**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-KSB**





(Mark
      One)





x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2006





 ̈
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




FOR
      THE
      TRANSITION PERIOD FROM __________ TO __________




COMMISSION
      FILE NUMBER ________________________________





**PHANTOM
      FIBER CORPORATION**


(Name
      of
      small business issuer in its charter)





**DELAWARE**
              (State
                or other jurisdiction of incorporation or organization)
            **04-2451506**
              (I.R.S.
                Employer Identification No.)




**144
      Front Street, Suite 580, Toronto, Ontario, Canada M5J
      2L7**


(Address
      of principal executive offices) (Zip Code)





Issuer’s
      telephone Number: **(416)
      703-4007**





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





Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par
      value





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





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





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





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





State
      issuer’s revenues for its most recent fiscal year. $309,271





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates, computed by reference to the average bid and asked price of
      such
      common equity as of April 9, 2007, was $5,107,827.





As
      of
      April 9, 2007, the issuer had 17,026,089 outstanding shares of Common
      Stock.





**DOCUMENTS
      INCORPORATED BY REFERENCE: NONE**





Transitional
      Small Business Disclosure Format (check one): Yes  ̈ No
      x









**TABLE
      OF CONTENTS**





**Page****PART
                I**Item
                1. Description of Business
            
            
            1Item
                2. Description of Property
            
            
            4Item
                3. Legal Proceedings
            
            
            4Item
                4. Submission of Matters to a Vote of Security Holders
            
            
            4**PART
                II**Item
                5. Market for Common Equity and Related Stockholder
                Matters
            
            
            5Item
                6. Management’s Discussion and Analysis or Plan of
                Operation
            
            
            7Item
                7. Financial Statements
            
            
            14Item
                8. Changes In and Disagreements with Accountants on Accounting and
                Financial Disclosure
            
            
            14Item
                8A. Controls and Procedures
            
            
            14Item
                8B. Other Information
            
            
            14**PART
                III**Item
                9. Directors, Executive Officers, Promoters and Control
                Persons;Compliance
                With Section 16(a) of the Exchange Act
            
            
            15Item
                10. Executive Compensation
            
            
            17Item
                11. Security Ownership of Certain Beneficial Owners and
                Managementand Related Stockholder Matters
            
            
            21Item
                12. Certain Relationship and Related Transactions
            
            
            23Item
                13. Exhibits
            
            
            24Item
                14. Principal Accountant Fees and Services
            
            
            25**SIGNATURES**
            
            
            27










**PART
      I**





**Item
      1. Description of Business.**





**Organizational
      History**





On
      July
      7, 2004, pursuant to a Share Exchange Agreement entered into as of April 21,
      2004, the Company acquired Phantom Fiber Corporation, a Canadian corporation
      ( ***“Phantom
      Fiber Canada”*** ),
      and
      its wholly owned subsidiary, Phantom Fiber Inc., also a Canadian corporation.
      Pursuant to the Share Exchange Agreement, the Company issued 137,410,735 shares
      of common stock (before giving effect to a one-for 20 reverse stock split)
      to
      the shareholders of Phantom Fiber Canada and 30,000,000 shares of common stock
      and warrants to purchase 15,000,000 shares of common stock (before giving effect
      to a one-for 20 reverse stock split) to debenture holders of Phantom Fiber
      Canada in exchange for all of the issued and outstanding shares of capital
      stock
      of Phantom Fiber Canada and subordinated convertible debentures of Phantom
      Fiber
      Canada.





The
      Company conducts its business through its wholly owned subsidiaries in Canada,
      being Phantom Fiber Corporation and Phantom Fiber Inc. Phantom Fiber Inc. was
      incorporated in the province of Ontario in February, 2002. Throughout this
      report, references to “Phantom Fiber,” the “Company,” “we,” “us,” and “our”
refer to Phantom Fiber Corporation together with its wholly owned
      subsidiaries.





**Overview**





Phantom
      Fiber is a developer of wireless software applications and mobile solutions
      that
      empower enterprises with high-performance functionality on today’s mobile
      devices and global communication networks. The Company has developed a wireless
      platform and supporting software developer kit that extends the rich multimedia
      content and user experience of existing Internet web sites securely and
      instantly to abroad range of PDA’s and mobile phones. While applications based
      on this platform can be applied to any enterprise requiring a mobile solution
      we
      have been most successful with clients that require speed and a rich user
      experience in their mobile solutions. Potential applications include remote
      monitoring of facilities, stock research, real time quoting and transacting,
      logistics and distribution, health care (including real time distribution of
      secure patient information), gaming and entertainment, and live streaming video.





Phantom
      Fiber derives revenue through the sale of its proprietary software and custom
      integration services. The Company’s business model generates initial revenue
      from integration and customization services and recurring revenue from
      usage-based licensing. The Company combines a low implementation cost with
      a
      rapid deployment strategy using reusable software objects to reduce initial
      purchase barriers. Once deployed, the platform utilizes Phantom Fiber’s
      proprietary Smart StreamingTM data transmission technique to deliver high-speed
      client side performance that intuitively adapts to device and network
      properties. Information is securely encased and delivered with complete
      end-to-end encryption on a variety of handset operating systems including Java,
      Palm, SmartPhone, Research In Motion, i-Mode, Symbian and Windows CE
      platforms.





With
      the
      ability to offer rich graphics and high transaction speed, the Company’s initial
      market strategy was to enter into the e-gaming market. This industry was
      attractive since it is a rapid adopter of new enabling technologies and
      currently has no single significant provider of wireless solutions. The latter
      half of 2006, the Company began defining its plans to extend its marketing
      strategy into the financial and enterprise software markets. It had also begun
      expanding on its previously developed video streaming software with the intent
      of expanding its market penetration into the security monitoring and
      surveillance markets.





Generally,
      the Company charges a one-time integration fee to implement and customize the
      product to match the functionality of the client’s Internet offerings. For
      clients with a potential client base or reach in excess of 10,000 users in
      which
      a service charge or transaction fee exists, Phantom Fiber also participates
      in
      that revenue stream via a revenue sharing or monthly subscription type
      commercial arrangement.




1


**Our
      Wireless Platform**





The
      Company’s wireless platform is built using a building block or object approach.
      The technical architecture was chosen to protect performance and ensure
      scalability on the device. Mobile devices commercially available at this time
      do
      not yet have the storage, memory, and computing power of a personal computer.
      Phantom Fiber created this object oriented programming structure and framework
      to ensure functional autonomy of its platform. Some of the primary features
      of
      the platform are listed below:





***Enhanced
      user experience:*** The
      wireless framework offers a rich graphic experience without compromising on
      performance. This is the primary reason the gaming sector has embraced the
      technology. The visual presentation is available today and can be deployed
      on
      existing wireless data networks.





***Cross-platform
      & Network compatibility:*** **** The
      client-side software supports Windows/CE, Palm, Symbian, i-Mode, Blackberry,
      SmartPhone and Java-enabled phones (J2ME). This cross-platform compatibility
      eliminates the need to recompile the application for devices running different
      operating systems, using different devices and running on different network
      protocols. The solution is network carrier independent. Therefore solutions
      can
      be deployed and run globally with various network providers without any change
      to the software. Being device and network agnostic is a key marketing feature
      for allowing the product to run on multiple wireless network carriers, device
      manufacturers, and content providers. Phantom Fiber currently supports over
      1,400 different device types and runs on over 600 network carriers around the
      world.





***Performance:*** Current
      browser based solutions format the presentation prior to transmission and then
      send the entire screen layout across the wireless network to the wireless
      device. The result is long delays between responses and inquiries. With Phantom
      Fiber’s data communication technology and client-side software, the client can
      deliver Internet type speed across networks. This approach puts less demand
      on
      the server and network and allows the Company to provide the user with improved
      performance and better graphic presentation.




Some
      of
      the other features inherent to the framework include a number of unique and
      proprietary functions such as:




·
            *Secure
                State Management*-
                Maintains a checkpoint connection in “no signal” areas. Should a user lose
                signal for a period of time, their mobile device will auto refresh
                once a
                connection is re-established. This function takes place without any
                action
                required by the user.




·
            *Security*-
                The communication component of the Company’s software uniquely delivers an
                end-to-end encrypted secure solution. By eliminating reliance on
                the
                browser and the network gateway, there is an increase in both security
                and
                performance while simplifying the technical
                implementation.




·
            *SmartStreamTM*-
                Communications are handled using compression to provide landline
                Internet
                speed on today’s wireless devices. SmartStream also queues and prioritizes
                transmissions to assure the quality of user experience and application
                responsiveness.




·
            *Client
                Libraries*-
                Presentation graphics and animation are stored in local device libraries
                eliminating redundant delivery and creating a vivid user experience
                without compromising performance.




·
            *Store
                & Forward*-
                Users without wireless connectivity can use Phantom Fiber’s software
                through PC connections and their device cradle. The software incorporates
                an encrypted database on the device. Users can experience the same
                functionality whether or not they have a current internet connection.
                This
                also allows clients to use the device in shielded or poorly serviced
                cellular zones.




**Market
      Strategy**




In
      implementing its initial strategy, Phantom Fiber established the following
      criteria:




·
            Users
                were likely to be “early adopters” of wireless technologies;




·
            There
                was no dominant competition apparent to Phantom Fiber;




·
            The
                Company could implement a stable recurring revenue model;
                and




·
            Focus
                on consumer based applications that would take advantage of the
                portability of the product.




2




Based
      on
      these factors, the Company initially targeted the entertainment and gaming
      markets. With a clear and dominant presence in this vertical market over the
      past year the platform and its feature suite has become more robust. These
      features are now being mapped to the characteristics of other vertical markets
      such as the financial services sector, the video delivery and surveillance
      sector and the large enterprise application markets with emphasis on transaction
      support and processing and a requirement to support a wide variety of handset
      types.





**Competition**





The
      wireless applications market is highly competitive and characterized by frequent
      product introductions, evolving wireless platforms and new technologies. As
      demand for applications continues to increase, Phantom Fiber expects new
      competitors to enter the market and existing competitors to allocate more
      resources to develop and market applications. As a result, competition in the
      wireless applications market will intensify.





The
      Company divides the current and potential competition in the wireless
      applications market into three groups: focused providers, gaming specific
      providers and systems integrators. Each of these groups is described
      below.





***Focused
      Providers:*** These
      are companies that have built a wireless set of tools to address the needs
      of a
      specific vertical market. Currently most of the competition in this sector
      consists of micro-browser based products with the majority of their revenue
      derived from infrastructure and ongoing professional services. For these
      companies to adapt their offering to next generation devices would require
      re-architecting the way they conduct business risking a loss of the
      infrastructure and professional services components of their business. They
      have, to date, focused on financial institutions or carriers for market
      penetration. These competitors include Aligo (who have been recently purchased),
      Infowave, 724, and Sybase, among others.





***Gaming
      Specific Providers:*** There
      are a number of SMS and WML game providers in today’s market, including Phantom
      EFX, Zone4Play, TIM.WE, Jamdat, and Airborne Entertainment. The Company believes
      these gaming specific providers have low penetration into the real time gaming
      environment due to risk of security breaches and latency issues inherent to
      SMS
      and WAP as well as technical restrictions that exist on the handheld devices.
      Further, these companies often sell their own games and content thereby
      competing with the existing internet gaming software providers who prefer to
      offer their own games. Phantom Fiber does not produce content including games
      preferring to facilitate the existing ones. In this aspect Phantom Fiber sees
      no
      direct competitors.





***Systems
      Integrators:*** Custom
      solutions will still consume some of the wireless applications market share
      as
      large organizations continually try to build ground-up solutions for each
      client, under the assumption that wireless is easy and can be built without
      the
      aid of tools and wireless platforms. These companies include IBM, Bearing Point,
      EDS, Accenture, CGI and BEA Systems. Phantom Fiber plans for some systems
      integrator companies to become future clients and value added resellers of
      its
      suite of products.





With
      any
      growing and expanding market new competitors will emerge. The Company believes
      this is particularly true in the wireless market due to the prevalence of open
      standards and trend towards the consolidation of computing power with telephone
      handsets.





**Government
      Regulation**





Together
      with our gaming and entertainment licensees, the Company is subject to various
      domestic and foreign laws applicable in the jurisdictions in which each company
      operates. At the present time, the Company’s gaming related software clients
      sell directly to licensees that hold government licenses to operate Internet
      gaming sites. Gaming regulations are based on policies that are concerned with:
      (i) the prevention of unsavory or unsuitable persons from having a direct or
      indirect involvement with gaming; (ii) the establishment and maintenance of
      responsible accounting practices and procedures; (iii) the maintenance of
      effective controls over the financial practices of licensees, including the
      establishment of minimum procedures for internal fiscal affairs and the
      safeguarding of assets and revenues, providing reliable record keeping and
      requiring the filing of periodic reports with the governing jurisdictions;
      (iv)
      the prevention of cheating and fraudulent practices; and (v) the provision
      of a
      source of government revenue through taxation and licensing fees.




