCorp Shares or shares to beissued upon exercise of the PacifiCorp Warrants were registered pursuant to theregistration statement.

During the year ended December 31, 2006, PacifiCorptransferred net funds totaling $1,195,439 to us for exercise of PacifiCorpWarrants for the purchase of 2,502,960 shares at an exercise price of $.50 pershare.  Notwithstanding the fact thatPacifiCorp has only paid for the purchase of 2,502,960 shares as of December31, 2006, it has requested and obtained transfer of a total of 5,078,160 of thePacifiCorp Shares to third parties.

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We protect ourrights with respect to return of the PacifiCorp Shares under the PacifiCorpAgreement (in the event PacifiCorp fails to meet its minimum fundingobligation) by maintaining control over the certificates representingPacifiCorp Shares that are registered in the name of PacifiCorp (i.e., theshares that have not been transferred to third parties). While we do not havethe right to recover shares sold or pledged by PacifiCorp to third-parties, wedo ensure receipt of funds for Warrant exercise prior to permitting transfersfrom the PacifiCorp certificates. Because we also hold the certificatesrepresenting shares issued upon the exercise of the PacifiCorp Warrants in thename of PacifiCorp (“PacifiCorp Warrant Shares”), we can use these shares topartially offset our inability to recover shares held by third-parties. Whilewe cannot have complete assurances as to recovery of all the PacifiCorp Sharesin the event it is unable to meet minimum funding obligations under thePacifiCorp Agreement, we believe that the funds generated by the Warrantexercise provides us with substantial benefits and that the retention ofcertificates representing the PacifiCorp Shares and the PacifiCorp WarrantShares provides us with adequate assurances and protections.

While PacifiCorphas agreed to provide potential financing, we do not intend to stop looking forother means of funding our needs.  Amongother things, we will continue to explore debt and equity financing fromqualified lenders or investors.  ThePacifiCorp Agreement contains no anti-dilution provisions or other restrictionsthat would prevent the Company from obtaining other financing.  John Dupont has personally loaned the Companyor paid Company expenses  to maintainCompany operations. See “**CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS”**section  below.

**SecuritiesAuthorized For Issuance Under Equity Compensation Plans**

At December 31, 2006, theCompany does not have any Equity Compensation Plans.

**ITEM 6. MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

The following discussionshould be read in conjunction with our consolidated financial statements providedin this annual report on Form 10-KSB. Certain statements contained herein mayconstitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements involve a number ofrisks, uncertainties and other factors that could cause actual results todiffer materially, as discussed more fully herein.

The forward-lookinginformation set forth in this annual report is as of the date of this filing,and we undertake no duty to update this information. More information aboutpotential factors that could affect our business and financial results isincluded in the section entitled “Risk Factors” of this annual report.

**Overview**

We are adevelopment stage research and development company with no product to sell, norevenue stream, significant operating losses and negative cash flow fromoperations.  The Company has incurred netlosses from operations of $8,608,000 for the period from inception to December31, 2006.  Our ability to continue as agoing concern is subject to sales of stock, the vagaries of the market for ourstock and various other factors.  Thereis no assurance that we can continue as a going concern.

Our currentbusiness plan is to focus on expediting the certification and production of theFF-1080-300 in furtherance of our goal to bring the aircraft to market within30 months****of commencement ofdevelopment of the Pre-Production Prototype FF-1080-300 aircraft assuming weare able to obtain adequate funding of approximately $89,000,000.  We anticipate that the Pre-productionprototype FF-1080-300 aircraft will cost approximately $13,000,000, Phase I FAAcertification will cost approximately $34,000,000 and Phase II FAAcertification will cost approximately $42,000,000. We expect to continue to fundoperations through private-placement sales of common stock and/or warrants.

To implement theforegoing time schedule, we expect to complete the detailed engineering of theFF-1080-300 Pre-Production Prototype aircraft and to construct the aircraftduring the first 12 months of the plan. The FF-1080-300 Pre-Production prototype will be a pre-certified,non-production aircraft that will be built under the regulations forexperimental aircraft.

Upon completion ofthe detailed CAD engineering of the prototype, we will initiate the FAA typecertification (“Part 25 Certification”) program, which is anticipated tobe completed over a 24 month period.  Wehave completed approximately 80% of our detailed CAD engineering, and expect tobe completed with this element within two months, pending availability offunds.

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Our Company plansto execute FAA Part 25 Certification in two phases:** **PhaseI is expected to commence 6 months after commencement of the Pre-productionprototype development and will be completed in 12 months.  Phase I will include the development of thecertification plan, filing of the certification application, certification ofthe detailed production engineering, construction of the static test articlesand the conformity aircraft subassemblies, and initial flight tests using theprototype aircraft.  Phase II, which willbegin 6 months after commencement of Phase I and is expected to take 18 months,will include final assembly of the conformity aircraft, initiation of limitedproduction of the aircraft (Production Lot I [48 aircraft]), certificationflight-testing and receipt of final Part 25 Aircraft Type Certification.

Upon receipt ofthe Part 25 Type Certification, our business plan calls for completion ofthe initial 36 aircraft for delivery. Though we have no firm orders secured as of the date of this Annualreport, we expect to begin obtaining orders during the Part 25 TypeCertification process.

Notwithstandingthe anticipated estimates set forth in this section, it should be noted thatthe timeline for the development stages has been and may be further delayed dueto lack of funding for specific stages of the development schedule.

We also continueto pursue various direct sales initiatives with prospective customers.  Our current focus is on the internationalmarket, where we believe buyers would be willing to begin committing funds toeventual purchases of our planes earlier than their domestic counterparts.** **Ourcurrent marketing and customer-development program is aimed at securing ordersfor the FF-1080-300 aircraft.

Critical AccountingPolicies and Estimates

     Use of Estimates

The discussion andanalysis of the financial condition and results of operations are based onthe  financial  statements, which have been prepared in accordance with accounting  principles generally accepted in the United States of America.  Note 1 of the Notes describes the significant  accounting policies essential to the financial statements. The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the amounts reported in the financial  statements  and accompanying  notes,  some of which may require revision infuture  periods.  Actual results could differ  materially from those

estimates.

We believe the followingto be critical accounting policies and estimates.  That is, they  are  both important  to the  portrayal of the  Company’s  financial condition  and results, and they require  significant  management judgment and estimates about matters that are inherently  uncertain. As a result of inherent uncertainty, there is a likelihood that materially different  amounts would bereported under different conditions or using different assumptions.  Although we believe  that our judgments  and  estimates are  reasonable,  appropriate and correct, actual future results may differ materially from our estimates.

     Stock Based Compensation

The Company  accounts for equity  instruments issued to employees  for servicesbased on the fair value of the equity instruments issued and accounts forequity instruments  issued  to other than  employees  based on the fair  value of theconsideration received or the fair value of the equity instruments, whicheveris more reliably  measurable.  The determined  value is recognized as an expense in theaccompanying statements of operations.

     Contingencies

In the normal course ofbusiness,  the Company is subject tocertain  claims and legal  proceedings. The Company records an accrued liability for these matters when an adverse outcome is probable and theamount of the potential liability is reasonably estimable.  The Company does not believe that theresolution of these matters will have a material  effect upon its  financial condition,  results of operations orcash flows for an interim or annual period.

     Recently Issued Accounting Pronouncements

Recently issuedaccounting  pronouncements  and their effect on us are discussed  in the notes to the  financial statements  in our  December 31, 2006  audited financial statements.

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**Liquidity andFuture Capital Requirements**

Since inception weinitially funded operations from proceeds from a private placement**.**  Wewere capitalized with approximately $2,000,000 raised from a private placementoffering of 20,000,000 shares of common stock on January 19, 2005.

We will requireapproximately $15,000,000 to sustain operations over the next 12 months, whichincludes prototype engineering and construction costs of $11,885,833, generaland administrative expenses of $3,003,750, and the balance to initiate FAA typecertification.  We cannot satisfy ourcurrent cash requirements without raising additional funds through ouragreement with PacifiCorp Funding Partners Trust or obtaining debt or equityfinancing through other qualified lenders or investors.

We entered into anAmended Master Financing Agreement (referred to herein as the “PacifiCorpAgreement”) Between PacifiCorp Funding Partners Trust****and Utilicraft Aerospace Industries, Inc. effective asof September 12, 2005. Pursuant to the terms of the PacifiCorp Agreement,PacifiCorp Funding Partners Trust****(“PacifiCorp”),a trust formed under the laws of the Republic of Mauritius****has agreed to potentially provide aminimum of $40,000,000 and a maximum of $80,000,000 in financing through theexercise of warrants (the “PacifiCorp Warrants”) granted to PacifiCorp for thepurchase of up to 60,000,000 shares of our common stock.  The PacifiCorp Agreement provides thatPacifiCorp will utilize its best efforts to provide funding but does notobligate PacifiCorp to exercise any of the PacifiCorp Warrants. The PacifiCorpWarrants consist of (1) warrants for the purchase of 20,000,000 shares ofcommon stock at a price of $0.50 per share, exercisable for a period of 360days (the exercise period has been extended by the Company to June 30, 2007);(2) warrants for the purchase of 30,000,000 shares of common stock at aprice of $1.50 per share, exercisable for a period of 540 days (the exerciseperiod has been extended by the Company to June 30, 2007); and(3) warrants for the purchase of 10,000,000 shares of common stock at aprice of $2.50 per share, exercisable for a period of 720 days.  The PacifiCorp Agreement expressly statesthat the parties reserve the right, without obligation, to renegotiate theterms of exercise of the PacifiCorp Warrants, whether as to exercise price orperiod, in the event of the establishment and based on the condition (price andvolume) of a public market for our common stock. In addition, the Company, JohnDupont and Darby Boland collectively agreed to contribute a total of 80,000,000shares (the “PacifiCorp Shares”) of restricted common stock of the Company toPacifiCorp.  The PacifiCorp Sharesconsist of 60,584,260 shares newly issued by the Company, 11,660,000 sharescontributed and transferred by John Dupont personally, and 7,755,740 sharescontributed and transferred by Darby Boland personally.  The PacifiCorp Trustee is entitled toexercise full voting rights relating to the PacifiCorp Shares.  In the event that PacifiCorp fails toexercise PacifiCorp Warrants sufficient to generate the minimum funding (i.e.,$40,000,000) provided for in the PacifiCorp Agreement within 540 days followingexecution (the exercise period has been extended by the Company to June 30,2007), PacifiCorp is obligated to return the PacifiCorp Shares and allunexercised PacifiCorp Warrants for cancellation.  Notwithstanding the foregoing obligation, thePacifiCorp Agreement allows for transfer of the PacifiCorp Shares to thirdparties but provides that any transfer during the period the PacifiCorpAgreement is in effect requires a counter-party signature from an Officer ofthe Company.  No security interest in thePacifiCorp Shares is reserved pursuant to the PacifiCorp Agreement, and absentany subsequent agreement between the parties with respect to resale of thePacifiCorp shares, the Company retains no right to demand return of the sharesfrom a third party in the event PacifiCorp defaults on its obligations.  None of the PacifiCorp Shares or shares to beissued upon exercise of the PacifiCorp Warrants are being registered pursuantto the registration statement relating to this Annual report.

During the year ended December 31, 2006, PacifiCorptransferred net funds totaling $1,195,439 to us for exercise of PacifiCorpWarrants for the purchase of 2,502,960 shares at an exercise price of $.50 pershare.  Notwithstanding the fact thatPacifiCorp has only paid for the purchase of 2,502,960 shares as of December31, 2006, it has requested and obtained transfer of a total of 5,078,160 of thePacifiCorp Shares to third parties.

We protect ourrights with respect to return of the PacifiCorp Shares under the PacifiCorpAgreement (in the event PacifiCorp fails to meet its minimum funding obligation)by maintaining control over the certificates representing PacifiCorp Sharesthat are registered in the name of PacifiCorp (i.e., the shares that have notbeen transferred to third parties). While we do not have the right to recovershares sold or pledged by PacifiCorp to third-parties, we do ensure receipt offunds for Warrant exercise prior to permitting transfers from the PacifiCorpcertificates. Because we also hold the certificates representing shares issuedupon the exercise of the PacifiCorp Warrants in the name of PacifiCorp (“PacifiCorpWarrant Shares”), we can use these shares to partially offset our inability torecover shares held by third-parties. While we cannot have complete assurancesas to recovery of all the PacifiCorp Shares in the event it is unable to meetminimum funding obligations under the PacifiCorp Agreement, we believe that thefunds generated by the Warrant exercise provides us with substantial benefitsand that the retention of certificates representing the PacifiCorp Shares andthe PacifiCorp Warrant Shares provides us with adequate assurances andprotections.

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While PacifiCorphas agreed to provide potential financing, we do not intend to stop looking forother means of funding our needs.  Amongother things, we will continue to explore debt and equity financing fromqualified lenders or investors.  ThePacifiCorp Agreement contains no anti-dilution provisions or other restrictionsthat would prevent the Company from obtaining other financing.

John Dupont has personally loaned the Company or paidCompany expenses  to maintain Companyoperations. See “**CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS”**section below on page 21.

We do not believe that inflation has had a materialimpact on our business or operations.

We are not a party to anyoff-balance  sheet  arrangements and do not engage in trading activities involving non-exchange tradedcontracts. In addition, we have no financial guarantees,  debt or leaseagreements or other  arrangements  that could trigger a requirement  foran early payment or that could change the value of our assets.

**MaterialCommitments for Expenditures**

Depending on ourability to arrange financing, we expect to pay Metalcraft between $7 millionand $10 million for the construction and assembly of a prototype FF-1080-300during the next 12 months. See “**Liquidity andFuture Capital Requirements”** section above for details regarding ourplans to finance such expenditures. In addition, apart from our current leaseobligations for the hangar and assembly facility at Double Eagle-II inAlbuquerque, New Mexico, we expect to spend between $200,000 and $400,000 forleasehold improvements to our facilities to make them suitable for finalassembly of the aircraft.  See “**DESCRIPTION OF PROPERTY**”section below. Additionally, we have committed to pay $323,276 toAnalytical Models, Inc. for construction of the wind tunnel model andrelated engineering and testing, of which we have paid a total of $87,150. Wehave also contracted with D3 Technologies, Inc. (“D3”) to provide structuralanalysis and design integration services. The services provided by D3 willtotal approximately $137,750, of which we have already paid $52,563.

**Off-BalanceSheet Arrangements**

We have nooff-balance sheet arrangements.

**DESCRIPTION OF PROPERTY**

The Company terminated asublease agreement with AMUC for its principal office and hangar facility inLawrenceville, Georgia, and the property has been sold by the owner,terminating AMUC’s lessee liabilities.