3




Some
      jurisdictions have introduced regulations attempting to restrict or prohibit
      Internet gaming, while other jurisdictions have taken the position that Internet
      gaming is legal and/or have adopted or are in the process of considering
      legislation to regulate Internet gaming. For example, the United Kingdom intends
      to establish a regulated market for online gaming. The Isle of Man and Alderney
      - both part of the British Isles - already have fully regulated environments
      for
      Internet gaming, based on high standards consistent with land-based gaming.
      Some
      European countries, including Italy, Germany and Holland where there are
      state-owned monopolies, are taking action aimed at banning foreign online gaming
      operators but facing resistance as it is being viewed as unfair foreign trade
      policies. Such actions by these European Union member states are in contrast
      with a favorably viewed ruling from the European Court of Justice and have
      prompted the European Commission to look at creating new legislation that could
      harmonize online gaming within the European Union, in line with the European
      Commission’s goal to encourage a free and open cross-border market.




Since
      companies and consumers involved in Internet gaming are located around the
      globe, including Phantom Fiber’s clients’ licensees and their players, there is
      uncertainty regarding which government has authority to regulate or legislate
      the industry. In recent months the United States has restricted internet
      wagering. It has passed legislation in October, 2006 which focuses on internet
      wagering activity in a play for real money mode. Online lotteries, fantasy
      wagering, and horse racing remains legal in most States. This had an indirect
      affect on Phantom Fiber. Although Phantom Fiber does not directly engage site
      operators, or have mobile games, content, payment processing or other gaming
      related technology; the new legislation had an overall global affect on the
      market. Although it is premature to fully assess the impact this will have
      on
      the global gaming sector, we do not feel this will have a lingering affect
      on
      Phantom Fiber’s operations and financial results. However, in direct response to
      this new legislation, Phantom Fiber has redirected a significant amount of
      its
      sales and marketing efforts to the European and United Kingdom markets. The
      recent passing of the gaming legislation may also result in the adoption of
      additional new laws or regulations relating to mobile, or particular mobile
      applications or interpretations of existing laws, which could decrease the
      present growth in use of mobile applications, decrease the demand for the
      Company’s products and services, increase its cost of doing business or could
      otherwise have a material adverse affect on its business, revenues, operating
      results and financial condition.




**Employees**





As
      of
      March 31, 2007 the Company had 27 full time employees and no part time
      employees. The Company has made it a priority to build and maintain a good
      working environment for employees. Turnover rates have been low and employees
      are active in referring their colleagues to the Company. The Company considers
      relations with its employees to be good. The overall number of resources
      employed by Phantom Fiber remained unchanged in 2006 as compared to
      2005.




**Item
      2. Description of Property.**





The
      Company maintains its corporate executive office at 144 Front Street, Suite
      580,
      Toronto, Ontario, Canada M5J 2L7. The offices are leased and are comprised
      of
      4,788 square feet, with a monthly rental of $3,990, expiring in April 2009.
      The
      company maintains a sales office in Costa Rica with a monthly rental of $3,000,
      expiring October 2009. The company also maintains an office in New York and
      pays
      a monthly fee of $285.





**Item
      3. Legal Proceedings.**





The
      Company is not a party to any pending legal proceeding, nor is its property
      the
      subject of a pending legal proceeding, that is not in the ordinary course of
      business or otherwise material to the financial condition of its business.
      None
      of the Company’s directors, officers or affiliates is involved in a proceeding
      adverse to its business or has a material interest adverse to its
      business.





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





No
      matters were submitted for a vote during 2006.




4





**PART
      II**





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





**Market
      Information**





The
      Company’s common stock is currently quoted on the OTC Bulletin Board under the
      symbol “PHFB.” For the periods indicated, the following table sets forth the
      high and low bid prices per share of common stock. These prices represent
      inter-dealer quotations without retail markup, markdown, or commission and
      may
      not necessarily represent actual transactions.





Fiscal
                2007
            
            Fiscal
                2006
            
            Fiscal
                2005Quarter
                Ended
            
            High
            
            Low
            
            High
            
            Low
            
            High
            
            LowMarch
                30
            
            $
            0.27
            
            $
            0.27
            
            $
            0.70
            
            $
            0.45
            
            $
            2.00*
            
            $
            0.80*June
                30
            
            
            —
            
            
            —
            
            $
            0.62
            
            $
            0.35
            
            $
            1.45
            
            $
            0.60*September
                30
            
            
            —
            
            
            —
            
            $
            0.58
            
            $
            0.30
            
            $
            1.25
            
            $
            0.59December
                31
            
            
            —
            
            
            —
            
            $
            0.47
            
            $
            0.20
            
            $
            0.73
            
            $
            0.45





*Prices
      adjusted to reflect a one-for-20 reverse stock split given effect by the OTC
      Bulletin Board on May 5, 2005.





**Holders**





As
      of
      March 31, 2007, shares of common stock were held by approximately 444
      stockholders of record. The number of record holders was determined from the
      records of the Company’s transfer agent and does not include beneficial owners’
common stocks whose shares are held in the names of various securities brokers,
      dealers and registered clearing agencies. The Company’s transfer agent is
      PacWest Transfer, LLC.





**Dividends**





Phantom
      Fiber has not declared any dividends to date. The Company has no present
      intention of paying any cash dividends on its common stock in the foreseeable
      future, as any earnings will be used to generate growth. The decision on the
      payment of dividends, in the future, rests within the discretion of the Board
      of
      Directors and will depend, among other things, upon earnings, capital
      requirements and financial condition, as well as other relevant factors. There
      are no restrictions in the Company’s certificate of incorporation or bylaws that
      restrict it from declaring dividends.




5


**Recent
      Sales of Unregistered Securities**





During
      the fiscal year ended December 31, 2006 and the quarter ended March 31, 2007
      Phantom Fiber issued the below securities without registration under the
      Securities Act of 1933, as amended (the “Securities Act”).





All
      of
      the below unregistered issuances of securities were made pursuant to the
      exemptions from registration requirements provided by Section 4(2) of the
      Securities Act and/or Regulation D, promulgated thereunder. Except as expressly
      set forth below the individuals and entities to which the Company issued
      securities are unaffiliated with it. For each of such sales, no advertising
      or
      general solicitation was employed in offering the securities. The offerings
      and
      sales were made to a limited number of persons, all of whom were accredited
      investors, business associates of the Company or its executive officers, and
      transfer was restricted by it in accordance with the requirements of the
      Securities Act. For each transaction exempt pursuant to Regulation D, each
      of
      the below security holders who were not Phantom Fiber executive officers
      represented that they are accredited and sophisticated investors, that they
      are
      capable of analyzing the merits and risks of their investment, and that they
      understand the speculative nature of their investment. Furthermore, all of
      the
      below-referenced persons had access to the Company’s Securities and Exchange
      Commission filings.





On
      January 9, 2006, the Company sold (a) $3,500,000 principal amount of senior
      convertible notes, and (b) warrants to purchase 7,000,000 shares of common
      stock, to 16 accredited investors. Participants in a private placement which
      closed on December 8, 2005 for gross proceeds of $858,000 exchanged the
      securities they previously purchased for an investment in the senior convertible
      notes and warrants based on the dollar amount of their prior investment,
      bringing the total gross proceeds from the transactions to $3,500,000. The
      senior convertible notes bear interest at 1% per annum payable semi-annually.
      Any overdue interest payments will be calculated at 14% per annum for the period
      in question. The Company has accrued $21,065 representing the 1% interest due
      and $173,826 for overdue interest at 14% per annum as of December 31, 2006.
      The
      notes mature two years from the date of issuance and are convertible into shares
      of common stock at the investors’ option at $0.50 per share, subject to
      adjustment. The warrants are exercisable until three years from the date of
      issuance. Half of the warrants are exercisable at a purchase price of $1.50
      per
      share and the other half of the warrants are exercisable at a purchase price
      of
      $0.56 per share. The investors may exercise the warrants on a cashless basis
      if
      the shares of common stock underlying the warrants are not then registered
      pursuant to an effective registration statement. This transaction was exempt
      from registration requirement pursuant to Section 4(2) of the Securities Act
      and
      Rule 506 promulgated thereunder.





Oberon
      Securities, LLC acted as placement agent in connection with the sale of
      $2,642,000 principal amount of the senior convertible notes and related warrants
      on January 9, 2006 and was paid $241,730 cash compensation and issued 483,460
      non-assignable compensation warrants exercisable until three years after the
      date of issuance, with one-half of such compensation warrants entitling the
      holder to purchase shares of common stock at $1.50 per share and the other
      half
      of the compensation warrants entitling the holder to purchase shares of common
      stock at a purchase price of $0.56 per share. The Company also granted other
      placement agents and a lawyer in connection with the sale of $858,000 principal
      amount of the senior convertible notes and related warrants compensation in
      the
      form of 72,000 restricted shares of common stock valued at $43,200. These
      issuances were exempt from registration requirement pursuant to Section 4(2)
      of
      the Securities Act.





In
      February and March, 2006, the Company issued 632,043 restricted common shares
      for the settlement of professional services, accrued payroll expenses and
      prepaid services. These services included 61,593 restricted common shares issued
      on February 17, 2006 for in-house accounting services, 25,000 restricted common
      shares were issued on March 27, 2006 for management consulting fees, 500,000
      restricted common shares were issued for accrued employee bonuses to the CEO
      for
      milestones met through 2004 and 2005, and 45,450 restricted common shares were
      issued on March 13, 2006 for public document filing services. These shares
      were
      valued at the fair market value on the date of grant. A total of $358,141 was
      charged to operations with a corresponding credit to equity.





On
      March
      27, 2006, the Company issued 500,000 restricted common shares to the CEO in
      fulfillment of a bonus stemming from previous efforts. These shares were valued
      at the fair market value of $0.53 and were charged to operations with a
      corresponding credit to equity.




6




On
      February 17, 2006 a previous employee exercised his option agreement to purchase
      20,625 restricted common shares which had previously vested. A total of $6,394
      was received with a corresponding credit to equity.





In
      March,
      2006, as part of an agreement for public relations services, investor relations
      services and document filing services the Company issued warrants to purchase
      500,000 restricted common shares. The warrants which were valued at $93,400,
      range in exercise prices from $0.56 to $2.00 and expire in 3 years.





In
      March,
      2006, as part of its agreement for the sale of its securities in a private
      placement transaction, the


Company
      issued warrants to purchase 483,460 restricted common shares to the placement
      agent. The value of the underlying shares were recorded as deferred costs
      attributable to the private placement transaction and the warrants were valued
      at $187,719. The warrants are exercisable over 3 years and the exercise price
      ranges from $0.56 to $1.50.





On
      June
      22, 2006, the Company issued 72,000 restricted shares to a placement agent
      in
      connection with the sale of $858,000 principal amount of the senior convertible
      notes and related warrants. See note 7, Senior Convertible Notes, for further
      information.




In
      November 2006 the company issued 899,000 restricted shares to senior convertible
      debt holders who exercised their right to convert to common shares at $0.50
      per
      share.





In
      December 2006 as part of an agreement for public relations services valued
      at
      $90,000, the company issued 600,572 restricted shares.




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





**Forward-Looking
      Statements**





Certain
      matters discussed in this Quarterly Report may constitute forward-looking
      statements within the meaning of the Private Securities Litigation Reform Act
      of
      1995 and as such may involve risks and uncertainties. These forward-looking
      statements relate to, among other things, expectations of the business
      environment in which the Company operates, projections of future performance,
      perceived opportunities in the market and statements regarding the Company's
      goals. The Company's actual results, performance, or achievements expressed
      or
      implied in such forward-looking statements may differ.





**Current
      Business and Outlook**





Phantom
      Fiber provides wireless technology products and services that allow users to
      experience internet-like graphics and internet-like speed in an end-to-end
      highly secure solution for multiple mobile platforms. The Company’s customers
      include cellular network carriers, and several online gaming, horse racing,
      fixed odd game providers and sports book software companies. The focus for
      the
      past year has been on the gaming and entertainment sector. These clients include
      Golden Palace, Real-Time Gaming, WagerWorks, Interactive Gaming and Wagering,
      Digital Gaming Solutions, Kiron Interactive, Bet Options, Tribeca Tables, GTS,
      Orbis, CaribSports, IQ-Ludorum, and Parlay Entertainment. The Company also
      recently signed Finsoft PLC and Bid Nation Ltd. both of which are UK based
      companies, which broadens its European exposure and further expands its product
      offering both geographically and functionally. In the past year the Company
      successfully deployed Excapsa’s Poker software for their largest client
      UltimateBet Poker. This was its first production release of an integrated
      multi-user poker product. Similar to other agreements, these agreements are
      multi-year and include an ongoing revenue sharing model. ** The
      Company also has clients and channel partners in the financial and mobile
      payments vertical (such as FireOne, Citadel, and Navaho Networks), logistics
      and
      distribution software providers, and the security and remote-monitoring
      industries.




Phantom
      Fiber’s licensing models are determined by customers that can sustain a client
      base greater then 1,000 mobile users. In such cases we typically enter into
      exclusive multi-year, revenue-sharing agreements, under which they use Phantom
      Fiber’s technology to offer services or functions such as games, content or
      various other features with the ability to transact to their existing data
      servers. The subscribers are charged a monthly user fee or percentage of the
      revenues generated from those clients. Phantom Fiber does not produce or
      distribute any game related or wagering software or content, it strictly
      provides a mobile transport layer that delivers encrypted packets over the
      cellular networks on behalf of a hosting client. Phantom Fiber remains a
      wireless transaction enablement company allowing clients to extend functionality
      to mobile devices such as cellular phones. Phantom Fiber has no plans of
      entering the wagering or game related market.




7




Over
      the
      past 12 months Phantom Fiber continued to strengthen its core functions such
      as
      increasing performance, simplifying usage, expanding its device coverage to
      over
      1,400 device types, and providing a more robust server architecture to allow
      clients to remotely monitor the performance and condition of the platform to
      ensure it remains up and running at all times. The Company also expanded its
      platform functionality with stronger video streaming technology and other
      analytical data to further differentiate its offering from any competition.
      It
      is the Company’s goal for 2007 to exploit these key technical differentiators
      and secure a larger market share in the gaming sector and also begin penetrating
      other markets including remote monitoring and video surveillance and the
      financial sector.




The
      Company’s stated goal for this year remains to deploy the backlog of sites it
      has amassed through its existing contracts and to work much closer with its
      partners in assisting them in the marketing of a mobile product. Each client
      signed usually represents several operators or sites who license our partners
      software. Therefore, each signed partnership agreement requires Phantom Fiber
      to
      deploy a number of sites which make up the companies backlog. In order to
      address this backlog the Company focused on introducing methodologies and
      product constructs geared towards more quickly producing brands for the
      underlying operators. It has also introduced several “ease of use” functions
      within the product to provide a more simple experience to the end user, again
      with the intent of increasing adoption.




These
      financial statements have been prepared on the going concern basis, which
      assumes the realization of assets and liquidation of liabilities in the normal
      course of business, notwithstanding the continuing operating losses and the
      deficit of $8,126,810 as at December 31, 2006. These circumstances raise
      substantial doubt about the Company’s ability to continue as a going concern
      without additional capital being made available. Management recognizes this
      and
      is currently going through the process of securing additional capital to allow
      the company to continue operations unhindered. Management’s efforts have also
      been directed towards the development and implementation of a plan to generate
      sufficient ongoing revenues to cover all of its present and future costs and
      expenses.




In
      early
      2006 the Company successfully completed a $3.5M convertible debt financing.
      The
      use of these funds has been applied to expand our geographic reach and
      increasing the depth of our technical and sales teams. The Company also
      successfully completed the registration of the underlying shares of common
      stock
      from this financing. Since that time the Company has begun executing on those
      goals. Over the past year Phantom has opened offices in New York and in San
      Jose, Costa Rica. The resources in Costa Rica work closely with several of
      the
      clients that are based out of this location. It is the Company’s intention to
      continue this expansion into the European market, specifically London, England.
      Over the past year the Company filed for a Canadian Scientific Research and
      Experimental Development grant from the Canadian Government based on the
      uniqueness of the product’s technical features. These grants are awarded to
      companies for the advancement of science or technology beyond the scope of
      current commercially available products. Due to the unique and proprietary
      technical advancements Phantom Fiber has developed in mobile transaction
      enablement it has received these grants.




**Results
      of operations**




In
      fiscal
      2006 the operating loss, before other income and expenses, increased by $980,995
      to $3,049,175 from $2,068,180 in fiscal 2005. After the net impact of other
      income and expenses the net loss for the fiscal year ended December 31, 2006
      was
      $2,904,936 ($0.19 per share) compared to a net loss of $2,725,200 ($0.20 per
      share) for the same period in the preceding year an increase of $179,736.





**Revenue**





Total
      revenue increased by $84,315 from $224,956 for the year ended December 31,
      2005
      to $309,271 for the year ended December 31, 2006, an increase of 37%.
      Professional services revenue increased by $49,956 from $105,701 in fiscal
      2005
      to $155,657 in fiscal 2006.




8





User
      fees
      and royalties are based on number of users and are recognized monthly. User
      fees
      and royalties increased by $34,359 from $119,255 in 2005 to $153,614 in 2006.




**Operating
      expenses**





Total
      operating expenses increased $1,065,310 from $2,293,136 for the year ended
      December 31, 2005 to $3,358,446 for the year ended December 31, 2006, an
      increase of 46%. Operating expenses are grouped into Research and Development,
      Sales and Marketing and General and Administrative. The change in each of these
      groupings is described below:





**Research
      and development**





The
      total
      research and development costs increased by $147,183 to $1,080,682 in 2006
      from
      $933,499 in the prior year. R&D salaries and benefits paid to develop the
      product and assist in implementation increased from $1,051,486 in 2005 to
      $1,315,024 in 2006 an increase of $263,538 (25%). The Company added 2 people
      in
      2006. This increase reflects the need for resources to continue to extend the
      capability of the product and to support the increased in product development
      activities and customer deployments. Employees were granted options valued
      at
      $81,155 during the year. Annual salary increases, new employees and the timing
      during the year of staff departures and arrivals account for the balance of
      the
      increase of approximately $220,800. Other R&D expenses include software
      licenses, phone usage and other miscellaneous items. These costs decreased
      from
      $11,585 in fiscal 2005 to $11,381 in fiscal 2006. The increase in salaries
      and
      benefits is offset by an increase in research and development tax credits from
      $129,572 in 2005 to $245,723 in 2006 an increase of $116,151 and an allocation
      of CEO’s salary to general and administration expenses which increased from
      $105,638 in 2005 to $177,800 in 2006, an increase of $72,162.




**Sales
      and marketing**





Total
      sales and marketing expenses increased by $500,384 to $853,000 in the year
      to
      date of fiscal 2006 from $352,616 in the previous year. The sales and marketing
      salaries increased by $120,079 from $154,360 in 2005 to $274,439 in 2006.
      Employee options accounted for $30,280 of this increase. The Company had four
      people in the sales and marketing department as of December 31, 2006 versus
      three in 2005. The additional staff account for the remaining salary increase
      for the period. The Company is currently developing its marketing strategy
      that
      will determine how much advertising and promotion spending will take place
      in
      subsequent periods. Spending on public relations, investor relations and
      advertising increased in 2006 to $389,517 from $100,139 in 2005. The Company
      signed an agreement with two firms during the year to assist in public relations
      and investor relations. The firms received stock compensation with a fair value
      of $80,300 as a signing bonus and $159,000 for services rendered. Travel and
      entertainment expenses increased from $47,290 in 2005 to $119,650 in 2006 an
      increase of $72,360 due to travel required to set up the Costa Rican office,
      attendance at the Costa Rican trade show and incremental sales and marketing
      expenses incurred by the new staff. Consulting expenses decreased by $32,633
      to
      $24,793 in 2006 from $57,426 in 2005. Since additional sales staff were hired
      there was less need for outside services. The Company also recognized $44,601
      in
      bad debt expenses for 2006 versus $19,807 in 2005. The previous year’s expense
      was reflected in general and administrative expenses.




**General
      and administrative expenses**





The
      Company’s general and administrative expenses increased to $1,424,764 for the
      year ended December 31, 2006 from $1,007,021 for the prior year, an increase
      of
      $417,743. Administrative salaries and benefits increased from $532,245 in 2005
      to $695,587 in 2006 an increase of $163,342, as a result of employee options
      valued at $53,390, bonuses of $265,000 in 2006 versus $270,000 in 2005, an
      allocation of $177,800 of the CEO’s salary versus $144,000 in the prior year and
      an increase in staff from one to three, accounting for the remaining salary
      increase. Accounting fees increased $109,533 year to date in 2006 as a result
      of
      a change in auditors and additional resources required to complete first and
      second quarters 2006. Consulting fees decreased $17,706 from $7,885 in 2005
      to
      ($9,821) in 2006 as a result of a $20,000 contract which was not fulfilled
      and
      the Company’s stock originally issued in payment were returned. The occupancy
      costs increased by $14,987 from $90,752 in 2005 to $105,739 in 2006 due to
      increases in monthly rent. The Company also increased its insurance coverage
      including a Directors and Officers insurance package in the amount of $32,224
      which had never previously been in place. The Company incurred legal and other
      professional fees of $154,930 during 2006, an increase of $113,260 over 2005.
      This increase is due to consulting work on tax returns and other legal work
      required for SEC filings.




9





**Other
      income and expenses**




The
      Company sold marketable securities in the second quarter of the current year
      and
      recorded a loss of $19,014. During 2005 the company sold marketable securities
      which resulted in a loss of $588,573. In the first quarter of 2006 the Company
      issued shares to pay for accounts payable that had a market value in excess
      of
      the outstanding balances. The excess value of $32,880 has been recorded as
      a
      loss on settlement. This loss was offset by gains of $68,447 recognized on
      the
      settlement of accounts payables as a result of favorable negotiations. The
      Company repaid a number of interest bearing obligations during fiscal 2005
      which
      amounted to $121,032. During 2006 the Company issued senior convertible debt
      and
      as a result of exercising the conversion feature, interest expense in the amount
      of $442,009 was recognized. An additional $115,299 of interest on accretion
      of
      senior convertible debt was recognized for the period in which the debt remained
      outstanding. The interest payable on this debt also accounted for $198,477
      of
      interest expense for the current year. The Company recognized a net gain for
      change on value of $1,182,776 related to the derivative instruments associated
      with the convertible debt issued by the Company. The financing costs associated
      with the senior convertible debt have been deferred and are being amortized
      over
      24 months, the life of the instrument and results in amortization expense of
      $313,387 for the current year.




**Financial
      Condition**





Total
      assets increased $70,238 from $719,859 as at December 31, 2005 to $790,097
      as at
      December 31, 2006:




·
            Cash
                decreased by $239,546 due to payment of normal
                expenses.·
            Accounts
                receivable net of allowance for doubtful accounts, decreased by $32,917
                due to and the receipt of $57,942 of the Company’s stock returned in
                payment of outstanding receivables, the increase in allowance for
                doubtful
                accounts of $20,845, the write off of uncollectible accounts of $7,530,
                offset by an increase in customer receivables of
                $50,463.·
            Marketable
                securities decreased by $15,499 due to the addition of 350,000 shares
                of
                Midland International reduced by a mark to market loss of $26,522
                on those
                shares and the sale of Wireless Age shares for $8,000.·
            Investment
                tax credits receivable increased by $241,686 from additional investment
                tax credits accrued for the current year and adjustment to reflect
                shortfall of previous years.·
            Deferred
                financing costs increased by $149,612 comprised of legal fees of
                $58,942,
                corporate finance fees of $216,338 and warrants issued in connection
                with
                financing with a fair value of $187,719 less amortization of
                $313,387.·
            Property
                and equipment increased by $10,138 from additional computer equipment
                leased in the period.





Total
      liabilities increased $1,140,023 from $2,124,704 at December 31, 2005 to
      $3,264,727 as at December 31, 2006.   At December 31, 2006 accounts payable
      and accrued liabilities decreased by $352,306 to $787,185 at December 31, 2006
      from $1,139,491 at the end of the fiscal 2005. The factors impacting this change
      include:





·
            a
                reduction in trade accounts payable of $34,555 from December 31,
                2005 to
                December 31, 2006,·
            the
                payment in 2006 of a common stock bonus accrued to the CEO of $265,000
                in
                2005,·
            an
                increase of $81,563 in accruals for professional fees,·
            a
                write-down of accounts payable of $27,790 from a negotiated
                settlement,·
            a
                decrease in statutory liabilities for employee tax deductions and
                sales
                tax of $64,125 from December 31, 2005,·
            an
                decrease of $88,119 in accruals for vacation and general at December
                31,
                2006 compared to the prior year, and·
            an
                increase of $2,317,224 attributable to the accounting for derivative
                instruments relating to convertible notes and a corresponding decrease
                in
                securities subscriptions of
                $858,000.




10




In
      the
      first quarter of 2006 short term borrowings temporarily increased to
      approximately $100,000 as all short term debts were repaid in the first six
      months of 2006. The balance at December 31, 2005 of $45,171 decreased to zero
      at
      the end of June 30, 2006 and remains the same as of December 31, 2006. The
      obligation under capital leases increased by $777 from $30,079 at the end of
      fiscal 2005 to $30,856 at the end of December 2006 as the Company leased
      additional computer equipment offset by older leases which expired during the
      year. The Company issued senior convertible notes totaling $3,500,000 in the
      first quarter of 2006. Securities subscriptions of $858,000 received during
      December, 2005 were rolled into this note issue.




The
      consolidated financial statements of the Company are prepared in conformity
      with
      accounting principles generally accepted in the United States (“U.S. GAAP”),
      which require management to make estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenues and expenses during the reporting period. Some of the significant
      estimates required to be made by management include the fair value of common
      stock and common stock equivalents issued for services or in settlement of
      obligations. Actual results could differ from those estimates.




**Liquidity
      and Capital Resources**





The
      Company improved from a negative working capital of $669,152 at December 31,
      2005 to a negative working capital of $326,350 at December 31, 2006 representing
      an improvement of $342,802. The improvement was primarily the result of funds
      raised in an issue of senior convertible notes of $2,642,000 net of a reduction
      in accounts payable of $446,173 paid with common stock As of December 31, 2006,
      the Company had cash and cash equivalents of $29,864 compared with cash and
      cash
      equivalents of $269,410 at the end of the prior year.