The Company has movedoperations to the Double Eagle II Airport in Albuquerque, New Mexico.  We have entered into a Ground Lease with theCity of Albuquerque for 10 acres located on the Double Eagle II Airport, at arate of $48,000 per year for the initial five year period and is adjusted eachsuccessive five year period throughout the 20 year term based on changes in thefair market value of the land. The City of Albuquerque has agreed to abatecertain portions of the monthly rentals until the end of the initial five yearsof the lease, in January 2010.  Theabatement results in 100% of the first year’s rent and 50% of the next fouryears’ rent to be deferred until January 2010, at which time, the abated rent,aggregating $144,000, will be due and payable.

We have also entered intoa Hangar Lease with the city, subsequently amended by a First Amendment to theDouble Eagle II Airport Hangar Lease (the original Hangar Lease, as Amended isreferred to herein as the “Amended Hangar Lease”), which provides for a 14,400square foot hangar at a rate of $3,600 per month.  The Amended Hangar Lease also provides thatwe will pay certain fees relating to maintenance, identification badges andrefuse containment. The city of Albuquerque has reserved the right to adjustthe rent annually in an amount equal to 3% of the previous years rent. The termof the Amended Hangar Lease is month to month, commencing on March 1,2006.  Separately, we are in negotiationswith builders to construct a 30,000 to 40,000 square foot addition to theexisting hangar, and to construct a 15,000 square foot attached office facilityat our expense to complete the Prototype Assembly Facility.  The property is an industrial park space,with runway access.  We also have plansfor a Final Assembly Facility on the lease option property.  The 80,000 sq. ft. hangar-like structure isexpected to be designed to support the planned production rate of eightaircraft per month or 96 aircraft per year. The facility is also expected toinclude 26,000 sq. ft. of office space. A second 100,000 sq. ft. facility may also be constructed to handlefuture increased production rates.  Weintend to perform the final assembly of all of the FF-1080-300 aircraft in NewMexico. Our Quality Assurance flight testing program will be conducted at theplanned facility in New Mexico. Additionally our customer on-site engineering employees will be housedat this facility as well as the final customer flight test and Final Deliveryinspection personnel.

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The Company entered intoa Lease Agreement with Plaza II Executive Center, Inc. on July 25,2005. Pursuant to the Lease Agreement the Company leased 1,500 sq. ft. ofoffice space located at 125 Lincoln Avenue, Suite 400, 125 Lincoln Plaza,Santa Fe, New Mexico for an initial term of eight (8) months beginning onAugust 1, 2005 and ending on March 1, 2006. The lease wasautomatically extended pursuant to its terms to July 31, 2006 and was amendedon August 1, 2006 to again extend the term of the lease to July 31, 2007.Pursuant to the amendment, the monthly rent on the extended lease is $2,420 andthe lease provides for a minimum $50 monthly support service charge, and a $10per month, per person, kitchen fee.

**CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

We believe that all of the transactions set forth below were made onterms no less favorable to us than could have been obtained from unaffiliatedthird parties. However, it should be noted that the Company only has onedirector that would be considered an “Independent Director” as defined by theNorth American Securities Administrators Association, Inc. (“NASAA”) Statementof Policy Regarding Corporate Securities Definitions, as amended.  As such, at the time of the followingtransactions, the Company lacked sufficient disinterested independent directorsto ratify the transactions as required by guidelines set forth in the NASAAStatement of Policy Regarding Loans and Other Material Affiliated Transactions,as amended.

The Company wasformed to effect a reorganization (the “Reorganization”) of American UtilicraftCorporation (“AMUC”). Upon formation, the Company: (1) obtained from JohnDupont, assignments of patent rights for the design of the FF-1080-300aircraft, the method patent for the Express Turn-Around (ETA) electronicfreight tracking system and for the Automated Flat Rate System (AFRS);(2) entered into separate employment agreements with John Dupont, DarbyBoland, Thomas Dapogny and Karen Shoemaker; (3) entered into leaseagreements for facilities for use in its business operations, including anow-terminated sublease from AMUC of facilities located at 554 Briscoe Blvd.,Lawrenceville, Georgia  (formerly AMUCheadquarters); and (4) recognized and resolved to honor deferredcompensation obligations of AMUC to its officers and employees. In connectionwith the Reorganization, the Company has also paid an aggregate of$1,095,076.58 to AMUC or its creditors. To effect the Reorganization, theCompany executed a Reorganization Agreement with AMUC pursuant to which itissued 111,444,769 shares of its common stock to AMUC to be distributed as ashare dividend to AMUC shareholders on a share-for-share basis. AMUC declared adividend of the shares of the Company’s common stock to its shareholders onSeptember 22, 2005. Pursuant to the terms of the Reorganization Agreementthe Company also issued warrants (the “UAI Warrants”) exercisable for thepurchase of 17,287,664 shares of our common stock to holders of AMUC issuedwarrants (the “AMUC Warrants”) for the purchase of 17,287,664 shares of AMUCcommon stock, in the same proportion and on the same terms as the AMUCWarrants, except that any cashless exercise rights in the AMUC Warrants werenot granted in connection with the UAI Warrants. It should be noted that AMUCand the Company had the same directors (i.e., Messrs. Dupont, Boland and Eatonwere the only directors of both AMUC and Utilicraft Aerospace Industries, Inc.)at the time of the Reorganization. Mr. Dupont executed the ReorganizationAgreement in his capacity as President on behalf of the Company, and  Mr. Boland executed the ReorganizationAgreement in his capacity as an officer of AMUC on behalf of AMUC.

In considerationof Mr. Dupont’s execution of the Employment Agreement and the Assignments,the Company entered into a Royalty Agreement with Mr. Dupont, President,Chief Executive Officer, and director of the Company on December 10,2004.  Pursuant to the Royalty Agreement,we agreed to pay Mr. Dupont royalties in the amount of 3% of the Company’sgross proceeds on all sales of the FF1080-100, FF1080-200, FF1080-300, and FF1080-500,and all variants and/or future versions or other aircraft and/or other productswhich are covered by the patents underlying the Assignments and/or whichutilize the trademarks assigned to the Company by Mr. Dupont. ** **Suchroyalties must be paid on the first two thousand (2,000) aircraft sold by theCompany. The aforementioned royalties are payable in addition to certainroyalties provided for in the Dupont Employment Agreement that may be triggeredupon termination/non-renewal of the Dupont Employment Agreement.

On May 6, 2005,the Board of Directors authorized the issuance of 10,000,000 shares of UAIcommon stock to John Dupont, President, Chief Executive Officer, and a directorof the Company and 10,000,000 shares of UAI common stock to Darby Boland, VicePresident, General Manager, and a director of the Company.  The 20,000,000 shares were issued forservices rendered and their agreement to serve as directors of the Company andnot issued in connection with either of the employment agreements in place withMessrs. Dupont or Boland.

On June 10,2005, in connection with the Reorganization (discussed above), the directors ofthe Company resolved to assume $2,031,511 in deferred compensation of AMUC toits officers and employees. Subsequent to the resolution, the Company reducedthe amount of AMUC deferred compensation that it would assume to$1,892,108.  The deferred compensationactually assumed included $385,678 payable to John Dupont, President, ChiefExecutive Officer and director of the Company; $208,442 payable to ThomasDapogny, Vice President Operations, Treasurer and Secretary; $179,668 payableto R. Darby Boland, Vice President, General Manager and a director of theCompany; and $393,814 payable to Karen Shoemaker, Vice President and PrincipalAccounting Officer.  Under AMUC’semployment contracts with these officers, their compensation was fixed andearned over the term of the contracts, but amounts due would not be paid untilthe Company reached certain financing goals. The unpaid obligations were deemed earned and the payment thereofdeferred, and the Company accrued the amounts earned but not paid.  The directors of the Company determined toassume the reduced deferred compensation amount in connection with theReorganization as an incentive to these officers to enter into employmentagreements with the Company.

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On August 5,2005, in connection with the Reorganization, the directors of the Companyresolved by unanimous consent to assume certain debt owed by AMUC in theaggregate amount of $470,000 (the “AMUC Debt”) owing and payable to JohnDupont, President, Chief Executive Officer, and director of the Company and JDAero, LLC, a company owned by John Dupont. The AMUC Debt bears interest at a rate of 4%.  Effective as of September 13, 2005, thedirectors of the Company resolved by unanimous consent to assume an additional$61,889 of debt of AMUC also payable to John Dupont. Since Mr. Dupont, anofficer and director of the Company, had interest in both sides of theassumption transaction, and participated in board consent of the assumptiontransaction, the transaction was not conducted in the same manner as that whichwould have been conducted between two unaffiliated parties.

The Company leasesa Cessna 414A aircraft from JD Aero, LLC, a company wholly owned by JohnDupont, for use in corporate travel, as well as research and developmentactivities regarding the information processing and navigation systems that maybe used in the FF-1080-300.  The monthlypayments are $2,500 per month.  The leasewas executed on July 1, 2005 and is for a term of 60 months.  We are also responsible for all maintenance,inspections, overhaul, repair, and insurance.** **In April 2006, the Company paid$25,489 for electronics that were added to the aircraft for testing purposesfor the FF-1080-300. Under the terms of the lease, any equipment andmodifications that we add to the aircraft will remain on the aircraft andbecome the property of JD Aero, LLC.

We entered intothe PacifiCorp Agreement with PacifiCorp effective as of September 12,2005. See “**MANAGEMENT’S DISCUSSION ANDANALYSIS OR PLAN OF OPERATION - Liquidity and Future Capital Requirements**”section above for details regarding the PacifiCorp Agreement. The Company,John Dupont, President, Chief Executive Officer, and a director of the Company,and Darby Boland, Vice President, General Manager, and a director of theCompany, collectively agreed to contribute a total of 80,000,000 shares (thePacifiCorp Shares) of restricted common stock of the Company to PacifiCorp. ThePacifiCorp Shares consist of 60,584,260 shares issued by the Company,11,660,000 shares contributed and transferred by John Dupont personally, and7,755,740 shares contributed and transferred by Darby Boland personally.

On January 15,2006, the Company entered into a Loan Agreement with John Dupont, President,Chief Executive Officer, and a director of the Company, pursuant to which theCompany memorialized certain loans made to UAI by John Dupont in the form ofwire transfers and expenses advanced by Dupont during the period beginning onAugust 16, 2005 and ending on December 31, 2005 in the aggregate amount of$224,355. The Company agreed to repay the full amount of $224,355 by March 15,2006.  As interest on the full amount ofthe loans, the Company has agreed to grant Mr. Dupont warrants for the purchaseof 897,416 shares of UAI common stock at an exercise price of $1.00 per sharefor a term of 3 years. The amount and terms of these warrants were agreed to inconsideration of default risk as well as in lieu of payment of interest.

On March 31, 2006,the Company executed a Loan Memorandum memorializing certain loans made to UAIfor various Company expenses by John Dupont, President, Chief ExecutiveOfficer, and a director of the Company, in the form of wire transfers andexpenses advanced by Dupont during the period beginning on January 1, 2006 andending on March 27, 2006 in the aggregate amount of $93,486. The LoanMemorandum notes that the Company settled $85,000 of the $93,486 on March 29,2006 and a balance of $8,486 remains owed to Mr. Dupont. As interest on thefull amount of the loans, the Company has agreed to grant Mr. Dupont cashlesswarrants for the purchase of 186,972 shares of UAI common stock at an exerciseprice of $1.00 per share for a term of 3 years. The amount and terms of thesewarrants were agreed to in consideration of default risk as well as in lieu ofpayment of interest.

As of December31,September 30, 2006, John Dupont, President, Chief Executive Officer, anddirector of the Company, has also advanced an additional $13,211 on behalf ofthe Company for miscellaneous expenses.

We anticipate thatall ongoing and future affiliated transactions will be made or entered into onterms that are no less favorable to the Company than those that can be obtainedfrom unaffiliated third parties. Moreover, all ongoing and future affiliated transactions and anyforgiveness of loans, must be approved by a majority of the independent,disinterested members of the Company’s Board of Directors.****Edward F. Eaton is the only independentdirector currently serving on our board of directors and all of the foregoingtransactions have been approved or ratified by Mr. Eaton.

Our workingcapital deficit at December 31, 2006, was $4,299,533. Our independent auditors’report includes an explanatory paragraph relating to substantial doubt as toour ability to continue as a going concern, due to our working capital deficitat December 31, 2006.

Historically, wehave financed operations through private debt and equity financings. In recentyears, financial institutions have been unwilling to lend to us and the cost ofobtaining working capital from investors has been expensive. We principallyexpect to raise funds through the sale of equity or debt securities. During theyears ended December 31, 2006, the Company received net proceeds ofapproximately $1,195,439 from the sale of equity securities. The Companyactively continues to pursue additional equity or debt financings, but cannotprovide any assurance that it will be successful. If we are unable to pay ourdebt as it becomes due and are unable to obtain financing on terms acceptableto us, or at all, we will not be able to accomplish any or all of ourinitiatives and will be forced to consider steps that would protect our assetsagainst our creditors.

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**ITEM 7. FINANCIALSTATEMENTS**

The Financial  Statements and Financial  Statement Schedulefiled as a part of This  Annual  Report on Form  10-KSB are  listed  on the Index to Financial Statements on page35.

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

None.

**ITEM 8A. CONTROLSAND PROCEDURES**

As required by theSecurities Exchange Act of 1934 (the “Exchange Act”), we carried out anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures as of December 31, 2006, being the date of our mostrecently completed fiscal year end. This evaluation was carried out under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer. Based upon that evaluation, our Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and proceduresare effective to ensure that the information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified by therules and forms of the Securities and Exchange Commission.

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed our reports filed or submitted under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed in ourreports filed under the Exchange Act is accumulated and communicated tomanagement, including our Chief Executive Officer and Chief Financial Officer,to allow timely decisions regarding required disclosure.

During our most recentlycompleted fiscal year ended December 31, 2006, there were no changes in ourinternal control over financial reporting that have materially affected, or arereasonably likely to affect, our internal control over financial reporting.

The term “internalcontrol over financial reporting” is defined as a process designed by, or underthe supervision of, the registrant’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe registrant’s board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles and includes those policies andprocedures that:

(1)            Pertain to themaintenance of records that in reasonable detail accurately and fairly reflectthe transactions and dispositions of the assets of the registrant;

(2)            Provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the registrant are being madeonly in accordance with authorizations of management and directors of theregistrant; and

(3)            Provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of the registrant’s assets that could have a material effecton the financial statements.

Our management, including our Chief Executive Officerand Chief Financial Officer, does not expect that our disclosure controls orour internal controls will prevent all error and all fraud. A control system,no matter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within our company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty and that breakdowns can occur because of simple errors ormistakes. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people or by management override ofthe control. The design of any system of controls also is partially based oncertain assumptions about the likelihood of future events, and we cannot assureyou that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

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**ITEM 8B. OTHERINFORMATION**

None.

**PART III**

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

The followingtable sets forth information concerning our directors, executive officers, andcertain of our significant employees as of April 5, 2007.  Our Board of Directors consists of a total ofthree members who serve terms of three years and hold office until death,resignation or until removed from office in accordance with our Bylaws.  Our officers are appointed by our Board of Directorsand hold office until their successors are chosen and qualified or removed byour Board of Directors.
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                      | ** ** | **Term as  Director  Expires** |
|--------------------|------------|---------|------------|-------------------------------------------------------------------|------------|--------------------------------|
| John Dupont        |       | 58      |       | Chief Executive Officer, President, and Director                  |       | 2007                           |
| R. Darby Boland    |       | 54      |       | Vice President, General Manger and Director                       |       | 2007                           |
| Edward F. Eaton    |       | 57      |       | Director                                                          |       | 2007                           |
| Thomas A.  Dapogny |       | 43      |       | Vice President of Operations, Treasurer, and  Secretary           |       | N/A                            |
| Randy Moseley      |       | 59      |       | Vice President, Chief Financial Officer                           |       | N/A                            |
| Karen Shoemaker    |       | 49      |       | Vice President, Controller                                        |       | N/A                            |
| Scott Jacox        |       | 46      |       | Vice President of Marketing                                       |       | N/A                            |
| Ruben Fragoso      |       | 47      |       | Vice President of Sales — Mexico, South and Central  America |       | N/A                            |

 

All directors holdoffice until the next annual meeting of our shareholders and until theirsuccessors have been elected and qualified. Officers serve at the pleasure ofthe board of directors.  There are nofamily relationships among any of our directors, executive officers, or personsnominated or chosen as our directors or executive officers.

**BusinessExperience**

John Dupont has beena director and President and Chief Executive Officer of our Company sinceinception, and also served American Utilicraft Corporation (“AMUC”) as adirector and President and Chief Executive Officer from its inception in 1990to March 7, 2006.  From 1984 to 1989,Mr. Dupont was the President and CEO of Skytrader Corporation, anaeronautical research and development firm which he founded in 1984, and wherehe designed the UV-23 Scout STOL (Skytrader). From 1989 through July 1990, Mr. Dupont was President ofAdvanced Lift Research, Inc. where he completed a design feasibilitystudy, market review and operational competitive analysis of a new 17,000 lb.aircraft design, the UC-219, specifically for the worldwide combinationpassenger/freight market.

R. Darby Bolandhas been a director, the Vice President and General Manager of our Companysince inception, and also currently serves AMUC as a director, and VicePresident.  From 1975 to 1978, he was aDesign and Logistics Engineer with McDonnell Douglas Corporation in connectionwith the F-4, F-15, Harpoon and Cruise Missile programs.  From 1978 to 1989, he was the ExecutiveManager with Southwestern Bell Corporation, where he was responsible for thedesign, implementation and marketing technical support of fiber-optic networksystems for long distance and cellular service providing companies.  From 1989 to 1992, he was the Director ofCorporate Development of Restore Industries, a telecommunications serviceequipment provider.  In 1988,Mr. Boland founded B&H Machine, Inc., a design manufacturer ofmetal cutting die products, where he served as President and Chief ExecutiveOfficer, and financed the sale of the company in 1996.  After 1996, Mr. Boland assisted AMUCwith the development of their program until his recent appointment to VicePresident, General Manager and Director of AMUC.  Mr. Boland is a graduate of St. LouisUniversity with a B.S. degree in Aeronautical Engineering Management.

Edward F. Eatonhas been a director of the Company since inception, and also currently servesAMUC as a director.  He is an attorneywith Connolly, Bove, Lodge & Hutz, LLP of Wilmington, Delaware, wherehe has been a partner since 1991.  Hepractices in the areas of litigation, criminal law, real estate law, andbusiness and commercial law, and has been employed with Connolly, Bove since1986.  Mr. Eaton received his J.D.from Temple University and his Bachelor’s degree from Cornell University.

Thomas A. Dapognyhas been the Vice President of Operations, Treasurer and Secretary sinceinception, and served AMUC as Vice President of Operations commencing in1998.  From 1986 to 1997, he served as aconsultant in information systems development for clients such asE-Systems/Raytheon, Ernst & Young, CACI, Global One, CSC and NationalComputer Systems.  His project workincluded CASE tool management; analysis and design; rapid prototype design andproduction; management and production of system life-cycle technical,management, and user documentation; development and production of Help systems;curriculum design and training material production; user-group management, andcontract proposal development.

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Randy Moseley was employed by the Company onMarch 16, 2007 to serve as Vice President and Chief Financial Officer. Mr.Moseley is also a director, Executive Vice President and Chief FinancialOfficer of Urban Television Network Corp. (OTC BB: UATV), a network ofindependent broadcast television stations and cable operators; he has servedUrban Television in various offices and as a director since 2001.  In 2005and 2006, Mr. Moseley served as Executive Vice President and the ChiefFinancial Officer for The Furia Organization, Inc. (OTC BB: FURA).  From 1999 to 2001, Mr. Moseley served as Executive Vice President and ChiefFinancial Officer for Tensor Information Systems, Inc., a private Fort Worthcompany in the business of developing custom software applications. From1993 to1999, Mr. Moseley served in the same capacity for American Independent NetworkCorporation, a Fort Worth based public company that provided genericprogramming to independent television stations across the country.  Mr. Moseley, a Certified Public Accountant, earned a BBA degree from SouthernMethodist University.  He is a member of the Texas Society of CPAs and theAICPA.

Karen Shoemakerhas been an officer of the Company since its inception, serving as the VicePresident, Chief Financial Officer and Principal Accounting Officer throughMarch 16, 2007 when she relinquished the Chief Financial Officer position andassumed the position of Controller of the Company.  Ms. Shoemaker served as PrincipalAccounting Officer of AMUC.

Ms. Shoemakerhas served as a principal of By the Numbers, Inc. (“BTN”) since 1988.  At BTN she worked as a consultant-controllerand accountant for startup to medium sized businesses, and was involved inpreparing extensive financial reporting and providing hands-on accountingmanagement.  Ms. Shoemaker hasexperience serving on project teams for BTN clients on finance and accountingrelated issues, consulting regarding selection, implementation and training forautomated accounting related systems and establishment of accountingprocedures, including internal control, revenue recognition and Governmentreporting.

Scott Jacox wasemployed by the Company on August 1, 2005 to serve as Vice President ofMarketing. Mr. Jacox received a Bachelors of Arts degree in ManagementInformation Systems and a Minor in Accounting from the University of Utah in1985.  From 1986 to 1987 Mr. Jacoxworked as a charter and cargo pilot for Sunwest Aviation.  In 1987 he began working as a freightdelivery pilot for Alpine Air Express. In 1990, Mr. Jacox worked as an overnight and express cargodelivery Pilot for Corporate Air. In 1992 he worked as a Captain for Alpine AirExpress where he logged over 15,000 flight hours and personally carried over 20million pounds of cargo in the overnight freight delivery system contracted toFederal Express, UPS, Airborne Express, and the USPS.  In 1998 he served as a Check Airmen andinstructor pilot responsible for the evaluation and instruction for all AlpineAir Captains and First Officers in the BE-99 and BE-1900 aircraft.  In 1999 he served as a Chief Pilot for AlpineAir Express where he was instrumental in the implementation of an innovativepalm pilot weight and balance system for all Alpine Aircraft.  In 2003 Mr. Jacox acted as Senior VicePresident at Alpine Air Express where he was responsible for the acquisition ofnew contracts as well as the bidding and successful awarding of a $50,000,000contract for the Hawaiian Islands for the USPS. As Senior Vice President at Alpine Air Express he was also responsiblefor the start up, safe and profitable operations for the Honolulu based 14 aircraftoperation.

Ruben Fragoso wasemployed by the Company on August 1, 2005 to serve as Vice President ofSales — Mexico, South and Central America. Mr. Fragoso initiated his career in international trade in 1990when he worked for a customs brokers agency. During his tenure with this agency as International Trade and LogisticsSpecialist he assisted importers and exporters with customs clearanceprocedures, document preparation, warehousing and distribution, andinternational logistics which included freight-forwarding (air-freight, ocean-freight,and land-freight).  Five years laterMr. Fragoso was offered a position with one of his clients who owned amanufacturing company in Albuquerque, New Mexico, and operated fivemanufacturing plants (maquiladoras) in Mexico. Mr. Fragoso’s duties were to manage all areas of the supply chain;such as, outsourcing, procurement, inventories, transportations, and customsclearance for the five maquiladoras.  Hewas also tasked with developing a vendor management program.  In 1998 Mr. Fragoso started InternationalTrade Services (ITS), a third party logistics and supply chain managementcompany.  As owner and managing partnerof ITS, Mr. Fragoso assisted businesses in the areas of international anddomestic logistics management, border crossing, international supply chainmanagement, international marketing, import and export management,international warehousing and distribution, and international outsourcing.  Mr. Fragoso also managed all areas ofthe business administration including operations, marketing, human resources,accounting, payroll, and financing.  Inearly 2002 Mr. Fragoso entered employment with the State of New Mexico’sEconomic Development Department in its Mexican Affairs Division.  During his tenure with the department heassisted in the development and implementation of the Maquiladora SupplierProgram - an initiative designed to recruit maquiladora suppliers to becloser to their market in order to reduce transportation costs, inventorylevels, and delivery times, while increasing customer service.  Mr. Fragoso also assisted in the designand implementation of several other programs that deal with Mexican federal andstate governments, such as the New Mexico/Chihuahua Commission which addressesborder, water, environment, immigration, and border development issues.  Mr. Fragoso has a Bachelors degree inInternational Business.

**COMMITTEES**

**AuditCommittee Financial Expert**

The Securities andExchange Commission has adopted rules implementing Section 407 of theSarbanes-Oxley Act of 2002 requiring public companies to disclose informationabout “audit committee financial experts.” As of the date of this Annual report, we do not have a standing AuditCommittee**.**  The functions of the Audit Committee arecurrently assumed by our full Board of Directors.  Additionally, we do not have a member of ourBoard of Directors that qualifies as an “audit committee financial expert.”  For that reason, we do not have an auditcommittee financial expert.

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**CODEOF ETHICS**

We have adopted aCode of Business Conduct and Ethics which is designed to set the standards ofbusiness conduct and ethics and help directors and employees resolve ethicalissues. The Code applies to all directors and employees, including the ChiefExecutive Officer and Chief Financial Officer and other persons performingsimilar functions. The Code covers topics including, but not limited to,conflicts of interest, confidentiality of information, fair dealing withcustomers, supplies and competitors, and compliance with applicable laws, rulesand regulations. The purpose of the Code is to ensure to the greatest possibleextent that our business is conducted in a consistently legal and ethicalmanner. Upon written request to the Company, we will provide a copy of the Codefree of charge.

**SECTION16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**

Section 16(a) ofthe Securities Exchange Act of 1934, as amended, requires our executiveofficers and directors, and persons who own more than ten percent of our commonstock, to file with the Securities and Exchange Commission initial reports ofownership, and reports of changes in ownership, of our common stock and otherequity securities of ours. Executive officers, directors and greater than tenpercent shareholders are required by SEC regulations to furnish us with copiesof all Section 16(a) reports that they file. To our knowledge, based solely ona review of the copies of the reports furnished to us, and representations fromour executive officers and directors that no other reports were required duringthe fiscal year ended December 31, 2006, we believe our executive officers,directors and greater than ten percent shareholders of our common stock,complied with all Section 16(a) filing requirements applicable to them.

**ITEM 10. EXECUTIVECOMPENSATION**

**EXECUTIVECOMPENSATION**

The followingSummary Compensation Table sets forth the total annual compensation paid oraccrued by us to or for the account of the Chief Executive Officer and eachother executive officer whose total cash compensation exceeds $100,000:

SUMMARY COMPENSATION TABLE
|                                        | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long-Term Compensation** | ** ** | ** **                           | ** ** | ** **                           |
|----------------------------------------|------------|------------|------------|------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|--------------------------------------|
| ** **                             | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                      | ** ** | ** **                           | ** ** | **Awards**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Name and Principal  Position | ** ** | **Year**   | ** ** | **Salary($)**                | ** ** | **Bonus($)**                    | ** ** | **Other  Annual  Compensation  ($)** | ** ** | **Restricted  Stock  Award(s)  ($)** | ** ** | **Securities  UnderlyingOptions/  SARs (#)** | ** ** | **Payout(s)**LTIP  Payouts  ($) | ** ** | **All Other  Compensation  ($)** | ** ** | ** ** |
| John Dupont,                           |       | 2004       |       | 11,833                       | (1)        | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
| President and CEO                      |       | 2005       |       | 200,000                      | (2)        | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 1,085,678 | (3) |   |
|                                        |       | 2006       |       | 200,000                      | (4)        | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
| R.  Darby Boland,                      |       | 2004       |       | 8,875                        | (5)        | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
| Vice  President, and                   |       | 2005       |       | 150,000                      | (6)        | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 879,668 | (7) |   |
| General  Manger                        |       | 2006       |       | 150,000                      | (8)        | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
| Thomas A. Dapogny,                     |       | 2004       |       | 8,875                        | (9)        | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
| VP Operations,                         |       | 2005       |       | 150,000                      | (10)       | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 208,442 | (11) |   |
| Treasurer, Secretary                   |       | 2006       |       | 150,000                      | (12)       | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
| Karen  Shoemaker,                      |       | 2004       |       | 7,395                        | (13)       | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
| VP,  Principal                         |       | 2005       |       | 125,000                      | (14)       | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 393,814 | (15) |   |
| Accounting  Officer                    |       | 2006       |       | 125,000                      | (16)       | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
| Scott Jacox,                           |       | 2004       |       | 0                            |       | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
| VP, Marketing                          |       | 2005       |       | 15,385                       |       | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |
|                                        |       | 2006       |       | 100,000                      |       | 0                               |       | 0                                    |       | 0                                    |   | 0 |   | 0 |   | 0 |   |   |

----

(1)             Weentered into an Employment Agreement with Mr. Dupont on December 10,2004, however, no compensation was paid under the agreement as ofDecember 31, 2004.****We accrued$11,834 as deferred compensation for services preformed as of December 31,2004.