For
      the
      year ended December 31, 2006, cash used in operating activities totaled
      $2,584,574, primarily as a result of operating losses. This amount compares
      to
      $1,513,922 used in operations in 2005. These losses were funded by an increase
      in financing activities of $2,307,304. The Company raised funds in an issuance
      of senior convertible notes of $2,642,000, a net decrease in short term
      borrowings of $45,171 and the proceeds from stock options of $6,394. These
      funds
      raised were offset by financing costs of $275,280 and capital lease payments
      of
      $20,639 during the year. During 2006 a short term investment was purchased
      for
      $516,293 which matured and the proceeds used to fund operations. During 2005
      the
      Company sold marketable securities for $860,065. During fiscal 2005 the Company
      generated $300,000 from the issuance of common stock and $858,000 from security
      subscriptions (which became senior convertible notes), offset by repayments
      on
      short term borrowings of $225,859 and repayment of capital lease obligations
      of
      $20,842.




**Subsequent
      Events**




In
      February 2007, the Company entered into an factoring agreement with a financing
      company to provide funds equal to 90% of the receivable due from the Canadian
      government related to tax credits generated from the Scientific Research and
      Experimental Development program. These funds which have been fully drawn down
      as of April 9, 2007 bear interest at a rate of 36.5% per annum and is secured
      by
      a promissory note, general security agreement over intangible and tangible
      assets, specific assignment over past, present and future tax credit claims,
      guarantee and postponement of claim.





In
      February 2007, the Company issued 80,000 unrestricted shares of common stock
      for
      services to be rendered during the next twelve months.




In
      March
      2007, the company issued 265,000 restricted shares to senior convertible debt
      holders who exercised their right to convert to common shares at $0.50 per
      share.




**Off-Balance
      Sheet Arrangements**





The
      Company does not have any off balance sheet arrangements that are reasonably
      likely to have a current or future effect on our financial condition, revenues,
      results of operations, liquidity or capital expenditures.




11


**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of results of operations and financial condition are
      based upon the consolidated financial statements, which have been prepared
      in
      accordance with U.S. GAAP. The preparation of these consolidated financial
      statements requires management to make estimates and judgments that affect
      the
      reported amounts of assets, liabilities, revenues and expenses, and related
      disclosure of contingent assets and liabilities. Management evaluates the
      estimates on an on-going basis, including those related to bad debts,
      inventories, investments, customer accounts, intangible assets, income taxes,
      and contingencies and litigation. Management bases its estimates on historical
      experience and on various other assumptions that they believe to be reasonable
      under the circumstances, the results of which form the basis for making
      judgments about the carrying values of assets and liabilities that are not
      readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions. Note 2 of the "Notes to
      Consolidated Financial Statements" of the Company’s annual audited Consolidated
      Financial Statements includes a summary of the significant accounting policies
      and methods used in the preparation of the consolidated financial statements.
      The following is a brief description of the more significant accounting policies
      and methods the Company uses.





**Investments**





The
      Company’s investment in marketable securities is classified as available for
      sale securities. Unrealized holding gains and losses are reported as a net
      amount in a separate component of shareholders’ equity until
      realized.





**Revenue
      recognition**





The
      Company recognizes software licensing revenues in accordance with all applicable
      accounting regulations, including the American Institute of Certified Public
      Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition”,
      SOP 98-9, "Modification of SOP 97-2 with respect to Certain Transactions" and
      Staff Accounting Bulletin (“SAB”) 104.




Following
      the requirements of these accounting pronouncements, the Company recognizes
      license revenues when all of the following conditions are met:




·
            there
                is a signed license agreement with the
                customer;




·
            the
                software product has been delivered to the
                customer;




·
            the
                amount of the fees to be paid by the customer is fixed or determinable;
                and




·
            collection
                of these fees is probable.




The
      Company generally negotiates formal license agreements with its customers.
      Each
      of the license agreements includes provisions for receipt of an up-front license
      fee and royalties. Generally, service providers pay these royalty fees either
      in
      the form of a one-time payment or as an on-going monthly fee. On-going royalties
      are recognized monthly based on the number of subscribers at month end. One-time
      royalties are recognized based on the number of new subscribers at the end
      of
      each period.





The
      Company may also negotiate license agreements that allow for the payment of
      the
      initial license fee to be made in future installments over a period of less
      than
      a year. Revenues recognized in advance of the installments being due are
      recorded as unbilled revenues in the balance sheet.





Maintenance
      and technical support revenues are recognized ratably over the applicable
      service period, which is usually one year. Revenues derived from professional
      services are recognized upon performance of the related services. Revenues
      derived from license agreements containing multiple deliverables, such as
      product licenses, maintenance and technical support and other services, are
      allocated among the various deliverables based on the fair value of each
      deliverable. Payments received from customers prior to the completion of
      services are recorded as unearned revenue.





12




**Recent
      Accounting Pronouncements Affecting The Company:**




SEC
      Staff Accounting Bulletin 108 (“SAB 108”), Considering the Effects of Prior Year
      Misstatements when Qualifying Misstatements in Current Year Financial
      Statements:





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
      "Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements." SAB 108 was issued in
      order
      to eliminate the diversity of practice surrounding how public companies quantify
      financial statement misstatements.





Traditionally,
      there have been two widely-recognized methods for quantifying the effects of
      financial statement misstatements: the “roll-over” method and the “iron curtain”
method. The roll-over method focuses primarily on the impact of a misstatement
      on the income statement—including the reversing effect of prior year
      misstatements—but its use can lead to the accumulation of misstatements in the
      balance sheet. The iron-curtain method, on the other hand, focuses primarily
      on
      the effect of correcting the period-end balance sheet with less emphasis on
      the
      reversing effects of prior year errors on the income statement.





In
      SAB
      108, the SEC staff established an approach that requires quantification of
      financial statement misstatements based on the effects of the misstatements
      on
      each of the company's financial statements and the related financial statement
      disclosures. This model is commonly referred to as a "dual approach" because
      it
      requires quantification of errors under both the iron curtain and the roll-over
      methods. SAB 108 permits existing public companies to initially apply its
      provisions either by (i) restating prior financial statements as if the "dual
      approach" had always been used or (ii) recording the cumulative effect of
      initially applying the "dual approach" as adjustments to the carrying values
      of
      assets and liabilities as of January 1, 2006 with an offsetting adjustment
      recorded to the opening balance of retained earnings.





Statement
      of Financial Accounting Standard 157, Fair Value Measurements (“SFAS
      157”):





On
      September 15, 2006, the Financial Accounting Standard Board issued a standard
      that provides enhanced guidance for using fair value to measure assets and
      liabilities. The standard applies whenever other standards require (or permit)
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value in any new circumstances. This Statement is effective
      for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. Earlier application is
      encouraged, provided that the reporting entity has not yet issued financial
      statements for that fiscal year, including financial statements for an interim
      period within that fiscal year. The Company will adopt this pronouncement
      effective January 1, 2008. We are currently evaluating the impact of adopting
      this pronouncement on our financial statements.




Financial
      Accounting Standards Board (FASB) Interpretation No. 48; Accounting for
      Uncertainty in Income Taxes (“FIN 48”)




In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109 (FIN 48), which provides clarification related to the process
      associated with accounting for uncertain tax positions recognized in
      consolidated financial statements. FIN 48 prescribes a more-likely-than-not
      threshold for financial statement recognition and measurement of a tax position
      taken, or expected to be taken, in a tax return. FIN 48 also provides guidance
      related to, among other things, classification, accounting for interest and
      penalties associated with tax positions, and disclosure requirements. We are
      required to adopt FIN 48 effective January 1, 2007, although early adoption
      is
      permitted. We are currently evaluating the impact of adopting FIN 48 on our
      consolidated financial statements.




13




FSP
      FAS 123(R)-5, Amendment of FASB Staff Position FAS 123(R)-1:




FSP
      FAS
      123(R)-5 was issued on October 10, 2006. The FSP provides that instruments
      that
      were originally issued as employee compensation and then modified, and that
      modification is made to the terms of the instrument solely to reflect an equity
      restructuring that occurs when the holders are no longer employees, no change
      in
      the recognition or the measurement (due to a change in classification) of those
      instruments will result if both of the following conditions are met: (a). There
      is no increase in fair value of the award (or the ratio of intrinsic value
      to
      the exercise price of the award is preserved, that is, the holder is made
      whole), or the antidilution provision is not added to the terms of the award
      in
      contemplation of an equity restructuring; and (b). All holders of the same
      class
      of equity instruments (for example, stock options) are treated in the same
      manner. The provisions in this FSP shall be applied in the first reporting
      period beginning after the date the FSP is posted to the FASB website. We will
      adopt this FSP from its effective date. We will evaluate whether the adoption
      will have any impact on our financial statements.




**Item
      7. Financial Statements.**





All
      financial information required by this Item is attached hereto at the end of
      this report beginning on page F-1 and is hereby incorporated by reference.





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





On
      July
      17, 2006, Phantom Fiber Corporation dismissed Mintz & Partners LLP as its
      principal independent accountant. Effective July 17, 2006, we engaged Lazar
      Levine & Felix, LLP as our new principal independent accountant. Our Board
      of Directors acting as our audit committee has approved the dismissal of Mintz
      & Partners LLP and the appointment of Lazar Levine & Felix, LLP as our
      new principal independent accountants.




From
      the
      date of Mintz & Partners LLP's appointment through the date of their
      dismissal on July 17, 2006, there were no disagreements between our company
      and
      Mintz & Partners LLP on any matter listed under Item 304 Section (a)(1)(iv)
      A to E of Regulation S-B, including accounting principles or practices,
      financial statement disclosure or auditing scope or procedure which, if not
      resolved to the satisfaction of Mintz & Partners LLP would have caused Mintz
& Partners LLP to make reference to the matter in its reports on our
      financial statements.





**Item
      8A.**  **Controls
      and Procedures.**





As
      of the
      end of the period covered by this report, the Company conducted an evaluation,
      under the supervision and with the participation of the Company’s chief
      executive officer and principal financial officer of its disclosure controls
      and
      procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
      Act). Based upon this evaluation, the Company’s chief executive officer and
      principal financial officer concluded that the disclosure controls and
      procedures are effective as of the end of the period covered by this report
      to
      ensure that information required to be disclosed by the Company in the reports
      that it files or submits under the Exchange Act is: (1) accumulated and
      communicated to management, including the Company’s chief executive officer and
      principal financial officer, as appropriate to allow timely decisions regarding
      required disclosure; and (2) recorded, processed, summarized and reported,
      within the time periods specified in the Commission's rules and forms. There
      was
      no change to the Company’s internal controls or in other factors that could
      affect these controls during the Company’s last fiscal quarter that has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.





**ITEM
      8B.**  **OTHER
      INFORMATION.**





None.




14


**PART
      III**





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





The
      members of the Company’s board of directors and executive officers, together
      with their respective ages and certain biographical information are set forth
      below. There are no family relationships among any of the directors or executive
      officers.


**Name**
              
              **Age**
              
              **Position**Jeffrey
                  T. Halloran
              
              45
              
              Chief
                  Executive Officer, President, Principal Financial Officer, Principal
                  Accounting Officer and ChairmanHerbert
                  C. Sears
              
              38
              
              Chief
                  Technology OfficerChris
                  Carmichael
              
              32
              
              DirectorShimon
                  Constante
              
              34
              
              DirectorKonstantine
                  (Gus) Lucas
              
              59
              
              DirectorStephen
                  Gesner
              
              51
              
              Director




Mr.
      Halloran became Chief Executive Officer, President and Chairman on January
      7,
      2002. Mr. Halloran assumed the positions of Principal Financial Officer and
      Principal Accounting Officer effective on January 1, 2005. From March 2001
      to
      November 2001, he was the Chief Executive Officer of Sona Innovations Inc.,
      a
      wireless software company. From March 1989 to February 2001, Mr. Halloran was
      the Chief Executive Officer and President of Relational Solutions Inc., a
      computer systems consulting firm. From August 1987 to March 1989, he was a
      Consulting Manager for Oracle Corporation providing database consulting
      services. Mr. Halloran graduated from St. Clair College in 1982 with a degree
      in
      business administration. He currently serves as a Director for the Council
      on
      Drug Abuse (“CODA”) in Toronto and is a member of the Board of Governors for
      Trafalgar Castle Girls School in Whitby, Ontario.




Mr.
      Sears
      has been Chief Technology Officer since January 2002. From November 2000 to
      December 2001, he was Vice President-Technology of Sona Innovations Inc.,
      engaged in software development. From May 1996 to October 2000, Mr. Sears was
      the Director of Technology of ANGOSS Software Corp. and was engaged in software
      development. From June 1992 to May 1996, he was a Senior Developer and
      programmer employed by CS Computing Services Inc. Mr. Sears graduated from
      DeVry
      Institute of Technology in 1989 with a degree in computer science.