(2)             Thisamount includes $113,846 paid and $86,154 accrued by UAI but unpaid.

(3)             Thisamount includes $385,678 of AMUC deferred compensation assumed by UAI, and$700,000 in value for issuance of 10,000,000shares of our common stock to Mr. Dupont.

(4)             Thisamount includes $184,615 paid and $15,385 accrued but unpaid.

26

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(5)             Weentered into an Employment Agreement with Mr. Boland on December 10,2004, however, no compensation was paid under the agreement as ofDecember 31, 2004.**** We accrued $8,875 as deferred compensation forservices preformed as of December 31, 2004.

(6)             Thisamount includes $103,500 paid and $46,500 accrued by UAI but unpaid.

(7)             Thisamount includes $179,668 of AMUC deferred compensation assumed by UAI, and$700,000 in value for issuance of 10,000,000 shares of our common stock to Mr.Boland.

(8)             Thisamount includes $129,808 paid and $20,192 accrued but unpaid.

(9)             Weentered into an Employment Agreement with Mr. Dapogny on December 10,2004, however, no compensation was paid under the agreement as ofDecember 31, 2004.**** We accrued $8,875 as deferred compensation forservices preformed as of December 31, 2004.

(10)       Thisamount includes $78,769 paid and $71,231 accrued by UAI but unpaid.

(11)       Thisreflects $208,442 of AMUC deferred compensation assumed by UAI.

(12)       Thisamount includes $122,885 paid and $27,115 accrued but unpaid.

(13)       Weentered into an Employment Agreement with Ms. Shoemaker onDecember 10, 2004, however, no compensation was paid under the agreementas of December 31, 2004.**** We accrued $7,395 as deferred compensation forservices preformed as of December 31, 2004.

(14)       Thisamount includes $7,488 paid and $117,513 accrued by UAI but unpaid.

(15)       Thisreflects $393,814 of AMUC deferred compensation assumed by UAI.

(16)       Thisamount includes $93,750 paid and $31,250 accrued but unpaid.

The Companyassumed the AMUC deferred compensation obligations referenced above infurtherance of its Reorganization plan and as an incentive to its employees toenter into employment agreements with the Company.

**Option/SARGrants in Last Fiscal Year**

No Options/SARswere granted in the last fiscal year to any executive officers.

**CompensationOf Directors**

Our Bylaws authorizeour Board of Directors to fix the compensation of directors for their servicesand allow the reimbursement of actual expenses of directors for theirattendance at each meeting of our Board of Directors.  10,000,000 shares of our common stock was issuedto John Dupont for services rendered and his agreement to serve on the Board ofDirectors, and 10,000,000 shares of our common stock was issued to Darby Bolandfor services rendered and his agreement to serve on the Board of Directors. Noother compensation has been paid to our directors since inception of thecompany for any services provided as director, committee participation orspecial assignments.

**EmploymentAgreements**

The followingdescriptions summarize some of material terms of the current employmentagreements between the Company and our executive officers named above, all ofwhich have been filed in their entirety as exhibits to our registrationstatement, and are qualified by reference to such agreements.

John Dupont 

We entered into anEmployment Agreement - John Dupont (referred to herein as the “DupontEmployment Agreement”) with Mr. Dupont on December 10, 2004 to serveas our President and Chief Executive Officer. The Dupont Employment Agreement was amended by a First Amendment to EmploymentAgreement — John J. Dupont pursuant to which a provision providing for a loanto Mr. Dupont was deleted.  The agreementis for five (5) years, with a base salary of two hundred thousand dollars($200,000) per annum, which shall be adjusted to two hundred fifty thousanddollars ($250,000) per annum in 2006 and to three hundred thousand dollars($300,000) per annum in 2007.  We havealso agreed to pay Mr. Dupont a bonus amounting to four percent (4%) ofthe net profits of the Company each fiscal year and commissions equaling fourpercent (4%) of the gross sale price of aircraft and equipment sold by theCompany.  After the Company obtains majorstart-up financing, it is obligated to pay Mr. Dupont’s legalrepresentatives $5,000 in the event of his death during the term of theagreement.  Mr. Dupont is notobligated to devote his full time and efforts to the Company until such time asmajor start-up financing is obtained. The employment agreement requires Mr. Dupont to assign and grantthe Company, subject to certain limitations, all rights necessary tomanufacture the FF-1080-300 aircraft and the ETA aircraft freight feedersystem. In the event the employment agreement expires without renewal or isterminated, the Company shall be obligated to pay Mr. Dupont royaltiesequal to three percent (3%) of the gross sales on the aircraft and/or systemsdelivered to purchasers after the termination date.  If the aforementioned termination/non-renewalroyalty provisions are triggered, such royalties would be payable in additionto three percent (3%) royalties due on the first 2000, aircraft sold by UAI, asprovided for in our separate Royalty Agreement with Mr. Dupont. The employmentagreement contains non-disclosure provisions and prohibits Mr. Dupont fromengaging in business competitive with the Company for a period of 3 years aftertermination of the agreement. Mr. Dupont and the Company have the right

27

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to terminate theagreement upon 180 days notice, however, if the Company exercises its right, itmust pay Mr. Dupont in lump sum, ten (10) times the average amount ofannual salary payable, and ten (10) times the average amount of bonuspayments payable prior to the date of termination (or projected).  In the event of a change in control, ifMr. Dupont is terminated he will be entitled to a lump sum payment of ten(10) times the amount of annual salary payable prior to the change incontrol, and ten (10) times the average amount of bonus payments payable(or projected), allowance of surrender of all outstanding stock options andemployee benefits for a period of two (2) years.

###### R. Darby Boland

We entered into anEmployment Agreement - R. Darby Boland with Mr. Boland onDecember 10, 2004 to serve as our Vice President, and GeneralManager.  The agreement is for a term ofthree (3) years, with a base salary of one hundred fifty thousand dollars($150,000) per annum.  Per the employmentagreement, Mr. Boland’s base salary is to be increased upon achievement ofFAA certification to two hundred thousand dollars ($200,000) per annum, and totwo hundred fifty thousand dollars ($250,000) per annum once the Company hasdelivered its twenty-fourth production aircraft.  The foregoing salary is not payable by theCompany until major start-up financing (approximately $20,000,000) has beenachieved.  We have also agreed to payMr. Boland a bonus amounting to .125% of sales of certain aircraft, theresponsibility for which has been assigned to Mr. Boland by the Presidentand CEO.  After the Company obtains majorstart-up financing, it is obligated to pay Mr. Boland’s legalrepresentatives $5,000 in the event of his death during the term of theagreement.  The employment agreementcontains nondisclosure provisions and prohibits Mr. Boland from engagingin business competitive with the Company for a period of 3 years aftertermination of the agreement.  Aftermajor financing has been achieved, Mr. Boland or the Company have theright to terminate the agreement upon 180 days notice, however, if the Companyexercises its right without cause, we must pay Mr. Boland in lump sum two(2) times his average annual salary. In the event of a change in control, if Mr. Boland is terminated hewill be entitled to a lump sum payment of ten (10) times the amount ofannual salary, allowance of surrender of all outstanding stock options, andemployee benefits for a period of two (2) years.

###### Randy Moseley

###### We entered into an Employment Agreement — Randy Moseley withMr. Moseley on March 16, 2007 to serve as our Vice President, and ChiefFinancial Officer.  The agreement is fora term of five (5) years, with a base salary of one hundred seventy fivethousand dollars ($175,000) per annum. Per the employment agreement, Mr. Moseley’s base salary is to beincreased upon achievement of FAA certification to two hundred thousand dollars($200,000) per annum, and to two hundred fifty thousand dollars ($250,000) perannum once the Company has delivered its thirty-sixth production aircraft.  We have also agreed to pay Mr. Moseley abonus amounting to .25% of sales of aircraft sales.  After the Company obtains major start-upfinancing, it is obligated to pay Mr. Boland’s legal representatives$5,000 in the event of his death during the term of the agreement.  The employment agreement containsnondisclosure provisions and prohibits Mr. Moseley from engaging inbusiness competitive with the Company for a period of 3 years after terminationof the agreement.  After major financinghas been achieved, Mr. Moseley or the Company have the right to terminatethe agreement upon 180 days notice, however, if the Company exercises its rightwithout cause, we must pay Mr. Moseley in lump sum two (2) times hisaverage annual salary.  In the event of achange in control, if Mr. Moseley is terminated he will be entitled to alump sum payment of ten (10) times the amount of annual salary, allowanceof surrender of all outstanding stock options, and employee benefits for aperiod of two (2) years.

Thomas A. Dapogny

We entered into anEmployment Agreement - Thomas A. Dapogny with Mr. Dapogny onDecember 10, 2004 to serve as our Vice President, Operations. Theagreement is for a term of three (3) years, with a base salary of onehundred fifty thousand dollars ($150,000) per annum.  Mr. Dapogny’s base salary is to beincreased upon achievement of FAA certification to two hundred thousand dollars($200,000) per annum, and to two hundred fifty thousand dollars ($250,000) perannum once the Company has delivered its twenty-fourth productionaircraft.  The foregoing salary is notpayable by the Company until major start-up financing (approximately$20,000,000) has been achieved.  We havealso agreed to pay Mr. Dapogny a bonus amounting to .125% of sales ofcertain aircraft, the responsibility for which has been assigned toMr. Dapogny by the President and CEO. After the Company obtains major start-up financing, it is obligated topay Mr. Dapogny’s legal representatives $5,000 in the event of his deathduring the term of the agreement.  Theemployment agreement contains provisions prohibiting disclosure of proprietaryinformation and prohibits Mr. Dapogny from engaging in businesscompetitive with the Company for a period of 3 years after termination of theagreement.  After major financing hasbeen achieved, Mr. Dapogny or the Company have the right to terminate theagreement upon 180 days notice, however, if the Company exercises its rightwithout cause, we must pay Mr. Dapogny in lump sum two (2) times hisaverage annual salary.  In the event of achange in control, if Mr. Dapogny is terminated he will be entitled to alump sum payment of ten (10) times the amount of annual salary, allowanceof surrender of all outstanding stock options, and employee benefits for aperiod of two (2) years.

28

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Karen Shoemaker

We entered into anEmployment Agreement — Karen Shoemaker with Ms. Shoemaker onDecember 10, 2004 to serve as our Vice President, Principal AccountingOfficer.  The agreement expired onJanuary 10, 2007 (Per the CEO, the Company intends to extend theemployment agreement with Ms. Shoemaker, but has not determined the terms ofthe extension at the date of the annual report), and provides for a base salaryof one hundred twenty-five thousand dollars ($125,000) per annum, which shallincrease to one hundred fifty thousand dollars ($150,000) per annum upon theeffective date of our registration statement and the Company becoming areporting company under the Exchange Act. The foregoing salary may be deferred to the extent the Company hasinsufficient funds available to pay such salary.  We have also agreed to payMrs. Shoemaker a bonus amounting to .0625% of sales of certain aircraft,the responsibility for which has been assigned to Ms. Shoemaker by thePresident and CEO.  After the Companyobtains major start-up financing, it is obligated to pay Ms. Shoemaker’slegal representatives $5,000 in the event of her death during the term of theagreement.  The employment agreementcontains provisions prohibiting disclosure of proprietary information andprohibits Ms. Shoemaker from engaging in business competitive with thecompany for a period of 3 years after leaving our employ.  After major financing has been achieved,Ms. Shoemaker or the Company have the right to terminate the agreementupon 180 days notice, however, if the Company exercises its right without cause,we must pay Ms. Shoemaker in lump sum two (2) times her averageannual salary.  In the event of a changein control, if Ms. Shoemaker is terminated without cause she will beentitled to a lump sum payment of ten (10) times the amount of annualsalary, allowance of surrender of all outstanding stock options, and employeebenefits for a period of two (2) years.

Scott Jacox

We entered into anEmployment Agreement — Scott Jacox with Mr. Jacox on August 1, 2005to serve as our Vice President of Marketing. The agreement expires onDecember 10, 2007 and provides for a base salary of one hundred thousanddollars ($100,000) per annum. Mr. Jacox’s base salary is to be increasedupon achievement of FAA certification to one hundred twenty five thousanddollars ($125,000) per annum, and to one hundred fifty thousand dollars($150,000) per annum once the Company has delivered its twenty-fourthproduction aircraft. We have also agreed to pay Mr. Jacox a bonusamounting to .125% of sales of certain aircraft, the responsibility for whichhas been assigned to Mr. Jacox by the President and CEO. After the Companyobtains major start-up financing, it is obligated to pay Mr. Jacox’s legalrepresentatives $5,000 in the event of his death during the term of theagreement. The employment agreement contains provisions prohibiting disclosureof proprietary information and prohibits Mr. Jacox from engaging inbusiness competitive with the company for a period of 3 years after terminationof the agreement. After major financing has been achieved, Mr. Jacox orthe Company have the right to terminate the agreement upon 180 days notice,however, if the Company exercises its right without cause, we must payMr. Jacox in lump sum two (2) times his average annual salary. In theevent of a change in control, if Mr. Jacox is terminated he will beentitled to a lump sum payment of ten (10) times the amount of annualsalary, allowance of surrender of all outstanding stock options, and employeebenefits for a period of two (2) years.

Ruben Fragoso

We entered into anEmployment Agreement — Ruben Fragoso with Mr. Fragoso on August 1,2005 to serve as our Vice President of Sales — Mexico, South and CentralAmerica. The agreement expires on December 10, 2007 and provides for abase salary of ninety-five thousand dollars ($95,000) per annum.Mr. Fragoso’s base salary is to be increased upon achievement of FAAcertification to one hundred fifteen thousand dollars ($115,000) per annum, andto one hundred fifty thousand dollars ($150,000) per annum once the Company hasdelivered its twenty-fourth production aircraft. We have also agreed to payMr. Fragoso a bonus amounting to .0625% of sales FF-1080 aircraftdelivered to commercial concerns in the Mexico, and South and Central Regions,(including commercial air carriers when owned and/or operated by a foreigngovernment) as, and only as, responsibility for such sales may be assigned toMr. Fragoso by the President and Chief Executive Officer.  After the Company obtains major start-upfinancing, it is obligated to pay Mr. Fragoso’s legal representatives$5,000 in the event of his death during the term of the agreement. Theemployment agreement contains provisions prohibiting disclosure of proprietaryinformation and prohibits Mr. Fragoso from engaging in businesscompetitive with the company for a period of 3 years after termination of theagreement. After major financing has been achieved, Mr. Fragoso or theCompany have the right to terminate the agreement upon 180 days notice,however, if the Company exercises its right without cause, we must payMr. Fragoso in lump sum two (2) times his average annual salary. Inthe event of a change in control, if Mr. Fragoso is terminated he will beentitled to a lump sum payment of ten (10) times the amount of annual salary,allowance of surrender of all outstanding stock options, and employee benefitsfor a period of two (2) years.