Mr.
      Carmichael became a director in June 2006. He has been the Chief Financial
      Officer of GC-Global Capital Corp. since 2004 and has been the Chief Financial
      Officer, a Director, Chairman of the Audit Committee and a member of the
      Corporate Governance Committee of Global Development Resources, Inc. since
      2005.
      In addition, Mr. Carmichael has been a Director and Chairman of the Audit
      Committee of Bison Gold Exploration Inc. since 2004. Mr. Carmichael was the
      Chief Financial Officer of Global (GMPC) Holdings Inc. from 2003 through 2005
      and the Chief Financial Officer of A&E Capital Funding Inc. from 2004
      through 2005. From 2005 through 2006 Mr. Carmichael was a Director, Chairman
      of
      the Audit Committee, member of the Corporate Governance Committee and member
      of
      the Compensation Committee of VIQ Solutions Inc. During 2003, Mr. Carmichael
      was
      the Manager of Financial Reporting and Analysis of Prime Restaurants Royalty
      Income Fund. From 2001 through 2003, Mr. Carmichael was Vice President of
      Finance for Canadian Benefits Consulting Group. From 1997 through 2001, Mr.
      Carmichael was the manager of accounting for A&E Capital Funding Inc.,
      Bradstone Equity Partners, Inc. and Global (GMPC) Holdings Inc. Mr. Carmichael
      received a Bachelor of Arts in Administrative and Commercial Studies; Financial
      and Economic Stream in 1996 from the University of Western Ontario.




Mr.
      Constante became a director in November 2006. He is the Chief Executive Officer
      of mPortico, a private mobile distribution and marketing services provider,
      since the company was founded in December 2005. Prior to founding mPortico,
      from
      March 2003 until August 2005, Mr. Constante was the Head of Mobile Business
      Development at 888.com, an online entertainment company. Prior to that, from
      July 2000 until January 2002, Mr. Constante was the Head or Technology and
      Business Research at Aduva, a privately held technology company. Mr. Constante
      received a B.A. in Psychology in 1999 and an Executive MBA from Kellogg,
      Northwestern University in 2004. Mr. Constante also currently sits on the board
      of directors of Cidway Security, a privately held company.




15




Mr.
      Lucas
      became a director on February 13, 2006. Mr. Lucas currently serves as Executive
      Vice President, Warner Bros. Domestic Cable Distribution. Prior to his Warner
      Bros. employment, from September 1998 until April 2000, Mr. Lucas was a
      consultant to the media industry including cable networks and MGM Studios.
      Prior
      to that, from May 1995 to August 1998, Mr. Lucas was President of Programming
      for the Family Channel. Before joining the Family Channel, from August 1986
      to
      September 1993, Mr. Lucas was Executive Vice-President, Viacom Entertainment
      Group, and President, West Coast Operations and Viacom Productions. Prior to
      that, from March 1970 until July 1986, Mr. Lucas held several positions at
      ABC
      Entertainment, culminating in his position as Vice-President and assistant
      to
      the President of ABC Entertainment.




Mr.
      Gesner became a director on February 13, 2006. Mr. Gesner currently serves
      as
      the Chief Information Officer of Meridian Credit Union. Prior to such service,
      from May 2004 to March 2005, Mr. Gesner was the Vice President of Financial
      Services Marketing for TELUS Communications and from May 2003 to December 2003
      served as the CTO for Cap Gemini Ernst and Young Canada. Before that Mr. Gesner
      worked for 14 years with TD Bank Financial Group, beginning in January 1989
      as a
      consultant in the Cash Management Group and moving through various senior roles
      culminating in his position as Senior Vice President and Chief Technology
      Officer from March 2000 through November 2002. Mr. Gesner began his career
      with
      Ford Motor Company of Canada in September 1979 and held several positions in
      Finance, Treasury, Production Planning, and Industrial Relations through
      December 1988. Mr. Gesner holds an Honours BSc from York University (1977)
      and
      an M.B.A from the Schulich School of Business (1979). He is a member of the
      Technical Advisory Board of Kinitos Software (April 2003) as well as a member
      of
      the J.L. Albright III Venture Fund Advisory Board (August 2002). He is also
      on
      the Board of Directors for Smart Systems for Health Agency.




**Board
      of Directors**





At
      each
      annual meeting of stockholders, all of the Company’s directors are elected to
      serve from the time of election and qualification until the next annual meeting
      of stockholders following election. The exact number of directors is to be
      determined from time to time by resolution of the Board of Directors.





Each
      officer is elected by, and serves at the discretion of the Board of Directors.
      Each of the Company’s officers devotes his full time to our affairs.





**Audit
      Committee**





On
      March
      24, 2006 the Board of Directors established an Audit Committee to oversee and
      monitor the Company’s accounting and reporting processes and the audits of the
      Company’s financial statements. The Audit Committee is presently composed of two
      persons, including Mr. Stephen Gesner and Mr. Chris Carmichael. Mr. Gesner
      serves as Chairman of the Audit Committee. As of the date this report was filed
      with the SEC, the Board of Directors has not yet adopted an Audit Committee
      Charter and the Audit Committee has not held any meetings or taken any action.
      The Company does have an audit committee financial expert as that term is
      defined in Item 401 of Regulation S-B. Mr. Chris Carmichael will serve as the
      audit committee financial expert.





**Compensation
      Committee**





On
      March
      24, 2006 the Board of Directors established a Compensation Committee to
      determine and recommend to the Board the compensation to be paid the Company’s
      executive officers, to review the amount of salary and bonus for each of the
      Company’s other officers and employees and to determine and recommend to the
      Board the amount of stock option grants to be issued to the Company’s officers
      and directors under the Company’s 2000 Stock Option Plan. The Compensation
      Committee is presently composed of 2 persons, including Konstantine (Gus) Lucas
      and Shimon Constante. Konstantine (Gus) Lucas serves as Chairman of the
      Compensation Committee. As of the date this report was filed with the SEC,
      the
      Board of Directors has not yet adopted a Compensation Committee Charter and
      the
      Compensation Committee has not held any meetings or taken any
      action.





**Code
      of Ethics**





The
      Company has adopted a Code of Ethics and Business Conduct that applies to
      executive officers, directors and employees, and is filed as Exhibit 14.1 to
      this Form 10-KSB. Upon request, the Company will provide to any person, without
      charge, a copy of its Code of Ethics. Any such request should be made to Attn:
      Secretary, Phantom Fiber Corporation, 144 Front Street, Suite 580, Toronto,
      Ontario, Canada M5J 2L7. A copy of the Code of Ethics is available to investors
      and can be found on the Corporate Website at: www.phantomfiber.com .




16





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





Section
      16(a) of the Securities Exchange Act of 1934 requires directors and executive
      officers and persons who beneficially own more than ten percent of a registered
      class of the Company’s equity securities to file with the SEC initial reports of
      ownership and reports of change in ownership of common stock and other equity
      securities. Officers, directors and greater than ten percent stockholders are
      required by SEC regulations to furnish the Company with copies of all Section
      16(a) forms they file. Based solely upon a review of Forms 3 and 4 and
      amendments thereto furnished to the Company under Rule 16a-3(e) during the
      fiscal year ended December 31, 2005, and Forms 5 and amendments thereto
      furnished to the Company with respect to the fiscal year ended December 31,
      2005, the Company believes that during the year ended December 31, 2005, its
      executive officers, directors and all persons who own more than ten percent
      of a
      registered class of the Company’s equity securities complied with all Section
      16(a) filing requirements, except as follows: Jeffrey Halloran reported two
      transactions late and filed one Form 4 late.





**ITEM
      10.**  **EXECUTIVE
      COMPENSATION.**





The
      following table sets forth information concerning the annual and long-term
      compensation earned by or paid to the Chief Executive Officer and to the other
      named executive officers who served as executive officers as at and/or during
      the fiscal year ended December 31, 2006, for services as executive officers
      for
      the last three fiscal years.




**SUMMARY
      COMPENSATION TABLE**




**Annual
                Compensation**
            
            
            
            **Long-Term
                Compensation****Awards**
            
            **Payouts****Name
                and**
              **Principal
                Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Other****Annual****Compen-**
              **sation
                ($)**
            
            **Restricted
                Stock Award(s) ($)**
            
            **Securities
                Underlying Options/ SARs (#)**
            
            **LTIP**
              **Payouts
                ($)**
            
            **All****Other****Compen-**
              **sation
                ($)**Jeffrey
                T. Halloran,
            
            
            2006
            
            $
            250,000
            
            
            -0-
            
            $
            6,000
            (1)
            
            -0-
            
            
            300,000
            (2)
            
            -0-
            
            
            -0-Chief
                Executive
            
            
            2005
            
            $
            250,000
            
            
            -0-
            
            $
            6,000
            (1)
            $
            270,000
            (3)
            
            250,000
            (4)
            
            -0-
            
            
            -0-Officer,
                President,
            
            
            2004
            
            $
            179,300
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-and
                PrincipalFinancial
                OfficerHerb
                Sears,
            
            
            2006
            
            $
            132,315
            
            
            -0-
            
            $
            5,293
            (5)
            
            -0-
            
            
            100,000
            (6)
            
            -0-
            
            
            -0-Chief
                Technology
            
            
            2005
            
            $
            132,195
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Officer
            
            
            2004
            
            $
            84,715
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Konstantine
                Lucas,
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            5,283
            (7)
            
            -0-
            
            
            52,817
            (8)
            
            -0-
            
            
            -0-Director
            
            
            2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-2004
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Stephen
                Gesner,
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            5,283
            (7)
            
            -0-
            
            
            52,817
            (8)
            
            -0-
            
            
            -0-Director
            
            
            2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-2004
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Chris
                Carmichael,
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            3,049
            (7)
            
            -0-
            
            
            44,920
            (8)
            
            -0-
            
            
            -0-Director
            
            
            2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-2004
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Shimon
                Constante,
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            913
            (7)
            
            -0-
            
            
            59,340
            (8)
            
            -0-
            
            
            -0-Director
            
            
            2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-2004
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Gordon
                Fowler
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            6,000
            (7)
            
            -0-
            
            
            119,410
            (9)
            
            -0-
            
            
            -0-Former
                Executive
            
            
            2005
            
            
            -0-
            
            
            -0-
            
            $
            40,000
            (10)
            $
            20,000
            (11)
            
            75,000
            (12)
            
            -0-
            
            
            -0-Chairman
            
            
            2004
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Vince
                Bulbrook,
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Former
                Chief
            
            
            2005
            
            
            -0-
            
            
            -0-
            
            $
            15,462
            (13)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Financial
                Officer
            
            
            2004
            
            
            -0-
            
            
            -0-
            
            $
            29,050
            (13)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Graham
                Simmonds
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            6,000
            (7)
            
            -0-
            
            
            119,410
            (9)
            
            -0-
            
            
            -0-Former
                Chief
            
            
            2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Executive
                Officer
            
            
            2004
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-


(1)
              Pertains
                  to a car allowance of $500 per month in payable to Mr.
                  Halloran.


17




(2)
            Reflects
                options granted to Mr. Halloran as a bonus entitling Mr. Halloran
                to
                purchase 300,000 restricted shares of common stock (after giving
                effect to
                a one-for-20 reverse stock split) at a price of $0.51 per share (after
                giving effect to a one-for-20 reverse stock
                split).




(3)
            Pertains
                to 500,000 restricted shares of common stock (after giving effect
                to a
                one-for-20 reverse stock split) issued to Mr. Halloran as a bonus
                earned
                pursuant to the terms of an employment agreement dated February 4,
                2004 at
                an estimated value of $0.54 per share (after giving effect to a one-for-20
                reverse stock split).




(4)
            Reflects
                warrants granted to Mr. Halloran as a bonus pursuant to the terms
                of an
                employment agreement dated February 4, 2004 and included as a de-facto
                options grant, entitling Mr. Halloran to purchase 250,000 restricted
                shares of common stock (after giving effect to a one-for-20 reverse
                stock
                split) at a price of $4.00 per share (after giving effect to a one-for-20
                reverse stock split).




(5)
            Pertains
                to a car allowance of $441 per month payable to Mr.
                Sears.




(6)
            Reflects
                options granted to Mr. Sears as a bonus entitling Mr. Sears to purchase
                100,000 restricted shares of common stock (after giving effect to
                a
                one-for-20 reverse stock split) at a price of $0.51 per share (after
                giving effect to a one-for-20 reverse stock
                split).




(7)
            Pertains
                to director fees earned during the
                year.




(8)
            As
                part of their compensation, current directors were granted options
                to
                purchase restricted common stock for services rendered at a price
                of $0.50
                per share. The number of options equated to $19,000 pro rated for
                the
                period of the year in which they were directors.




(9)
            Former
                directors were granted options to purchase restricted common stock
                at a
                price of $0.53 for their services from July 2004 to December
                2005.




(10)
            Pertains
                to cash amounts payable to Mr. Fowler for consulting services rendered
                during the period January 1, 2005 to April 30, 2005.




(11)
            Pertains
                to 25,000 restricted shares of common stock (after giving effect
                to a
                one-for-20 reverse stock split) to be issued to Mr. Fowler for consulting
                services rendered during the period November 1, 2004 to December
                31, 2004
                at an estimated value of $0.80 per share (after giving effect to
                a
                one-for-20 reverse stock split).




18




(12)
            Represents
                stock options granted to Mr. Fowler for consulting services during
                the
                fiscal year entitling Mr. Fowler to purchase: (a) 37,500 shares of
                common
                stock (after giving effect to a one-for-20 reverse stock split) at
                a price
                of $0.99 per share (after giving effect to a one-for-20 reverse stock
                split); and (b) 37,500 shares of common stock (after giving effect
                to a
                one-for-20 reverse stock split) at a price of $1.08 per share (after
                giving effect to a one-for-20 reverse stock
                split).