**DIRECTORCOMPENSATION**

The Company  does not pay any cash  compensation for  attendance  at directors meetings or participation in directors’ functions.

29

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**ITEM 11.**    SECURITIES OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The followingtable sets forth information as of April 5, 2007, relating to the ownership ofour common and preferred stock, by (i) each person known by us to be thebeneficial owner of more than five percent of the outstanding shares of eachclass of our capital stock, (ii) each of our directors and nominees, (iii) eachof our named executive officers and (iv) all of our executive officers anddirectors as a group. Except as may be indicated in the footnotes to the tableand subject to applicable community property laws, each person has the solevoting and investment power with respect to the shares owned. 
| **Title of Class** | ** ** | **Name and Address of  Beneficial Owner**                                               | ** ** | **Amount and Nature of  Beneficial Owner(1)** | ** ** | **Percent of Class(2)** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------|------------|
| Common Stock As  a Group     |       | Officers and Directors  7339 Paseo Del Volcan   Albuquerque, New Mexico 87121                          |       | 36,831,540                                                        |       | 16.7%                             |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
| As Individuals               |       | John Dupont   7339 Paseo Del Volcan   Albuquerque, New Mexico 87121                                         |       | 18,350,048                                                        | (3)        | 8.4%                              |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | R. Darby Boland   7339 Paseo Del Volcan   Albuquerque, New Mexico 87121                                     |       | 14,355,050                                                        | (4)        | 6.7%                              |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | Thomas A. Dapogny   7339 Paseo Del Volcan   Albuquerque, New Mexico 87121                                   |       | 2,933,716                                                         | (5)        | 1.4%                              |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | Edward F. Eaton   7339 Paseo Del Volcan   Albuquerque, New Mexico 87121                                     |       | 958,726                                                           | (6)        | 0.4%                              |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | Karen Shoemaker   7339 Paseo Del Volcan   Albuquerque, New Mexico 87121                                     |       | 234,000                                                           | (7)        | 0.1%                              |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | Scott Jacox   7339 Paseo Del Volcan   Albuquerque, New Mexico 87121                                         |       | 0                                                                 |       | 0%                                |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | Ruben Fragoso   7339 Paseo Del Volcan   Albuquerque, New Mexico 87121                                       |       | 0                                                                 |       | 0%                                |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | PacifiCorp Funding Partners Trust   c/o The Newhaven Group(8)   40 Gerard Street   London, England W1V 7 LP |       | 135,917,400                                                       | (9)        | 49.9%                             |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | Patricia Parsons   2820 Sugarloaf Club Drive   Duluth, Georgia 30097                                        |       | 14,397,625                                                        | (10)       | 6.7%                              |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | Douglas E Smith   46 Delegal   Savannah, Georgia 31411                                                      |       | 20,706,181                                                        | (11)       | 9.6%                              |       |
|                         |       |                                                                                                        |       |                                                              |       |                              |       |
|                         |       | Richard Trolard   6 Emerald Terrace #1   Swansea, Illinois 62226                                            |       | 12,128,970                                                        | (12)       | 5.7%                              |       |

 

30

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----

(1)             UnderRule 13d-3 under the Exchange Act, certain shares may be deemed to bebeneficially owned by more than one person (if, for example, persons share thepower to vote or the power to dispose of the shares). In addition, shares aredeemed to be beneficially owned by a person if the person has the right toacquire the shares (for example, upon exercise of an option) within 60 days ofthe date as of which the information is provided. In computing the percentageownership of any person, the amount of shares outstanding is deemed to includethe amount of shares beneficially owned by that person (and only that person)by reason of these acquisition rights. As a result, the percentage of outstandingshares of any person as shown in this table does not necessarily reflect theperson’s actual ownership with respect to the number of shares of our commonstock actually outstanding at April 5, 2007. As of April 5, 2007, we had214,825,989 common shares, $.0001 par value, outstanding. 

(2)             Thepercentage is based on 214,825,989 shares of common stock outstanding as ofDecember 31, 2006. 

(3)             Includesexercisable warrants for the purchase of 5,906,312 shares of common stock.

(4)             Includesexercisable warrants for the purchase of 735,000 shares of common stock.

(5)             Includesexercisable warrants for the purchase of 903,922 shares of common stock.

(6)             Includesexercisable warrants for the purchase of 756,462 shares of common stock.

(7)             Includesexercisable warrants for the purchase of 40,000 shares of common stock.

(8)             FergusAnstock serves as the Trustee/Protector of PacifiCorp Funding Partners Trustand is consequently the natural person who would be considered the beneficialowner of the shares held in the name of PacifiCorp Funding Partners Trust.

(9)             Includes2,502,960 currently un-issued shares to be issued pursuant to warrants thatPacifiCorp has transferred funds to exercise (but has not provided the requiredNotice of Exercise) and the remaining exercisable warrants for the purchase of57,497,040 shares of common stock issued to PacifiCorp Funding PartnersTrust pursuant to the PacifiCorp Agreement. 

(10)       Includesexercisable warrants for the purchase of 1,200,000 shares of common stock.

(11)       Includesexercisable warrants for the purchase of 3,726,000 shares of common stock.28,042 shares are held in the name of “Smith Family Trust, Douglas E. Smith,TTEE.”

(12)       Includesexercisable warrants for the purchase of 250,000 shares of common stock.

There are noarrangements the operation of which would result in a change in control ofUtilicraft Aerospace Industries, Inc.

**CHANGEIN CONTROL**

We are not aware of anyarrangement that might result in a change in control in the future.

**ITEM 12. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

There were notransactions with related persons, promoters, or control persons that requireddisclosure during the period covered by this report.

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**ITEM 13. EXHIBITS,LISTS and REPORTS on FORM 8-K**

**     (a) EXHIBITS**
| Exhibit No. | ** ** | **Description of Document**                                                                                                                                                                |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                 |
| 2.1              |       | Reorganization Agreement                                                                                                                                                                   |
|             |       |                                                                                                                                                                                       |
| 3.1              |       | Articles of Incorporation of the Company filed  December 10, 2004.                                                                                                                    |
|             |       |                                                                                                                                                                                       |
| 3.2              |       | Certificate of Amendment to Articles of  Incorporation for Nevada Profit Corporations filed July 1, 2005                                                                              |
|             |       |                                                                                                                                                                                       |
| 3.3              |       | Bylaws of the Company adopted December 9, 2004.                                                                                                                                       |
|             |       |                                                                                                                                                                                       |
| 4.1              |       | $2,000,000 Private Placement Memorandum of  Understanding and Subscription Agreement dated January 19, 2005                                                                                |
|             |       |                                                                                                                                                                                       |
| 4.2              |       | Private Placement Loan December 2004 Memorandum of  Understanding (John Scott) dated December 16, 2004                                                                                     |
|             |       |                                                                                                                                                                                       |
| 4.3              |       | Private Placement Loan December 2004 Memorandum of  Understanding (Marion Nicastro) dated December 15, 2004                                                                                |
|             |       |                                                                                                                                                                                       |
| 4.4              |       | Private Placement Loan December 2004 Memorandum of  Understanding (James P McGowen) dated December 14, 2004                                                                                |
|             |       |                                                                                                                                                                                       |
| 4.5              |       | Private Placement Loan December 2004 Memorandum of  Understanding (Nathan L. Graves) dated December 14, 2004                                                                               |
|             |       |                                                                                                                                                                                       |
| 5.1              |       | Opinion on Legality dated October 30, 2006                                                                                                                                                 |
|             |       |                                                                                                                                                                                       |
| 10.1             |       | Employment Agreement — John J. Dupont dated  December 10, 2004                                                                                                                   |
|             |       |                                                                                                                                                                                       |
| 10.2             |       | Employment Agreement — R. Darby Boland dated  December 10, 2004                                                                                                                  |
|             |       |                                                                                                                                                                                       |
| 10.3             |       | Employment Agreement —Thomas A. Dapogny dated  December 10, 2004                                                                                                                 |
|             |       |                                                                                                                                                                                       |
| 10.4             |       | Employment Agreement — Karen Shoemaker dated  December 10, 2004                                                                                                                  |
|             |       |                                                                                                                                                                                       |
| 10.5             |       | Employment Agreement — Scott Jacox dated  August 1, 2005                                                                                                                         |
|             |       |                                                                                                                                                                                       |
| 10.6             |       | Employment Agreement — Ruben Fragoso dated  August 1, 2005                                                                                                                       |
|             |       |                                                                                                                                                                                       |
| 10.7             |       | Assignment dated December 10, 2004                                                                                                                                                    |
|             |       |                                                                                                                                                                                       |
| 10.8             |       | Assignment 1 dated December 10, 2004                                                                                                                                                  |
|             |       |                                                                                                                                                                                       |
| 10.9             |       | Assignment 2 dated December 10, 2004                                                                                                                                                  |
|             |       |                                                                                                                                                                                       |
| 10.10            |       | Royalty Agreement dated December 10, 2004                                                                                                                                             |
|             |       |                                                                                                                                                                                       |
| 10.11            |       | Purchase Agreement Dated March 18, 2005, An  Aircraft Sub-Assembly Manufacturing Agreement Between Utilicraft Aerospace  Industries, Inc. and Metalcraft Technologies, Inc. |
|             |       |                                                                                                                                                                                       |
| 10.12            |       | Double Eagle II Airport Ground Lease, Utilicraft  Aerospace Industries, Inc.                                                                                                          |
|             |       |                                                                                                                                                                                       |
| 10.13            |       | Double Eagle II Airport Hangar Lease, Utilicraft  Aerospace Industries, Inc.                                                                                                          |

 

32

----

 
|  10.14 |   | Sublease Agreement between American Utilicraft  Corporation (lessor) and Utilicraft Aerospace Industries, Inc. (lessee)  dated March 28, 2005.                    |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                        |
| 10.15       |   | Aircraft Lease Agreement dated July 1, 2005                                                                                                                            |
|        |   |                                                                                                                                                                        |
| 10.16       |   | Utilicraft Aerospace Industries, Inc. Purchase  Order No. AMI-03-05-SOW-2 dated March 25, 2005                                                                    |
|        |   |                                                                                                                                                                        |
| 10.17       |   | Master Financing Agreement Between PacifiCorp  Funding Partners Trust and Utilicraft Aerospace Industries, Inc. dated  effective as of May 6, 2005                |
|        |   |                                                                                                                                                                        |
| 10.18       |   | Amended Master Financing Agreement Between  PacifiCorp Funding Partners Trust and Utilicraft Aerospace  Industries, Inc. dated effective as of September 12, 2005 |
|        |   |                                                                                                                                                                        |
| 10.19       |   | Lease Agreement between Utilicraft Aerospace  Industries, Inc. and Plaza II Executive Center, Inc. dated  July 25, 2005                                      |
|        |   |                                                                                                                                                                        |
| 10.20       |   | First Amendment to Employment Agreement — John J.  Dupont dated February 22, 2006                                                                                      |
|        |   |                                                                                                                                                                        |
| 10.21       |   | Utilicraft Aerospace Industries, Inc. Purchase  Order No. D3-07-05-SOW-1 dated July 25. 2005                                                                      |
|        |   |                                                                                                                                                                        |
| 10.22       |   | Letter of Intent to Purchase 100 (One-Hundred)  FF-1080-300 Aircraft between Benin Airlines SA and Utilicraft Aerospace  Industries, Inc. dated December 2, 2005       |
|        |   |                                                                                                                                                                        |
| 10.24       |   | First Amendment to the Double Eagle II Airport  Hangar Lease, Utilicraft Aerospace Industries, Inc.                                                                    |
|        |   |                                                                                                                                                                        |
| 10.25       |   | Loan Agreement dated January 15, 2006                                                                                                                                       |
|        |   |                                                                                                                                                                        |
| 10.26       |   | Loan Memorandum dated March 31, 2006                                                                                                                                        |
|        |   |                                                                                                                                                                        |
| 10.27       |   | Amendment to Lease Agreement between Plaza II  Executive Center as Lessor and Utilicraft Aerospace Industries, Inc. as  Lessee dated August 1, 2006                    |
| 10.28       |   | Employment Agreement — Randy Moseley dated March 16,  2007 *                                                                                                           |
|        |   |                                                                                                                                                                        |
| 31.1        |   | Certification by Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 *                                                                       |
|        |   |                                                                                                                                                                        |
| 31.2        |   | Certification by Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 *                                                                       |
|        |   |                                                                                                                                                                        |
| 32.1        |   | Certification by Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 *                       |
| 32.2        |   | Certification by Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 *                       |

----

*                    Filedherewith

(b)  Reports onForm 8-K.

On  March 30, 2007,  we filed a Form 8-K  announcing the  appointment of principalofficers for the Company.

**ITEM 14. PRINCIPALACCOUNTANTS FEES AND SERVICES**

The Board of Directors approved the engagement ofTurner, Stone & Company, LLP as our independent auditors for the year endedDecember 31, 2006.

33

----

**AUDITFEES**

The aggregate fees billedby Turner, Stone & Company, LLP for the audit and review of our annualfinancial statements and services that are normally provided by an accountantin connection with statutory and regulatory filings or engagements for thefiscal years ended December 31, 2006 and 2005, were approximately $22,000 and$33,450, respectively.

**AUDIT-RELATEDFEES**

The aggregate fees billedby Turner, Stone & Company, LLP for assurance and related services renderedby Turner, Stone & Company, LLP that are reasonably related to theperformance of the audit or review of our financial statements for the fiscalyears ended December 31, 2006 and 2005 were approximately $34,425 and $5,750,respectively.

**TAX FEES**

The aggregate fees billedby Turner, Stone & Company, LLP for professional services rendered for taxcompliance, tax advice and tax planning for the fiscal years ended December 31,2006 and 2005, were approximately $9,450 and $ -0- respectively.

**ALLOTHER FEES**

No other fees were billedby Turner, Stone & Company, LLP for the fiscal years ended December 31,2006 and 2005.