(13)
            Pertains
                to cash amounts paid and/or payable to Mr. Bulbrook for consulting
                services rendered.




**OPTIONS
      GRANT TABLE**





The
      following table sets forth information with respect to the named executive
      officers concerning the grant of stock options during the fiscal year ended
      December 31, 2006. The Company did not have during such fiscal year any plans
      providing for the grant of stock appreciation rights (“SARs”).





**Option/SAR
                Grants in Last Fiscal Year****Individual
                Grants**
            
            **Potential
                Realizable Value at Assumed Annual Rates of Stock Price Appreciation
                for****Option
                Term**
            
            **Alternative
                to (f) and (g): Grant****Date
                Value****(a)**
              **Name**
            
            **(b)**
              **Number
                of Securities Underlying Options/ SARs Granted
                (#)**
            
            **(c)**
              **%
                of Total Options/ SARs Granted to Employees in Fiscal
                Year**
            
            **(d)**
              **Exercise
                or Base Price ($/Sh)**
            
            **(e)**
              **Expiration
                Date**
            
            **(f)**
              **5%
                ($)**
            
            **(g)**
              **10%
                ($)**
            
            **(h)**
              **Grant
                Date Present**
              **Value
                ($) (1)**Jeffrey
                T. Halloran
            
            
            300,000
            (2)
            
            18.3
            %
            $
            0.51
            
            
            July
                15, 2011
            (3)
            
            —
            
            
            —
            
            $
            110,176Herb
                Sears
            
            
            100,000
            (2)
            
            6.1
            %
            $
            0.51
            
            
            July
                15, 2011
            (3)
            
            —
            
            
            —
            
            $
            36,725Konstantine
                Lucas
            
            
            52,817
            (4)
            
            3.2
            %
            $
            0.50
            
            
            February
                13, 2008
            
            
            —
            
            
            —
            
            $
            19,000Stephen
                Gesner
            
            
            52,817
            (4)
            
            3.2
            %
            $
            0.50
            
            
            February
                13, 2008
            
            
            —
            
            
            —
            
            $
            19,000Chris
                Carmichael
            
            
            44,920
            (4)
            
            2.7
            %
            $
            0.50
            
            
            June
                28, 2008
            
            
            —
            
            
            —
            
            $
            14,002Shimon
                Constante
            
            
            59,340
            (4)
            
            3.6
            %
            $
            0.50
            
            
            November
                8, 2008
            
            
            —
            
            
            —
            
            $
            7,184Gordon
                Fowler
            
            
            119,410
            (5)
            
            7.3
            %
            $
            0.53
            
            
            March
                23, 2007
            
            
            —
            
            
            —
            
            $
            28,500Graham
                Simmonds
            
            
            119,410
            (5)
            
            7.3
            %
            $
            0.53
            
            
            March
                23, 2007
            
            
            —
            
            
            —
            
            $
            28,500




(1)
            The
                value shown was calculated utilizing the Black-Scholes option pricing
                model and is presented solely for the purpose of comparative disclosure
                in
                accordance with certain regulations of the Securities and Exchange
                Commission. This model is a mathematical formula used to value traded
                stock price volatility. The actual value that an executive officer
                may
                realize, if any, is dependent on the amount by which the stock price
                at
                the time of exercise exceeds the exercise price. There is no assurance
                that the value realized by an executive officer will be at or near
                the
                value estimated by the Black-Scholes model. These values should not
                be
                used to predict stock value.




19




(2)
            Represents
                options granted to Mr. Halloran and Mr. Sears as a bonus, entitling
                the
                holder to purchase restricted shares of common stock (after giving
                effect
                to a one-for-20 reverse stock split) at a price of $0.51 per share
                (after
                giving effect to a one-for-20 reverse stock
                split).




(3)
            The
                options granted expiry equally over a four year period, being July
                15,
                2011, July 15, 2012, July 15, 2013 and July 15,
                2014.




(4)
            Represents
                options granted to the current directors to purchase restricted shares
                of
                common stock for their services.




(5)
            Represents
                options granted to the former directors to purchase restricted shares
                of
                common stock for their services.





**Aggregate
      Option Exercises and Fiscal Year-End Option Values**





The
      following table sets forth information with respect to the named executive
      officers concerning the year-end value of “in the money” options and the value
      of unexercised options as of December 31, 2006. No options were exercised by
      the
      named executive officers during the fiscal year ended December 31,
      2006.




**Number of Securities****Underlying Unexercised****Options at****December
                31, 2006 (#)(1)**
            
            **Value of Unexercised****In-the-Money Options****at December
                31, 2006 ($)(2)****(Exercisable/Unexercisable)**
            
            **(Exercisable/Unexercisable)**Jeffrey
                T. Halloran
            
            
            206,250/0
            
            $
            43,725/$0Herb
                Sears
            
            
            118,250/0
            
            $
            25,069/$0Gordon
                Fowler
            
            
            19,250/0
            
            $
            4,081/$0




(1)
            Share
                numbers give effect to a one-for-20 reverse stock split and exclude
                (a) warrants granted to Mr. Halloran and expiring December 15, 2010
                which entitle him to purchase 250,000 restricted shares of common
                stock at
                $4.00 per share, (b) options granted to Mr. Halloran and expiring
                July 15, 2011, July 15, 2012, July 15, 2013 and July 15, 2014 entitling
                him to purchase 75,000 restricted shares of common stock at $0.51
                per
                share in each of the years, and (c) options granted to Mr. Sears
                and
                expiring July 15, 2011, July 15, 2012, July 15, 2013 and July 15,
                2014
                entitling him to purchase 25,000 restricted shares of common stock
                at
                $0.51 per share in each of the
                years.




(2)
            Using
                a stock price of $0.44 (after giving effect to a one-for-20 reverse
                stock
                split) at December 31, 2006. This number is calculated by: (a) subtracting
                the option exercise price from the December 30, 2006 closing market
                price
                ($0.44 per share, as reported on the OTC Bulletin Board) to calculate
                the
                “average value per option”; and (b) multiplying the average value per
                option by the number of exercisable and unexercisable “in the money”
                options. The amounts in this column may not represent amounts that
                will
                actually be realized by the named executive
                officer.




**Compensation
      of Directors**





On
      March
      24, 2006, the Company’s Board of Directors approved a plan to compensate each
      director with cash and stock options valued at $25,000 annually. The cash
      component will equal $6,000 per year with the balance being the value of stock
      options valued using the Black Scholes pricing model. As a result the Board
      of
      Directors granted the following stock options to non-management directors as
      compensation, as applicable, for 2006: (1) the Board granted Gordon S. Fowler
      options to purchase 119,410 shares of common stock with an exercise price of
      $0.53 per share; (2) the Board granted J. Graham Simmonds options to purchase
      119,410 shares of common stock with an exercise price of $0.53 per share; (3)
      the Board granted Konstantine (Gus) Lucas options to purchase 52,817 shares
      of
      common stock with an exercise price of $0.50 per share; (4) the Board granted
      Stephen Gesner options to purchase 52,817 shares of common stock with an
      exercise price of $0.50 per share; (5) the Board granted Chris Carmichael
      options to purchase 44,920 shares of common stock with and exercise price of
      $0.50 per share; and (6) the Board granted Shimon Constante options to purchase
      59,340 shares of common stock with an exercise price of $0.50 per
      share.




20




**Employment
      Agreements**





Under
      an
      employment agreement dated February 4, 2004, Jeff Halloran was engaged as
      President and Chief Executive Officer at an annual base salary of $250,000
      per
      annum, plus other benefits including a monthly car allowance of $500. Should
      the
      company choose to terminate the employment agreement, Mr. Halloran is entitled
      to receive two times his base salary. All outstanding options are to immediately
      vest and all extended health care premiums will remain in full effect for a
      one-year period. Mr. Halloran is required to enter into a non-compete agreement
      with the Company.





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





**Security
      Ownership of Certain Beneficial Owners and Management**





The
      following table sets forth information regarding the beneficial ownership of
      the
      Company’s Common Stock as of March 31, 2007. The information in this table
      provides the ownership information for: each person known to be the beneficial
      owner of more than 5% of the Company’s Common Stock; each of the Company’s
      directors; each of the Company’s executive officers; and the Company’s executive
      officers and directors as a group.





Name
                and Address
              of
                Beneficial Owner
            
            Number
                of Shares of Common StockBeneficially
                Owned (1)
            
            Percentage
                of Outstanding Shares of Common Stock (1)Jeffrey
                T. Halloran
            
            
            5,612,050
            (2)
            
            32.4
            %c/o
                Phantom Fiber Corporation144
                Front Street WestToronto,
                Ontario M5J 2L7Lorraine
                Halloran
            
            
            825,000
            
            
            4.9
            %c/o
                Phantom Fiber Corporation144
                Front Street WestToronto,
                Ontario M5J 2L7Herbert
                C. Sears
            
            
            118,250
            (3)
            
            *45
                Roberson DriveAjax,
                Ontario, Canada L1T 4K1Gordon
                S. Fowler
            
            
            163,660
            (4)
            
            1.0
            %95
                Lake Road TerraceWayland,
                MA 01778J.
                Graham Simmonds
            
            
            119,410
            (5)
            
            *330
                University AvenueToronto,
                Ontario, Canada M5G 1R7Konstantine
                (Gus) Lucas
            
            
            2,378,817
            (6)
            
            13.4
            %17428
                Oak Creek CourtEncino,
                CA 91316Stephen
                Gesner
            
            
            259,067
            (7)
            
            1.5
            %395
                March CrescentOakville,
                Ontario, Canada L6H 5X7All
                Directors and Executive Officers as a Group (6 persons)
            
            
            8,651,254
            
            
            46.5
            %


*
        Less
        than 1%


21


(1)
            Applicable
                percentage ownership is based on 16,882,504 shares of Common Stock
                (after
                giving effect to a one-for-20 reverse stock split) outstanding as
                of March
                31, 2007, together with securities exercisable or convertible into
                shares
                of Common Stock within 60 days of March 31, 2007 for each stockholder.
                Beneficial ownership is determined in accordance with the rules of
                the
                Securities and Exchange Commission and generally includes voting
                or
                investment power with respect to securities. Shares of Common Stock
                that
                are currently exercisable or exercisable within 60 days of March
                31, 2007
                are deemed to be beneficially owned by the person holding such securities
                for the purpose of computing the percentage of ownership of such
                person,
                but are not treated as outstanding for the purpose of computing the
                percentage ownership of any other
                person.




(2)
            Includes:
                4,155,800 shares held by the Halloran Family Trust; 500,000 restricted
                shares of Common Stock issued by the Company as bonus shares on March
                24,
                2006 at an estimated value of $0.515 per share; 500,000 restricted
                shares
                of Common Stock issued by the Company as bonus shares on December
                15, 2005
                at an estimated value of $0.54 per share; warrants to purchase 250,000
                shares of Common Stock at $4.00 per share issued by the Company on
                December 15, 2005; and stock options to purchase 206,250 shares of
                Common
                Stock, comprised of 165,000 options owned by Mr. Halloran and 41,250
                options owned by Bernadette Halloran, with an exercise price of $0.228
                per
                share. Quantities and prices in this footnote are adjusted to give
                effect
                to a one-for-20 reverse stock split.




(3)
            Represents
                a stock option to purchase 118,250 shares of Common Stock of the
                Company
                with an exercise price of $0.228 per share. Quantities and prices
                in this
                footnote are adjusted to give effect to a one-for-20 reverse stock
                split.




(4)
            Represents
                25,000 restricted shares held and 138,660 stock options to purchase:
                (i)
                19,250 shares of Common Stock with an exercise price of $0.228 per
                share;
                and (ii) 119,410 shares of Common Stock with an exercise price of
                $0.53
                per share. Quantities and prices in this footnote are adjusted to
                give
                effect to a one-for-20 reverse stock
                split.




(5)
            Represents
                stock options to purchase 119,410 shares of Common Stock of the Company
                with an exercise price of $0.53 per share. Quantities and prices
                in this
                footnote are adjusted to give effect to a one-for-20 reverse stock
                split.




(6)
            Represents
                stock options to purchase 52,817 shares of Common Stock of the Company
                with an exercise price of $0.50 per share and 2,326,000 shares held
                or to
                be held by Konstantine J. Lucas and/or Konstantine J. Lucas and Beth
                Anne
                Lucas Trust and/or immediate family of which 250,000 shares of Common
                Stock is issuable upon exercise of warrants obtained April 26, 2005
                with
                an exercise price of $2.00 per share, 550,000 shares of Common Stock
                issued to Mr. Lucas as a result of conversion of outstanding senior
                convertible notes issued in a financing which closed on January 9,
                2006,
                and 550,000 shares are issuable upon exercise of warrants issued
                in
                connection with such financing (275,000 with an exercise price of
                $1.50
                per share and 275,000 with an exercise price of $0.56 per share).
                Quantities and prices in this footnote are adjusted to give effect
                to a
                one-for-20 reverse stock split.




(7)
            Represents
                206,250 shares of Common Stock held by Mr. Gesner and stock options
                to
                purchase 52,817 shares of Common Stock of the Company with an exercise
                price of $0.50 per share. Quantities and prices in this footnote
                are
                adjusted to give effect to a one-for-20 reverse stock
                split.





22


**Securities
        Authorized for Issuance Under Equity Compensation Plans**
 
 The
        following table shows information with respect to each equity compensation
        plan
        under which common stock is authorized for issuance as of the fiscal year
        ended
        December 31, 2006. All common stock share amounts and exercise prices in
        this
        section have been adjusted to reflect a one-for-20 reverse split given effect
        by
        the OTC Bulletin Board on May 5, 2005.




**EQUITY
      COMPENSATION PLAN INFORMATION**


**Plan
                  category**
              
              **Number
                  of securities**
                **to
                  be issued upon**
                **exercise
                  of**
                **outstanding
                  options,**
                **warrants
                  and rights**
              
              **Weighted
                  average**
                **exercise
                  price of**
                **outstanding
                  options,**
                **warrants
                  and rights**
              
              **Number
                  of securities**
                **remaining
                  available for future issuance under equity compensation plans (excluding
                  securities reflected in column (a)****(a)**
              
              **(b)**
              
              **(c)****Equity
                  compensation plans approved by security holders**
              
              
              2,153,471
              
              $
              0.88
              
              
              96,529**Equity
                  compensation plans not approved by security
                  holders**
              
              
              -0-
              
              
              -0-
              
              
              -0-**Total**
              
              
              2,153,471
              
              $
              0.88
              
              
              96,529





On
      January 5, 2000, our Board of Directors adopted the Company’s 2000 Stock Option
      Plan which terminates on January 5, 2010. At a Special Meeting of Stockholders
      on February 29, 2000, the Plan was approved by the stockholders. On November
      30,
      2005, the Board of Directors approved an amendment to the 2000 Stock Option
      Plan
      to increase the number of shares of common stock subject to the plan after
      effectiveness of a one-for-20 reverse stock split from 1,000,000 shares to
      2,000,000 shares. On December 12, 2005, the Company’s shareholders approved the
      increase by unanimous written consent. The Company also will be presenting
      the
      increase to shareholders to vote on at its upcoming 2006 annual shareholders
      meeting. As of December 31, 2005, after giving effect to the one-for-20 reverse
      stock split, there were 567,500 options outstanding under the 2000 Stock Option
      Plan and 250,000 warrants issuable to Jeff Halloran as a bonus under an
      employment agreement dated February 4, 2004 and entitling him to acquire 250,000
      restricted shares of common stock at a price of $4.00 per share. The 2000 Stock
      Option Plan is intended to help the Company and its subsidiaries attract and
      retain employees (including officers), directors, consultants and independent
      contractors and to furnish additional incentives to such persons to enhance
      the
      value of its business over the long term by encouraging them to acquire a
      proprietary interest in the Company. After March 24, 2006, the 2000 Stock Option
      Plan is administered by the Company’s Compensation Committee. The 2000 Stock
      Option Plan was previously administered by the Board of Directors.





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





The
      Company’s management believes the terms of each of the below transactions are at
      least as favorable as could be obtained from unrelated third
      parties.





**Loans
      From Related Parties**





One
      of
      our officers, Jeff Halloran, loaned us $45,171 as at December 31, 2005 to fund
      our operations. This loan is included in short term borrowings. It is unsecured,
      non-interest bearing and has no formal repayment terms. The loan has been repaid
      during 2006.





**Phantom
      Fiber Acquisition**





Pursuant
      to the terms of the share exchange agreement with Phantom Fiber Corp., our
      wholly owned subsidiary formed in Ontario, Canada, on July 7, 2004, the holders
      of an aggregate of CAD$1,200,000 (approximately US$919,750) principal amount
      of
      our convertible debentures received an aggregate of 1,500,000 shares of our
      common stock and warrants (after adjustment for a one-for-20 reverse stock
      split) exercisable until the second anniversary of the closing to purchase
      750,000 shares of common stock (after adjustment for a one-for-20 reverse stock
      split) at an exercise price of $1.68 per share (after adjustment for a
      one-for-20 reverse stock split). Our former directors, Brian Usher-Jones and
      John G. Simmonds, each held CAD$100,000, and our former Secretary, Carrie
      Weiler, held CAD$25,000 principal amount of such debentures. Accordingly, upon
      the closing, Mr. Usher-Jones, Mr. Simmonds and Ms. Weiler received 125,000,
      125,000 and 31,250 shares of common stock (after adjustment for a one-for-20
      reverse stock split) and 62,500, 62,500 and 15,625 warrants (after adjustment
      for a one-for-20 reverse stock split), respectively **.** These
      warrants expired on July 7, 2006.




23





**Private
      Sales Transactions**





On
      January 13, 2005, we entered into a private sales transaction with a former
      director and officer, Mr. John G. Simmonds, pursuant to which we agreed to
      deliver 800,000 shares of common stock of Wireless Age Communications Inc.
      for
      cash consideration of $600,000 and 3,000,000 shares of common stock of
      Trackpower Inc. for cash consideration of $150,000. The transaction, as amended,
      provides for payment of consideration through a combination of cash and
      cancellation of a note payable of $52,225 to a company controlled by Mr.
      Simmonds, as well as for periodic delivery of these shares upon satisfaction
      of
      various conditions and in quantities proportionate to cash payments received
      as
      a percentage of the total proceeds of the transaction.





Konstantine
      (Gus) Lucas, one of our directors, currently beneficially owns approximately
      13.4% of our outstanding common stock as described under “Security Ownership of
      Certain Beneficial Owners and Management” beginning on page 15 of this Proxy
      Statement. On April 26, 2005 Mr. Lucas purchased 250,000 shares of Common Stock
      in a private placement transaction at $1.00 (post one-for-20 stock split
      adjusted) per share. In connection with the April 26, 2005 private placement,
      Mr. Lucas received a warrant to purchase 250,000 shares of Common Stock with
      an
      exercise price of $2.00 (post one-for-20 stock split adjusted) per share and
      a
      term of 30 months. On December 8, 2005 Mr. Lucas purchased 500,000 shares of
      Common Stock and warrants to purchase 500,000 shares of Common Stock from the
      Company in a private placement financing transaction for an aggregate purchase
      price of $275,000. Mr. Lucas subsequently exchanged the securities he purchased
      on December 8, 2005 for $275,000 principal amount of senior convertible notes
      and warrants to purchase 550,000 shares of Common Stock in a private placement
      financing which closed on January 9, 2006. On November 22, 2006 Mr. Lucas
      exercised his right to convert the notes into 550,000 shares of Common Stock.





**Item
      13.**  **Exhibits.**





The
      following exhibits are included as part of this 10-k. References to the
“Company” in this Exhibit List mean Phantom Fiber Corporation, a Delaware
      corporation.





**Exhibit
                Number**
            
            **Description**3.1
            
            Certificate
                of Incorporation of the Company (Incorporated by reference to Amendment
                No. 1 to the Company’s Registration Statement on Form 10-SB/A (File No.
                001-15627), filed with the Securities and Exchange Commission on
                February
                17, 2000)3.2
            
            Certificate
                of Merger of Hycomp, Inc. Into Eieihome.com Inc. filed with the Delaware
                Secretary of State on March 3, 2000 (Incorporated by reference to
                the
                Company’s Registration Statement on Form SB-2 (File No. 333-131808), filed
                with the Securities and Exchange Commission on February 13,
                2006)3.3
            
            Certificate
                of Amendment to the Company’s Certificate of Incorporation filed with the
                Delaware Secretary of State on September 26, 2000 (Incorporated by
                reference to the Company’s Registration Statement on Form SB-2 (File No.
                333-131808), filed with the Securities and Exchange Commission on
                February
                13, 2006)3.4
            
            Amended
                and Restated Certificate of Incorporation of the Company filed with
                the
                Delaware Secretary of State on October 2, 2001 (Incorporated by reference
                to the Company’s Registration Statement on Form SB-2 (File No.
                333-131808), filed with the Securities and Exchange Commission on
                February
                13, 2006)3.5
            
            Certificate
                of Amendment to the Company’s Amended and Restated Certificate of
                Incorporation filed with the Delaware Secretary of State on July
                2, 2004
                (Incorporated by reference to the Company’s Registration Statement on Form
                SB-2 (File No. 333-131808), filed with the Securities and Exchange
                Commission on February 13, 2006)3.6
            
            By-laws
                of the Company (Incorporated by reference to Amendment No. 1 to the
                Company’s Registration Statement on Form 10-SB/A (File No. 001-15627),
                filed with the Securities and Exchange Commission on February 17,
                2000)4.1
            
            Form
                of Senior Convertible Note (Incorporated by reference to the Company’s
                Form 8-K filed with the Securities and Exchange Commission on January
                10,
                2006)




24




4.2
            
            Form
                of $1.50/$0.56 Warrants(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on January 10, 2006)10.1
            
            Amended
                and Restated 2000 Stock Option Plan (Incorporated by reference to
                Appendix
                A to the Company’s Preliminary Schedule 14C filed with the Securities and
                Exchange Commission on December 19, 2005)10.2
            
            2005
                Stock Option, SAR and Stock Bonus Consultant Plan (Incorporated by
                reference to the Company’s Registration Statement on Form S-8 (File No.
                333-122730) filed with the Securities and Exchange Commission on
                February
                11, 2005)10.3
            
            Subscription
                Agreement effective December 8, 2005 between Phantom Fiber Corporation
                and
                the subscribers thereto (Incorporated by reference to the Company’s 8-K
                filed with the Securities and Exchange Commission on December 14,
                2005)10.4
            
            Securities
                Purchase Agreement dated January 5, 2006 by and among Phantom Fiber
                Corporation and the investors listed on the Schedule of Buyers attached
                thereto (Incorporated by reference to the Company’s Form 8-K filed with
                the Securities and Exchange Commission on January 10,
                2006)10.5
            
            Agreements
                of December 8, 2005 investors to exchange securities (Incorporated
                by
                reference to the Company’s Form 8-K filed with the Securities and Exchange
                Commission on January 10, 2006)





10.6
            
            Registration
                Rights Agreement dated January 5, 2006 by and among Phantom Fiber
                Corporation and the Buyers signatory thereto (Incorporated by reference
                to
                the Company’s Form 8-K filed with the Securities and Exchange Commission
                on January 10, 2006)10.7
            
            Transfer
                Agent Instructions dated January 4, 2006 (Incorporated by reference
                to the
                Company’s Form 8-K filed with the Securities and Exchange Commission on
                January 10, 2006)21.1
            
            Subsidiaries
                of the Company (Incorporated by reference to the Company’s Registration
                Statement on Form SB-2 (File No. 333-131808), filed with the Securities
                and Exchange Commission on February 13, 2006)14.1*
            
            Code
                of Ethics21.1
            
            List
                of Subsidiaries (Incorporated by reference to the Company’s Registration
                Statement on Form SB-2 (File No. 333-131808), filed with the Securities
                and Exchange Commission on February 13, 2006)31.1*
            
            Certification
                by Chief Executive Officer and Principal Financial Officer, required
                by
                Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act32.1*
            
            Certification
                by Chief Executive Officer and Principal Financial Officer, required
                by
                Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
                1350 of
                Chapter 63 of Title 18 of the United States
                Code











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





**Audit
      Fees**





The
      aggregate fees billed for professional services rendered by the Company’s
      principal accountants for the audit of our financial statements included in
      the
      annual report Form 10-KSB, for the reviews of the Company’s financial statements
      included in the 10-QSB reports, and for other services normally provided in
      connection with statutory filings were $85,072 and $80,800 for the years ended
      December 31, 2006 and December 31, 2005, respectively.





**Audit-Related
      Fees**





The
      Company incurred fees of $Nil and $12,000 for the years ended December 31,
      2006
      and December 31, 2005, respectively, for professional services rendered by
      its
      principal accountants related to the performance of the audit and review of
      the
      Company’s financial statements and not included in “Audit Fees.”





25




**Tax
      Fees**





The
      aggregate fees billed for professional services rendered by the Company’s
      principal accountants for tax compliance, tax advice, and tax planning were
      $50,731 and $ nil, for the years ended December 31, 2006 and December 31, 2005,
      respectively.





**All
      Other Fees**





The
      Company did not incur any fees for other professional services rendered by
      its
      principal accountants during the years ended December 31, 2006 and December
      31,
      2005.





**Audit
      Committee Pre-Approval Policies and Procedures**





The
      Company’s Audit Committee was formed on March 24, 2006, and in the future will
      consult with respect to audit policy, choice of auditors, and approval of any
      financial transactions that are not in the ordinary course of business. As
      of
      the date this report was filed with the SEC and previously the entire Board
      of
      Directors was responsible for such functions.