**SIGNATURES**

In accordance withSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|  Date: April 27,  2007 |   | Utilicraft Aerospace Industries, Inc.                |
|----------------------------------|--------|------------------------------------------------------|
|                             |   |                                                 |
| By:                              |   | /s/ John Dupont                                      |
|                             |   | John Dupont, President, Chief Executive Officer, and |
|                             |   | Chairman of the Board of Directors                   |

 

POWER OF ATTORNEY

KNOW ALL PERSONSBY THESE PRESENTS, that each person whose signature appears below constitutesand appoints John Dupont, his attorney-in-fact, each with the power ofsubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Annual Report on Form10-KSB, and to file the same, with all exhibits thereto and all documents inconnection therewith, with the Securities and Exchange Commission, grantingunto said attorney-in-fact and agents, full power and authority to do andperform each and every act and thing requisite and necessary to be done in andabout the premises, as fully to all intents and purposes as he might or coulddo in person, hereby ratifying and confirming said attorney-in-fact and agentsor any of them, or his or their substitute or substitutes, may lawfully do orcause to be done by virtue hereof.

In accordance withthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.
| Date: April 27, 2007  |   | /s/ John Dupont                                            |
|----------------------------|--------|------------------------------------------------------------|
|                       |   | John Dupont, President, Chief Executive Officer,           |
|                       |   | and Chairman of the Board of Directors                     |
|                       |   |                                                       |
| Date: April 27,  2007 |   | /s/ Robert Darby Boland                                    |
|                       |   | Robert Darby Boland Executive Vice President and  Director |
|                       |   |                                                       |
| Date: April 27,  2007 |   | /s/ Edward F. Eaton                                        |
|                       |   | Edward F. Eaton Director                                   |

 

34

----

 

FINANCIALSTATEMENTS

Our financial statementsare stated in United States Dollars (US$) and are prepared in conformity withgenerally accepted accounting  principlesof the United States of America.

The  following financial  statements  pertaining to Utilicraft Aerospace Industries, Inc. are filed as part of this10KSB:
|                                                                                                                                                                      | ** ** | **Page**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
|                                                                                                                                                                 |       |        |       |
| Report  of Independent Registered Public Accounting Firm                                                                                                             |       | F-1         |       |
|                                                                                                                                                                 |       |        |       |
| Balance  Sheet as of December 31, 2006                                                                                                                               |       | F-2         |       |
|                                                                                                                                                                 |       |        |       |
| Statements  of Operations for the Years Ended December 31, 2006 and 2005 and Period from  inception (December 9, 2004) to December 31, 2006                          |       | F-3         |       |
|                                                                                                                                                                 |       |        |       |
| Statements  of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2006 and  2005 and Period from inception (December 9, 2004) to December 31, 2006 |       | F-4         |       |
|                                                                                                                                                                 |       |        |       |
| Statements  of Cash Flows for the Years Ended December 31, 2006 and 2005 and Period from  inception (December 9, 2004) to December 31, 2006                          |       | F-5 to F-6  |       |
|                                                                                                                                                                 |       |        |       |
| Notes to Financial  Statements                                                                                                                                       |       | F-7 to F-15 |       |

 

35

----

**Report ofIndependent Registered Public Accounting Firm**

To the Board of Directorsand Stockholders of Utilicraft Aerospace Industries, Inc. 

We have audited the accompanying balance sheet ofUtilicraft Aerospace Industries, Inc. (the Company) (a development stagecompany) as of December31, 2006 and the related statements of operations,stockholders’ equity (deficit) and cash flows for the years ended December 31,2006 and 2005 and the period from December 9, 2004 (inception) throughDecember 31, 2006.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits. 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatements.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion. 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofUtilicraft Aerospace Industries, Inc. as of December 31, 2006 and theresults of its operations and cash flows for the periods set forth above, inconformity with accounting principles generally accepted in the United Statesof America. 

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financialstatements, the Company has incurred substantial losses from operations ofapproximately $8,600,000 since inception in December 2004, has experiencednegative cash flows from operations of approximately $2,600,000 since inceptionin December 2004 and has a working capital deficiency of approximately$4,300,000 at December 31, 2006, all of which raise substantial doubtabout its ability to continue as a going concern.  Management’s plans in regard to these mattersare also described in Note 1.  Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty. 
| /s/ Turner, Stone &  Company, L.L.P. |   |
|------------------------------------------|--------|
|                                     |
| Certified Public  Accountants            |
| Dallas, Texas                            |
|                                     |
| April 23, 2007                           |

F-1

----

**UtilicraftAerospace Industries, Inc.**

**(ADevelopment Stage Company)**

**BalanceSheet**

**December31, 2006**
| Assets                                                                                                    |       |       |       |
|-----------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                                                | ** ** | ** ** | ** ** |
| Current assets:                                                                                           |       |       |       |
| Cash                                                                                                      |       | $          | 35,800     |   |
|                                                                                                      |       |       |       |
| Total current assets                                                                                      |       | 35,800     |       |
|                                                                                                      |       |       |       |
| Computer equipment, net of depreciation of $6,829                                                         |       | 20,221     |       |
|                                                                                                      |       |       |       |
| Other assets:                                                                                             |       |       |       |
| Lease security deposits and other assets                                                                  |       | 23,250     |       |
| Prototypes for design aircraft                                                                            |       | 312,804    |       |
|                                                                                                      |       | 336,054    |       |
|                                                                                                      |       |       |       |
| Total assets                                                                                              |       | $          | 392,075    |   |
|                                                                                                      |       |       |       |
| Liabilities and Stockholders’ Equity (Deficit)                                                       |       |       |       |
|                                                                                                      |       |       |       |
| Current  liabilities:                                                                                     |       |       |       |
| Accounts payable and accrued expenses                                                                     |       | $          | 512,284    |   |
| Payroll taxes payable                                                                                     |       | 353,697    |       |
| Accrued interest, related party                                                                           |       | 48,874     |       |
| Rent payable, related party                                                                               |       | 114,000    |       |
| Accrued aircraft rent, related party                                                                      |       | 45,000     |       |
| Deferred compensation                                                                                     |       | 2,712,537  |       |
| Loans and advances from related party                                                                     |       | 548,941    |       |
| Total current liabilities                                                                                 |       | 4,335,333  |       |
|                                                                                                      |       |       |       |
| Long-term  liabilities:                                                                                   |       |       |       |
| Deferred rent obligation                                                                                  |       | 66,000     |       |
|                                                                                                      |       |       |       |
| Commitments and  contingencies (Note 5)                                                                   |       |       |       |
|                                                                                                      |       |       |       |
| Stockholders’  equity (deficit):                                                                     |       |       |       |
| Preferred stock, $.0001 par value, 25,000,000 shares  authorized, no shares issued or outstanding         |       | —     |       |
| Common stock, $.0001 par value, 475,000,000 shares  authorized, 214,825,989 shares issued and outstanding |       | 21,482     |       |
| Additional paid-in capital                                                                                |       | 4,577,335  |       |
| Deficit accumulated during the development stage                                                          |       | (8,608,075 | )          |
| Total stockholders’ equity (deficit)                                                                 |       | (4,009,258 | )          |
|                                                                                                      |       |       |       |
| Total  liabilities and stockholders’ equity (deficit)                                                |       | $          | 392,075    |   |

 

The accompanying notes are an integral part of thesefinancial statements.

F-2

----

**Util****icraft Aerospace Industries, Inc.**

**(ADevelopment Stage Company)**

**Statementsof Operations**
| ** **                                                                         | ** ** | ** **            | ** ** | ** **            | ** ** | **Period From**       | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | ** **            | ** ** | ** **            | ** ** | **December 9,  2004** | ** ** |
| ** **                                                                         | ** ** | **Year Ended**   | ** ** | **Year ended**   | ** ** | **(Inception) to**    | ** ** |
| ** **                                                                         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,**      | ** ** |
| ** **                                                                         | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2006**                   | ** ** |
| ** **                                                                         | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                 | ** ** |
| ** **                                                                         | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                 | ** ** |
| Revenues                                                                           |       | $                     | —     |                  | $          | —                     |       | $ | — |   |
|                                                                               |       |                  |       |                  |       |                       |       |
| Operating  expenses:                                                               |       |                  |       |                  |       |                       |       |
|                                                                               |       |                  |       |                  |       |                       |       |
| Related party reorganization costs (Notes 1 and 2)                                 |       | —                |       | —                |       | 3,519,073                  |       |
| Compensation and related costs                                                     |       | 1,006,384             |       | 2,311,945             |       | 3,360,529                  |       |
| General and administrative, exclusive of  compensation cost shown separately above |       | 505,604               |       | 709,302               |       | 1,235,128                  |       |
|                                                                               |       |                  |       |                  |       |                       |       |
| Engineering, research and development                                              |       | 174,445               |       | 261,428               |       | 439,753                    |       |
|                                                                               |       |                  |       |                  |       |                       |       |
| Interest expense                                                                   |       | 30,393                |       | 23,199                |       | 53,592                     |       |
| Total operating expenses                                                           |       | 1,716,826             |       | 3,305,874             |       | 8,608,075                  |       |
|                                                                               |       |                  |       |                  |       |                       |       |
| Loss before  provision for income taxes                                            |       | (1,716,826            | )          | (3,305,874            | )          | (8,608,075                 | )          |
|                                                                               |       |                  |       |                  |       |                       |       |
| Provision for  income taxes                                                        |       | —                |       | —                |       | —                     |       |
|                                                                               |       |                  |       |                  |       |                       |       |
| Net loss                                                                           |       | $                     | (1,716,826 | )                     | $          | (3,305,874                 | )          | $ | (8,608,075 | ) |
|                                                                               |       |                  |       |                  |       |                       |       |
| Basic net loss  per share based on weighted average common shares                  |       | $                     | (0.01      | )                     | $          | (0.02                      | )          |   |   |
|                                                                               |       |                  |       |                  |       |                       |       |
| Weighted average number  of common shares outstanding                              |       | 155,516,257           |       | 142,342,517           |       |                       |       |

 

The accompanying notes are an integral part of thesefinancial statements.

F-3

----

 

**Utilicraft Aerospace Industries, Inc.**

**(ADevelopment Stage Company)**

**Statementsof Stockholders’ Equity (Deficit)**
| ** **                                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**         | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|---------------------|------------|------------|------------|
| ** **                                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated**     | ** ** | ** ** | ** ** |
| ** **                                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | **during the** | ** ** | ** ** | ** ** |
| ** **                                                                          | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Development** | ** ** | ** **          | ** ** |
| ** **                                                                          | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**           | ** ** | **Total**  | ** ** |
| Balance at December 9,  2004                                                        |       | —                |       | $           | —     | ** **      | **$**      | **—**          | ** ** | **$**      | **—** |   | $ | — |   |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Issuance of common  stock in reorganization transaction                             |       | 111,738,769           |       | 11,174      |       | (11,174         | )          | —              |       | —     |       |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Net loss                                                                            |       | —                |       | —      |       | —          |       | (3,585,375          | )          | (3,585,375 | )          |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Balance at December 31,  2004                                                       |       | 111,738,769           |       | 11,174      |       | (11,174         | )          | (3,585,375          | )          | (3,585,375 | )          |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Issuance of common  stock for cash                                                  |       | 20,000,000            |       | 2,000       |       | 1,998,000       |       | —              |       | 2,000,000  |       |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Issuance of common  stock for services                                              |       | 20,000,000            |       | 2,000       |       | 1,398,000       |       | —              |       | 1,400,000  |       |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Issuance of common  stock for financing commitment                                  |       | 60,584,260            |       | 6,058       |       | (6,058          | )          | —              |       | —     |       |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Net loss for year ended  December 31, 2005                                          |       | —                |       | —      |       | —          |       | (3,305,874          | )          | (3,305,874 | )          |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Balance at December 31,  2005                                                       |       | 212,323,029           |       | 21,232      |       | 3,378,768       |       | (6,891,249          | )          | (3,491,249 | )          |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Issuance of common  stock for exercise of warrants, net of $271,000 financing costs |       | 2,502,960             |       | 250         |       | 1,195,189       |       | —              |       | 1,195,439  |       |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Accrued interest  converted to warrants                                             |       | —                |       | —      |       | 3,378           |       | —              |       | 3,378      |       |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Net loss for year ended  December 31, 2006                                          |       | —                |       | —      |       | —          |       | (1,716,826          | )          | (1,716,826 | )          |
|                                                                                |       |                  |       |        |       |            |       |                |       |       |       |
| Balance at December 31, 2006                                                        |       | 214,825,989           |       | $           | 21,482     |            | $          | 4,577,335           |       | $          | (8,608,075 | ) | $ | (4,009,258 | ) |

 

The accompanying notes are an integral part of thesefinancial statements.

F-4

----

**Utilicraft Aerospace Industries, Inc.**

**(A Development Stage Company)**

**Statements of Cash Flows**
| ** **                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | **Period From**           | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | **December 9, 2004** | ** ** |
| ** **                                                                   | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **(Inception) to**        | ** ** |
| ** **                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,**          | ** ** |
| ** **                                                                   | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2006**                       | ** ** |
| ** **                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                     | ** ** |
| Cash flows from  operating activities:                                       |       |                  |       |                  |       |                           |       |
|                                                                         |       |                  |       |                  |       |                           |       |
| Net loss                                                                     |       | $                     | (1,716,826 | )                     | $          | (3,305,874                     | )          | $ | (8,608,075 | ) |
|                                                                         |       |                  |       |                  |       |                           |       |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                  |       |                  |       |                           |       |
| Depreciation                                                                 |       | 6,829                 |       | —                |       | 6,829                          |       |
| Non-cash portion of related party reorganization  costs                      |       | —                |       | —                |       | 2,450,615                      |       |
| Common stock issued for services                                             |       | —                |       | 1,400,000             |       | 1,400,000                      |       |
| Deferred compensation                                                        |       | 287,332               |       | 519,397               |       | 853,429                        |       |
| Expenses paid by related party                                               |       | 101,697               |       | 104,355               |       | 206,052                        |       |
| Compensation paid by AMUC                                                    |       | —                |       | 46,923                |       | 46,923                         |       |
| Deferred rent                                                                |       | 18,000                |       | 48,000                |       | 66,000                         |       |
| Changes in  operating assets and liabilities:                                |       |                  |       |                  |       |                           |       |
| Prepaid expenses                                                             |       | 26,400                |       | (26,400               | )          | —                         |       |
| Lease security deposits and other assets                                     |       | 17,870                |       | (41,120               | )          | (23,250                        | )          |
| Deferred financing costs                                                     |       | 176,172               |       | (176,172              | )          | —                         |       |
| Accounts payable and accrued expenses                                        |       | 87,508                |       | 328,023               |       | 435,133                        |       |
| Accounts payable, AMUC                                                       |       | —                |       | (1,068,458            | )          | —                         |       |
| Payroll taxes payable                                                        |       | 170,227               |       | 187,080               |       | 357,307                        |       |
| Accrued interest, related party                                              |       | 26,046                |       | 22,828                |       | 48,874                         |       |
| Rent payable, related party                                                  |       | —                |       | 114,000               |       | 114,000                        |       |
| Accrued aircraft rent, related party                                         |       | 30,000                |       | 15,000                |       | 45,000                         |       |
| Deferred compensation                                                        |       | —                |       | (33,000               | )          | (33,000                        | )          |
| Net cash used in  operating activities                                       |       | (768,745              | )          | (1,865,418            | )          | (2,634,163                     | )          |
|                                                                         |       |                  |       |                  |       |                           |       |
| Cash flows from  investing activities:                                       |       |                  |       |                  |       |                           |       |
| Purchase of prototypes for design aircraft                                   |       | (79,729               | )          | (233,075              | )          | (312,804                       | )          |
| Purchase  of computers                                                       |       | (27,050               | )          | —                |       | (27,050                        | )          |
| Net cash used in  investing activities                                       |       | (106,779              | )          | (233,075              | )          | (339,854                       | )          |
|                                                                         |       |                  |       |                  |       |                           |       |
| Cash flows from  financing activities:                                       |       |                  |       |                  |       |                           |       |
| Proceeds from issuance of common stock                                       |       | 1,466,439             |       | 2,000,000             |       | 3,466,439                      |       |
| Financing cost associated with common stock                                  |       | (271,000              | )          | —                |       | (271,000                       | )          |
| Advances from related party                                                  |       | 3,378                 |       | 119,000               |       | 122,378                        |       |
| Repayment of advances from related party                                     |       | (288,000              | )          | (20,000               | )          | (308,000                       | )          |
| Net cash  provided by financing activities                                   |       | 910,817               |       | 2,099,000             |       | 3,009,817                      |       |
|                                                                         |       |                  |       |                  |       |                           |       |
| Net increase in  cash                                                        |       | 35,293                |       | 507                   |       | 35,800                         |       |
| Cash at  beginning of period                                                 |       | 507                   |       | —                |       | —                         |       |
| Cash at end of  period                                                       |       | $                     | 35,800     |                  | $          | 507                            |       | $ | 35,800 |   |
|                                                                         |       |                  |       |                  |       |                           |       |
| Interest paid                                                                |       | $                     | —     |                  | $          | 371                            |       | $ | 371 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

F-5

----

**UtilicraftAerospace Industries, Inc.**

**(ADevelopment Stage Company)**

**Statementsof Cash Flows**

Supplemental Disclosures of Non-Cash

Investing and Financing Activities
| ** **                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | **Period From**           | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | **December 9, 2004** | ** ** |
| ** **                                                                   | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **(Inception) to**        | ** ** |
| ** **                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,**          | ** ** |
| ** **                                                                   | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2006**                       | ** ** |
| ** **                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                     | ** ** |
| Assumption of  obligations for deferred compensation of former AMUC officers |       | $                     | —     |                  | $          | —                         |       | $ | 1,892,108 |   |
|                                                                         |       |                  |       |                  |       |                           |       |
| Assumption of  loans and advances from related party                         |       | $                     | —     |                  | $          | —                         |       | $ | 531,889 |   |
|                                                                         |       |                  |       |                  |       |                           |       |
| Assumption of  accounts payable of AMUC                                      |       | $                     | —     |                  | $          | —                         |       | $ | 1,145,609 |   |
|                                                                         |       |                  |       |                  |       |                           |       |

 

The accompanying notes are an integral part of thesefinancial statements.

F-6

----

 

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOFINANCIAL STATEMENTS**

**DECEMBER31, 2006**

**1.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

Organization and business 

UtilicraftAerospace Industries, Inc., (the “Company”) was incorporated in the State ofNevada on December 9, 2004 and uses a December 31 year end.  It is a development stage, research anddevelopment company.  The Company wasformed to conceive and implement a solution to the problem of decliningcapacity in the short haul (or feeder) route segments of the air cargo hub andspoke system.  The research anddevelopment efforts are focused on the design of a system for moving freight,centered around a new aircraft specifically designed for feeder route segments,the FF-1080-300 Freight Feeder aircraft (FF-1080).  The Company is also engaged in thedevelopment of related systems for fuel management and electronic freighttracking (Note 2).

Basis ofpresentation and going concern uncertainty 

The financialstatements of the Company have been prepared assuming that the Company willcontinue as a going concern.  However,since inception the Company has a loss from operations of approximately$8,600,000.  This is largely attributableto the reorganization costs associated with American Utilicraft Corporation (“AMUC”)(Note 2) and the costs of sustaining a corporate infrastructure and the relatedoverhead deemed necessary to support the Company’s operations while raisingcapital to develop a prototype of the aircraft described above.  Cash losses from operations since inceptionhave been approximately $2,634,000. Although the Company has a working capital deficiency of approximately$4,300,000 at December 31, 2006, approximately $3,310,000 of this deficiency isowed to the principal officers of the Company and will be paid when and iffunds are available.

In light of theCompany’s current financial position and the uncertainty of raising sufficientcapital to achieve its business plan, there is substantial doubt about theCompany’s ability to continue as a going concern.  In the opinion of management, approximately$15,000,000 will be required over the next twelve months to remove any threatto the continuation of its business during such time.  The Company has entered into a financingagreement as more fully discussed in Note 5, with PacifiCorp Funding PartnersTrust (“PacifiCorp”), to potentially provide between $40,000,000 and$80,000,000 in equity financing.  Despitethese activities, there can be no assurance that management’s efforts toadequately capitalize the Company will be successful.

Management estimates 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the dates ofthe financial statements and the reported amounts of operating expenses duringthe reporting periods.  Actual resultscould differ from these estimates.

Cash and cash flows 

For purposes ofthe statements of cash flows, cash includes demand deposits and time depositswith maturities of less than three months. None of the Company’s cash is restricted.

The Companymaintains cash accounts, which could exceed federally insured limits. TheCompany has not experienced any losses from maintaining cash accounts in excessof federally insured limits. Management believes that the Company does not havesignificant credit risk related to its cash accounts.

F-7

----

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOFINANCIAL STATEMENTS**

**DECEMBER31, 2006**

**1.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED**

Fair value of financial instruments 

In accordance with the reporting requirements of SFAS No. 107, *Disclosures About Fair Value of Financial Instruments*, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this statement and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair value of the loans from related party approximate their carrying amounts due to the short maturity of these instruments. At December 31, 2006, the Company did not have any other financial instruments.

Stock Based Compensation

Effective September 30, 2005, the Company adoptedStatement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment,using the modified prospective method. This statement requires the Company torecognize compensation cost based on the grant date fair value of optionsgranted to employees and directors. 

Recent accounting pronouncements 

In July 2006, the FASBissued FASB Interpretation No. 48, Accounting for Uncertainty in IncomeTaxes (FIN 48). FIN 48 clarifies the accounting for income taxes byprescribing a minimum probability threshold that a tax position must meetbefore a financial statement benefit is recognized. The minimum threshold isdefined in FIN 48 as a tax position that is more likely than not to besustained upon examination by the applicable taxing authority, includingresolution of any related appeals or litigation processes, based on thetechnical merits of the position. The tax benefit to be recognized is measuredas the largest amount of benefit that is greater than fifty percent likely ofbeing realized upon ultimate settlement. FIN 48 must be applied to all existingtax positions upon initial adoption. The cumulative effect of applying FIN 48at adoption, if any, is to be reported as an adjustment to opening retainedearnings for the year of adoption. FIN 48 is effective for the Company’s yearend 2007, although early adoption is permitted. The Company is assessing the potentialeffect of FIN 48 on its financial statements.

In 2006, theFinancial Accounting Standards Board issued the following:

- SFAS No. 155:*Accounting forCertain Hybrid Financial Instruments*

* - SFAS No. 156: Accounting for Servicing ofFinancial Assets*

* - SFAS No. 157: Fair Value Measurements*

* - SFAS No. 158: Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans*

Management hasreviewed these new standards and believes that they have no impact on thefinancial statements of the Company.

#### Income taxes

The Company employs theasset and liability method in accounting for income taxes pursuant to Statementof Financial Accounting Standards (SFAS) No. 109 “*Accounting for Income Taxes*.” Under thismethod, deferred tax assets and liabilities are determined based on temporarydifferences between the financial reporting and tax bases of assets andliabilities and net operating loss carryforwards, and are measured usingenacted tax rates and laws that are expected to be in effect when the differencesare reversed.

F-8

----

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOFINANCIAL STATEMENTS**

**DECEMBER31, 2006**

**1.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED**

Net loss per share 

Basic net loss per shareis computed based upon the weighted average number of common shares outstandingduring the periods, adjusted for contingently returnable shares (see Note 5)and is computed by dividing net loss by the adjusted weighted average number ofshares during the periods. Diluted net loss per share is based upon theweighted average number of common shares outstanding during the periods,adjusted for contingently returnable shares, plus the number of incrementalshares of common stock contingently issuable upon the exercise of theoutstanding warrants, (Notes 3 and 5). No effect has been given to the potential exercise of the warrantsbecause their effect would be anti-dilutive.

Basic net loss per sharehas been computed as follows:
| ** **                                                          | ** ** | **Year**                        | ** ** | **Year**                        | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **Ended**                       | ** ** | **Ended**                       | ** ** |
| ** **                                                          | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|                                                                |       |                            |       |                            |       |
| Net loss                                                            |       | $                               | (1,716,826 | )                               | $          | (3,305,874 | ) |
|                                                                |       |                            |       |                            |       |
| Weighted average  common shares outstanding                         |       | 213,879,386                     |       | 181,019,509                     |       |
| Less - weighted  average contingently returnable shares             |       | (58,363,129                     | )          | (38,676,992                     | )          |
| Adjusted weighted  average for basic net loss per share computation |       | 155,516,257                     |       | 142,342,517                     |       |
| Basic net loss per  share                                           |       | $                               | (0.01      | )                               | $          | (0.02 | ) |

 

Engineering, research and development 

The Company expenses engineering, research anddevelopment costs as they are incurred.  For the years ended December 31, 2006 and2005, respectively, and for the period from December 9, 2004 (inception)through December 31, 2006, such costs were $174,445, $261,428 and $439,753,respectively.  These amounts relate toresearch and development of the Company’s new aircraft design.  Costs directly related to building aprototype aircraft which will have an alternative future use are beingcapitalized.  Upon completion, thesecosts will be depreciated over the then estimated useful lives.

Patents

In December 2004, the Company obtained the assignmentof rights to three U.S. patents from its President pursuant to the terms of his“Employment Agreement.” One patent is for the design of the FF-1080 aircraft.Another is a method patent that incorporates the design in an integrated aircargo information system for an electronic freight tracking system. The thirdpatent is for a system that computes the most economical route segment based onthe change in aircraft gross weight on each segment resulting in better fuelefficiency.

The Company’saccess to the patents was obtained from the Employment Agreement discussedabove with its President, and were not assigned any value because  all of the costs and obligations incurred inconnection with obtaining access to the patents were not paid to its Presidentbut were paid to AMUC, its stockholders and creditors aggregating approximately$3,519,000 and were expensed at the reorganization date of December 9, 2004 andreflected in the accompanying financial statements as “Related partyreorganization costs.”

F-9

----

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOFINANCIAL STATEMENTS**

**DECEMBER31, 2006**

**2.             TRANSACTIONSWITH AMERICAN UTILICRAFT CORPORATION**

The Company was effectively reorganized from AmericanUtilicraft Corporation (“AMUC”) through the issuance of 111,444,769 commonshares to AMUC and 294,000 common shares issued directly to AMUC stockholders,effective for accounting purposes as of December 9, 2004.  AMUC distributed the shares it received toits stockholders.  AMUC was engaged inthe development of the FF-1080-300 prior to the forming of UAI.  As consideration for the release of anyclaims to the patent rights (Note 1), the Company paid approximately $1,095,000to AMUC or directly to its creditors and assumed liabilities for deferredcompensation to former officers and employees of AMUC of approximately$1,892,000 and debt to an officer of approximately $532,000.  Such amounts have been reflected as “Relatedparty reorganization costs” in the accompanying statements of operations asdiscussed in Note 1.

Since the Company acquired none of the assets of AMUCnor assumed any business formerly operated by AMUC, no financial statements ofAMUC are presented.  The reorganizationtransactions were accounted for at the fair value of cash paid and liabilitiesassumed.

**3.**             **CAPITALSTRUCTURE DISCLOSURES**

The Company’s capital structure is not complex.  The Company is authorized to issue 25,000,000shares of preferred stock with a par value of $.0001 per share.  The Company is authorized to issue475,000,000 shares of common stock with a par value of $.0001 per share.

Preferred stock 

No shares of preferred stock have been issued as ofDecember 31, 2006.

Common stock 

Each common stock share has one voting right and theright to dividends if and when declared by the Board of Directors.

Stock options, warrants and other rights 

As of December 31, 2006, the Company has not adoptedany employee stock option plans.

Valuation of stock issued for services 

Effective May 6, 2005, the Company issued 20,000,000shares to two executive officers for services rendered in connection withpre-incorporation services and their agreement to serve as directors.  The shares were valued at $.07 per sharebased on shares issued in February and March 2005 for cash at $.10 pershare.  Management of the Companyestimated the value below the cash price of $.10 per share because the sharescontained no registration rights and contain resale restrictions.  The expense is reflected in the accompanyingstatements of operations under “compensation and related costs.”

F-10

----

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOFINANCIAL STATEMENTS**

**DECEMBER31, 2006**

**3.             CAPITALSTRUCTURE DISCLOSURES -CONTINUED**

Warrants 

A summary of all the Company’s warrants outstanding atDecember 31, 2006 and 2005, respectively and the changes during the years thenended is presented in the following table.

 
| ** **                               | ** ** | **AMUC**         | ** ** | ** **     | ** ** | **Related** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------------|------------|----------------|------------|-------------|------------|------------|------------|
| ** **                               | ** ** | **Stockholders** | ** ** | **PacifiCorp** | ** ** | **Party**   | ** ** | **Total**  | ** ** |
|                                     |       |             |       |           |       |        |       |       |       |
| Warrants  outstanding, December 31, 2004 |       | 17,287,664       |       | —         |       | —      |       | 17,287,664 |       |
|                                     |       |             |       |           |       |        |       |       |       |
| Issued                                   |       | —           |       | 60,000,000     |       | —      |       | 60,000,000 |       |
|                                     |       |             |       |           |       |        |       |       |       |
| Warrants  outstanding, December 31, 2005 |       | 17,287,664       |       | 60,000,000     |       | —      |       | 77,287,664 |       |
|                                     |       |             |       |           |       |        |       |       |       |
| Issued                                   |       | —           |       | —         |       | 1,084,388   |       | 1,084,388  |       |
|                                     |       |             |       |           |       |        |       |       |       |
| Exercised                                |       | —           |       | (2,502,960     | )          | —      |       | (2,502,960 | )          |
|                                     |       |             |       |           |       |        |       |       |       |
| Warrants outstanding,  December 31, 2006 |       | 17,287,664       |       | 57,497,040     |       | 1,084,388   |       | 75,869,092 |       |

As of December 31,2006, the Company has outstanding warrants issued to AMUC stockholders that areexercisable to purchase 17,287,664 shares of the Company’s common stock atprices ranging from $.10 to $5.00 per share. All such warrants expire in January 2008.  See Note 5 for a description of warrantsissued in connection with a financing agreement to purchase 60,000,000 sharesof common stock.

In January and March 2006, the Company agreed to issuewarrants to its President to purchase 897,416 and 186,972, respectively, sharesof common stock in lieu of paying interest and for consideration of defaultrisk on the additional loans made to the Company during 2005 and 2006 (Note5).  The warrants are exercisable at$1.00 per share over three years from April 15, 2006 and March 31, 2006.

**4.**             **INCOMETAXES**

The Company accounts for corporate income taxes inaccordance with SFAS No. 109, *Accounting forIncome Taxes*.  Under SFAS No.109, deferred tax assets and liabilities are recognized for the estimatedfuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases.  In addition,future tax benefits, such as those from net operating loss carry forwards, arerecognized to the extent that realization of such benefits is more likely thannot.  Deferred tax assets and liabilitiesare measured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.   The effect on deferred taxassets and liabilities of a change in tax rates is recognized in the periodthat includes the enactment date.

F-11

----

 

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOFINANCIAL STATEMENTS**

**DECEMBER31, 2006**

**4.**             **INCOMETAXES -CONTINUED**

At December 31, 2006 and December 31, 2005, theCompany’s only deferred tax assets, are offset by a valuation allowance, (therewere no deferred tax liabilities) which totaled approximately $2,912,000 and$2,335,660, respectively (using an anticipated effective tax rate of 34%) andwas attributable to its net operating tax loss carryforwards of approximately$3,960,000 incurred since inception. These net operating losses expire from 2024 through 2026.

A reconciliation of income tax expense at thestatutory federal rate of 34% to income tax expense at the Company’s effectivetax rate is as follows: 
| ** **                              | ** ** | ** **            | ** ** | ** **            | ** ** | **Period From**    | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                              | ** ** | ** **            | ** ** | ** **            | ** ** | **December 9,**    | ** ** |
| ** **                              | ** ** | ** **            | ** ** | ** **            | ** ** | **2004**                | ** ** |
| ** **                              | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **(Inception) to** | ** ** |
| ** **                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,**   | ** ** |
| ** **                              | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2006**                | ** ** |
| ** **                              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **              | ** ** |
| Tax benefit computed at  statutory rate |       | $                     | 562,000    |                  | $          | 1,116,000               |       | $ | 2,912,000 |   |
|                                    |       |                  |       |                  |       |                    |       |
| Increase in valuation  allowance        |       | (562,000              | )          | (1,116,000            | )          | (2,912,000              | )          |
|                                    |       |                  |       |                  |       |                    |       |
|                                    |       | $                     | —     |                  | $          | —                  |       | $ | — |   |

 

**5.**             **COMMITMENTSAND CONTINGENCIES**

Funding commitment 

The Company entered into a financing agreement (the “Agreement”)effective September 12, 2005 with PacifiCorp Funding Partners Trust (“PacifiCorp”)to provide equity financing of a minimum of $40,000,000 and a maximum of$80,000,000 through the exercise of warrants for the purchase of up to60,000,000 shares.  The terms of thewarrants are as follows:

(i)                                     Warrantsfor the purchase of 20 million shares are exercisable at $.50 per share for aperiod of 360 days after execution of the Agreement (the exercise period hasbeen extended to June 30, 2007 by the Company);

(ii)                                  Warrantsfor the purchase of 30 million shares are exercisable at $1.50 per share for aperiod of 540 days after execution of the Agreement (the exercise period hasbeen extended to June 30, 2007 by the Company;

(iii)                               And,warrants for the purchase of 10 million shares are exercisable at $2.50 pershare for a period of 720 days after execution of the Agreement.

As consideration for PacifiCorp’s funding efforts, theCompany and two executive officers collectively agreed to contribute a total of80,000,000 shares (the “PacifiCorp Shares”) of restricted common stock of theCompany to PacifiCorp.  The PacifiCorpShares consist of 60,584,260 common shares newly issued by the Company toPacifiCorp (these shares are considered legally issued and outstanding and areentitled to full voting rights and dividends, provided that in the eventPacifiCorp fails to meet its funding obligations and the subsequent return ofany portion of the shares, PacifiCorp will have an obligation to repay anydividends on returned shares), and a total of 19,415,740 common sharespersonally transferred to PacifiCorp from the two executive officers.

In the event that PacifiCorp fails to exercisewarrants sufficient to generate the minimum funding ($40,000,000) within 540days following the execution of the Agreement (effectively, March 6, 2007),extended by the Company to June 30, 2007, upon demand, PacifiCorp will beobligated to return all of the PacifiCorp Shares to the Company and return allunexercised warrants for cancellation or resale.  The Agreement allows the parties torenegotiate the terms of exercise of the warrants, whether as to exercise priceor period, in the event of the establishment of a public market for the Company’scommon stock.

F-12

----

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOFINANCIAL STATEMENTS**

**DECEMBER31, 2006**

**5.**             **COMMITMENTSAND CONTINGENCIES - CONTINUED**

The 60,584,260 new PacifiCorp Shares issued by theCompany were not valued under the provisions of SFAS 123R since there is noperformance commitment other than to return the shares.  The value of the above warrants wasdetermined by management to be insignificant and, accordingly, no value wasassigned to the warrants.  Any sharesreturned by PacifiCorp due to failure to exercise sufficient warrants togenerate the minimum funding will be returned pro-rata to the Company and theexecutive officers.  Though PacifiCorpmay be obligated to return the PacifiCorp Shares, upon obtaining authorizationfrom an Officer of the Company, it is authorized to transfer such shares tothird parties during the period the Agreement remains in effect. Because thenew PacifiCorp shares are contingently returnable until the minimum funding of$40,000,000 is reached, all unearned shares as of December 31, 2006 (58,363,129common shares) have been excluded from the weighted average common shares usedin computing basic net loss per share until all necessary conditions have beensatisfied or when the shares are no longer returnable.

During the year ended December 31, 2006, PacifiCorptransferred net funds totaling $1,466,439 to the Company for exercise ofwarrants for the purchase of 2,502,960 shares at an exercise price of $.50 pershare.  Notwithstanding the fact thatPacifiCorp has only paid for the purchase of 2,502,960 shares as ofDecember 31, 2006, it has requested and obtained transfer of a total of5,078,160 PacifiCorp Shares to third parties. Since the Company has not retained a security interest in the PacifiCorpShares and retains no right to demand return of the shares from a third partyin the event PacifiCorp defaults on its minimum funding obligations as ofDecember 31, 2006, the Company has recognized 2,221,131 of the 60,584,260PacifiCorp Shares transferred as “earned.” In addition, 711,829 of the19,415,740 previously issued and outstanding shares personally transferred bythe two executive officers, have also been considered as “earned.”

The Companyprotects its rights with respect to return of the PacifiCorp Shares (in theevent PacifiCorp fails to meet its minimum funding obligation) by maintainingcontrol over the certificates representing PacifiCorp Shares that areregistered in the name of PacifiCorp (i.e., the shares that have not beentransferred to third parties) as well as any shares issued upon the exercise ofthe warrants in the name of PacifiCorp (“PacifiCorp Warrant Shares”). As such,the Company is effectively able to insure that PacifiCorp will be able to meetshare return obligations in the event it is unable to meet minimum fundingobligations under the Agreement.

Operating leases 

The Company is presently obligated under severaloperating leases.

Ground Lease, City of Albuquerque, New Mexico 

This lease, effective March 31, 2005, is for theCompany’s future primary operations and manufacturing facility.  The City of Albuquerque has agreed to abatecertain portions of the monthly rentals until the end of the initial five yearlease in January 2010.  The abatementresults in 100% of the first year’s rent and 50% of the next four years’ rentto be deferred until January 2010, at which time, the abated rent, aggregating$144,000, will be due and payable. During the first year of the lease, abated monthly rentals of $4,000were accrued. In April 2006, the abated monthly rentals were reduced to $2,000per month.  This abated rent obligationis reflected in the accompanying balance sheet as “Deferred rent obligation.”   During the years ended December 31, 2006 and2005, respectively, the Company recorded rent expense under this lease of$48,000 and $48,000, respectively.

At the end of the initial five year period, the leaseprovides for changes in the annual rent during each successive five year periodthroughout its 20 year term based on changes in the fair market value of theunderlying land.

Hanger Lease, City of Albuquerque, New Mexico 

This lease is for temporary space until the Company’spermanent facility is constructed as discussed above.  Monthly rentals are $3,600 on amonth-to-month basis beginning March 1, 2006.  During the year ended December 31, 2006, the Company recorded leaseexpense under this lease of $50,699.

F-13

----

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOFINANCIAL STATEMENTS**

**DECEMBER31, 2006**

**5.**             **COMMITMENTSAND CONTINGENCIES - CONTINUED**

Aircraft Lease, Related Party, J.D. Aero, LLC 

The Company leases an aircraft from a company whollyowned by the Company’s President.  Thelease is for five year term with monthly payments of $2,500. During the yearsended December 31, 2006 and 2005 and  forthe period from December 9, 2004 (inception) through December 31, 2006, theCompany recorded rent expense under this lease of $30,000, $21,478 and $51,478,respectively.

In April 2006, the Company paid $25,489 forelectronics that were added to the aircraft for testing purposes for theFF-1080.  Under terms of the lease, theseadditions remain the property of J.D. Aero, L.L.C.

Sublease with Related Party, AMUC 

Effective April 2005, the Company executed a lease fortemporary space in Georgia from AMUC. The lease was on a month-to-month basis at $19,000 per month.  During the year ended December 31, 2005, andthe period from December 9, 2004 (inception) through December 31, 2006, theCompany recorded rent expense under this lease of $171,000.

Effective January 1, 2006, this lease was terminated.

The following is a schedule of future minimum rentalpayments required under the above long-term operating leases for the next fivecalendar years: 

| Year   | ** ** | ** ** | ** ** | **Amount** | ** ** |
|--------|------------|------------|------------|------------|------------|
|   |       |       |       |
| 2007   |       | $          | 78,000     |       |
| 2008   |       | 78,000     |       |
| 2009   |       | 78,000     |       |
| 2010   |       | 63,000     |       |
|   |       | $          | 297,000    |       |

 

Purchase commitments 

Once production of the Company’s prototype aircraftcommences, purchase commitments will consist primarily of agreements for rawmaterials and parts needed in the Company’s aircraft manufacturing operations.

The Company estimates it will spend approximately$15,000,000 over the next 12 months for its prototype performance flight testaircraft, engineering and general and administrative expenses.

An engineering contract for the wing design and a windtunnel is in place for approximately $325,000, of which approximately $87,150,has been paid through December 31, 2006, and is reflected in “Prototypes fordesign aircraft” on the accompanying balance sheet.

Executive compensation 

The Company is obligated under the terms of employmentcontracts for seven of its executive officers. The terms of the contracts are generally five years and provide forannual salaries of $95,000 to $300,000 each. The annual compensation for these seven executive officers aggregatesapproximately $1,120,000.

F-14

----

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOFINANCIAL STATEMENTS**

**DECEMBER31, 2006**

**5.**             **COMMITMENTSAND CONTINGENCIES - CONTINUED**

The contracts provide for substantial increases basedon certain future events that, if achieved by the Company, would raise theaggregate annual compensation to approximately $1,500,000, subject to inflationadjustments.

The contracts also provide for bonuses based oncertain numbers of aircrafts sold in the future.  Certain officers may earn a bonus based onrates varying from 1¤16 of 1% to 3% of the aircraft’sselling price.

The employment agreement for the President of theCompany also provides that he will receive a bonus equal to 4% of the “netprofits,” as defined, in each fiscal year.

If there is a change in control, of the Company, asdefined, each officer is subject to significant severance benefits, whichprovide, among other things, for ten times then current salary, allowance tosurrender stock options, receive health benefits for two years and to pay legalexpenses to defend the officer’s contract up to $250,000 each.

Royalties to officer/founder 

As part of the consideration for transferring use ofthe patents to the Company that are owned by the President, in December 2004,the Company agreed to pay royalties in the amount of 3% of the Company’s grossproceeds on all sales of the FF-1080 Series of aircraft to its President.  Such royalties are payable within thirty daysof receipt for payments on such aircraft. Royalties are payable on the first 2000 aircraft sold by the Company.

Pursuant to the employment agreement of the President,if it expires without renewal or is terminated for any reason except one thatwould cause revocation of the patent assignments, the Company may continue thedevelopment, manufacture and sale of the FF-1080 Series of aircraft subject tothe payment of additional royalties equal to 3% of the gross sales of theproducts. This would be in addition to the royalties payable that are discussedabove.

**6.**             **RELATEDPARTY TRANSACTIONS**

As discussed in Note 2, the Company assumed theobligation for loans and advances made to AMUC by J.D. Aero, LLC (“Aero”) andthe Company’s President, of $532,000.  Asof December 31, 2006, these loans and advances, which bear interest at 4% andare unsecured, aggregated $548,941, plus accrued and unpaid interest of$48,874, and are reflected in “Loans and advances from related party” and “Accruedinterest, related party” on the accompanying balance sheet.  For the years ended December 31, 2006 and2005 and the period from December 9, 2004 (inception) to December 31, 2006,interest expense of $30,393, $23,199 and $53,592, respectively, has beenreflected in the accompanying statements of operations.

In January and March 2006, the Company agreed to issuewarrants to its President to purchase 897,416 and 186,972, respectively, sharesof common stock in lieu of paying interest and for consideration of defaultrisk on the advance portion of the loans, which were $317,841 at the conversiondate (Note 3).  Accordingly, accruedinterest of $3,378 has been included in additional paid-in capital during theyear ended December 31, 2006.  Thewarrants are exercisable at $1.00 per share over three years from April 15,2006 and March 31, 2006.

As of December 31, 2006, the balance of all advancesto the Company’s President was reduced to approximately $124,000 and thebalance of the Aero loan was $450,000.

F-15

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