26


**SIGNATURES**





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





**Dated:**April
                12, 2007
            
            
            **PHANTOM
                FIBER CORPORATION**By:
            /s/
                Jeffrey T. HalloranJeffrey
                T. HalloranChief
                Executive Officer, President,Principal
                Financial Officer, PrincipalAccounting
                Officer and Director





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s/
                  Jeffrey T. Halloran
            
            Chief
                Executive Officer, President, Principal Financial Officer,
            
            April
                12, 2007Jeffrey
                T. Halloran
            
            Principal
                Accounting Officer and
                Director/s/
                  Konstantine (Gus) Lucas
            
            Director
            
            April
                12, 2007Konstantine
                (Gus) Lucas/s/
                  Stephen Gesner
            
            Director
            
            April
                12, 2007Stephen
                Gesner/s/
                  Chris Carmichael
            
            Director
            
            April
                12, 2007Chris
                Carmichael/s/
                Shimon ConstanteShimon
                Constante
            
            Director
            
            April
                12, 2007




27




**INDEX**
 
 CONSOLIDATED
        FINANCIAL STATEMENTS
 Report
                    of Independent Registered Public Accounting Firm
                
                
                F
                    - 2Report
                    of Independent Registered Public Accounting Firm
                
                
                F
                    - 3Consolidated
                    Balance Sheets as at December 31, 2006 and 2005
                
                
                F
                    - 4Consolidated
                    Statements of Operations For the Years EndedDecember
                    31, 2006 and 2005
                
                
                F
                    - 5Consolidated
                    Statement of Stockholders’ Deficiency For the Years EndedDecember
                    31, 2005 and 2006
                
                
                F
                    - 6Consolidated
                    Statements of Cash Flows For the Years EndedDecember
                    31, 2006 and 2005
                
                
                F
                    - 7 - F - 8Notes
                    to Consolidated Financial Statements
                
                
                F
                    - 9 - F - 27
  F-1
  **REPORT
        OF INDEPENDENT REGISTERED AUDITORS**
 
 To
        the
        Board of Directors and Stockholders of
 Phantom
        Fiber Corporation
 
 We
        have
        audited the accompanying consolidated balance sheet of Phantom Fiber Corporation
        and subsidiaries, as at December 31, 2006 and the related consolidated
        statements of operations and comprehensive loss, changes in stockholders'
        deficiency and cash flows for the year ended December 31, 2006. These
        consolidated financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statements presentation. We believe that our audit provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Phantom Fiber Corporation
        as
        at December 31, 2006 and the results of its operations and its cash flows
        for
        the year ended December 31, 2006 in conformity with accounting principles
        generally accepted in the United States of America.
 
 As
        described in the Note 1(c), the accompanying consolidated financial statements
        have been prepared assuming the Company will continue as a going concern,
        As at
        December 31, 2006 the Company had a shareholders’ deficiency of $2,474,630. The
        recurring losses raise substantial doubt about the Company's ability to continue
        as a going concern. The consolidated financial statements do not include
        any
        adjustments that might result from the going concern assumption not being
        applicable.
 
 
 /s/
                  Lazar Levine & Felix LLPNew
                  York, New YorkApril
                  7, 2007
  F-2
 **REPORT
          OF INDEPENDENT REGISTERED AUDITORS**
 
 To
          the
          Board of Directors and Stockholders of
 Phantom
          Fiber Corporation
 
 We
          have
          audited the accompanying consolidated balance sheet of Phantom Fiber
          Corporation, as at December 31, 2005, and the related consolidated statements
          of
          operations and comprehensive loss, changes in stockholders' deficiency
          and cash
          flows for the year ended December 31, 2005. These consolidated financial
          statements are the responsibility of the Company's management. Our
          responsibility is to express an opinion on these consolidated financial
          statements based on our audit.
 
 We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statements presentation. We believe that our audits provide a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Phantom Fiber Corporation
          as
          at December 31, 2005, and the results of its operations and its cash flows
          for
          the year ended December 31, 2005 in conformity with accounting principles
          generally accepted in the United States of America.
 
 As
          described in the Note 1(c), the accompanying consolidated financial statements
          have been prepared assuming the Company will continue as a going concern,
          As at
          December 31, 2005 the Company had an accumulated deficit of $5,221,874.
          The
          recurring losses raise substantial doubt about the Company's ability to
          continue
          as a going concern. The consolidated financial statements do not include
          any
          adjustments that might result from the going concern assumption not being
          applicable.
 
 
 /s/
                    Mintz & Partners L.L.P.Toronto,
                    CanadaApril
                    14, 2006
                CHARTERED
                    ACCOUNTANTS
 F-3
 **Phantom
          Fiber Corporation**
  Consolidated
          Balance Sheets
 As
          at
          December 31, 2006 and December 31, 2005
 
  2006
              
              
              2005**ASSETS****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              29,864
              
              $
              269,410Accounts
                  receivable net of allowance for doubtful accounts of$20,845
                  and $0 for 2006 and 2005, respectively
              
              
              35,146
              
              
              68,063Marketable
                  securities
              
              
              25,001
              
              
              40,500Investment
                  tax credit receivable
              
              
              376,345
              
              
              134,659Prepaid
                  expenses and other receivable
              
              
              26,400
              
              
              69,636**Total
                  current assets**
              
              
              492,756
              
              
              582,268**Property
                  and Equipment - net**
              
              
              55,289
              
              
              45,151**Other
                  Assets:**Deferred
                  financing costs net of accumulated amortization of$313,387
                  and $0 for 2006 and 2005, respectively
              
              
              242,052
              
              
              92,440**TOTAL
                  ASSETS**
              
              $
              790,097
              
              $
              719,859**LIABILITIES
                  AND STOCKHOLDERS’ DEFICIENCY****Current
                  liabilities:**Accounts
                  payable
              
              $
              56,315
              
              $
              178,428Accrued
                  liabilities
              
              
              578,371
              
              
              527,950Accounts
                  payable and accrued liabilities to related parties
              
              
              152,499
              
              
              433,113Unearned
                  revenue
              
              
              14,163
              
              
              51,963Short
                  term borrowings - related party
              
              
              —
              
              
              45,171Current
                  portion of obligations under capital leases
              
              
              17,758
              
              
              14,795**Total
                  current liabilities**
              
              
              819,106
              
              
              1,251,420**Long-Term
                  liabilities:**Obligations
                  under capital leases
              
              
              13,098
              
              
              15,284Securities
                  subscriptions received
              
              
              —
              
              
              858,000Derivative
                  instruments
              
              
              2,317,224
              
              
              —Senior
                  convertible note
              
              
              115,299
              
              
              —**Total
                  liabilities**
              
              
              3,264,727
              
              
              2,124,704**Commitments
                  and Contingencies****Stockholders’
                  Deficiency:**Preferred
                  stock, $0.001 par value, 10,000,000 shares authorized,none
                  issued and outstanding
              
              
              —
              
              
              —Common
                  stock, $.001 par value, 400,000,000 shares authorized,16,761,089
                  shares, issued and outstanding;(13,890,464
                  shares, December 31, 2005)
              
              
              16,760
              
              
              13,890Additional
                  paid-in capital
              
              
              5,619,436
              
              
              3,811,881Accumulated
                  deficit
              
              
              (8,126,810
              )
              
              (5,221,874
              )Accumulated
                  other comprehensive income (loss)
              
              
              15,984
              
              
              (8,742
              )**Total
                  stockholders’ deficiency**
              
              
              (2,474,630
              )
              
              (1,404,845
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIENCY**
              
              $
              790,097
              
              $
              719,859
  See
        notes
        to consolidated financial statements.
 
 F-4
 **Phantom
          Fiber Corporation**
  Consolidated
          Statements of Operations and Comprehensive Loss Twelve month periods ended
          December 31, 2006 and December 31, 2005
 2006
                
                2005**Revenue:**Professional
                    services
                
                $
                155,657
                
                $
                105,701User
                    fees and royalties
                
                
                153,614
                
                
                119,255309,271
                
                
                224,956**Operating
                    expenses:**Research
                    and development
                
                
                1,080,682
                
                
                933,499Sales
                    and marketing
                
                
                853,000
                
                
                352,616General
                    and administrative
                
                
                1,424,764
                
                
                1,007,021Total
                    operating expenses
                
                
                3,358,446
                
                
                2,293,136**Operating
                    loss**
                
                
                (3,049,175
                )
                
                (2,068,180
                )**Other
                    income (expenses):**Loss
                    on disposal of marketable securities
                
                
                (19,014
                )
                
                (588,573
                )Gain
                    (loss) on settlement and write off of accounts payable
                
                
                35,567
                
                
                (27,902
                )Amortization
                    of deferred financing costs
                
                
                (313,387
                )
                
                -Change
                    in value of derivative instruments
                
                
                1,182,776
                
                
                -Interest
                    expense
                
                
                (218,442
                )
                
                (121,032
                )Interest
                    on accretion of senior convertible debt
                
                
                (564,799
                )
                
                -Interest
                    and other income
                
                
                19,857
                
                
                6,464Earnout
                    on sale of battery business
                
                
                -
                
                
                82,500Gain
                    (loss) on foreign exchange
                
                
                21,681
                
                
                (8,477
                )**Net
                    loss**
                
                
                (2,904,936
                )
                
                (2,725,200
                )Other
                    comprehensive income (loss):Unrealized
                    gain (loss) on marketable securities
                
                
                (8,985
                )
                
                519,364Foreign
                    exchange translation gain (loss)
                
                
                33,711
                
                
                (30,059
                )Comprehensive
                    loss
                
                $
                (2,880,210
                )
                $
                (2,235,895
                )**Loss
                    per share (Basic and Diluted):**Weighted
                    average number of common shares outstanding
                
                
                15,097,612
                
                
                13,568,016Loss
                    per share
                
                $
                (0.19
                )
                $
                (0.20
                )
 
 See
        notes
        to consolidated financial statements
 
 F-5
 **Phantom
          Fiber Corporation**
  Consolidated
          Statements of Changes in Stockholders’ Deficiency
 December
          31, 2006 and December 31, 2005
  Common
                  stock
                Number
                  (post split - see Note 6)
              
              Common
                  stock
                Par
                  Value
              
              Additional
                  paid-in capital
              
              Accumulated
                Deficit
              
              Accumulated
                  other comprehensive
                income
                  (loss)
              
              Total
                Stockholders’
                Equity
                  /(Deficiency)(#)
              
              ($)
              
              ($)
              
              ($)
              
              ($)
              
              ($)**Balance,
                  December 31, 2004**
              
              
              **13,034,454**
              
              
              **13,034**
              
              
              **2,780,564**
              
              
              **(2,496,674**
              **)**
              
              **(498,047**
              **)**
              
              **(201,123**
              **)**Shares
                  issued for settlement on accounts payable, debt and services
              
              
              537,376
              
              
              537
              
              
              575,666
              
              
              
              
              
              
              
              
              576,203Shares
                  issued for conversion of senior subordinated convertible
                  debentures
              
              
              18,634
              
              
              19
              
              
              93,151
              
              
              
              
              
              
              
              
              93,170Net
                  loss for the year ended December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              (2,725,200
              )
              
              
              
              
              (2,725,200
              )Adjustment
                  arising from reduction in unrealized gain on marketable
                  securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              519,364
              
              
              519,364Adjustment
                  arising from foreign exchange translation loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (30,059
              )
              
              (30,059
              )Stock
                  based compensation -expensed
              
              
              
              
              
              
              
              
              39,000
              
              
              
              
              
              
              
              
              39,000Stock
                  based compensation - deferred
              
              
              
              
              
              
              
              
              23,800
              
              
              
              
              
              
              
              
              23,800Common
                  stock issued in connection with private placement
              
              
              300,000
              
              
              300
              
              
              299,700
              
              
              
              
              
              
              
              
              300,000**Balance,
                  December 31, 2005**
              
              
              **13,890,464**
              
              
              **13,890**
              
              
              **3,811,881**
              
              
              **(5,221,874**
              **)**
              
              **(8,742**
              **)**
              
              **(1,404,845**
              **)**Fractional
                  adjustment due to stock split
              
              
              143,585
              
              
              143
              
              
              (143
              )Shares
                  issued for bonuses, services, payroll and settlement of accounts
                  payable
              
              
              2,017,415
              
              
              2,017
              
              
              837,562
              
              
              
              
              
              
              
              
              839,579Stock
                  options exercised
              
              
              20,625
              
              
              21
              
              
              6,373
              
              
              
              
              
              
              
              
              6,394Shares
                  returned per settlement agreement
              
              
              (185,000
              )
              
              (185
              )
              
              16,476
              
              
              
              
              
              
              
              
              16,291Shares
                  returned for non performance of services
              
              
              (25,000
              )
              
              (25
              )
              
              (19,975
              )
              
              
              
              
              
              
              
              (20,000
              )Warrants
                  issued
              
              
              
              
              
              
              
              
              311,094
              
              
              
              
              
              
              
              
              311,094Stock
                  based compensation - expensed
              
              
              
              
              
              
              
              
              207,567
              
              
              
              
              
              
              
              
              207,567Shares
                  issued for conversion of senior convertible debt
              
              
              899,000
              
              
              899
              
              
              448,601
              
              
              
              
              
              
              
              
              449,500Net
                  loss for the year ended December 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              (2,904,936
              )
              
              
              
              
              (2,904,936
              )Adjustment
                  arising from increase in unrealized loss on marketable
                  securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,985
              )
              
              (8,985
              )Adjustment
                  arising from foreign exchange translation gain
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              33,711
              
              
              33,711**Balance,
                  December 31, 2006**
              
              
              **16,761,089**
              
              
              **16,760**
              
              
              **5,619,436**
              
              
              **(8,126,810**
              **)**
              
              **15,984**
              
              
              **(2,474,630**
              **)**
  See
        notes
        to consolidated financial statements
 
 F-6
 **Phantom
          Fiber Corporation**
  Consolidated
          Statements of Cash Flows
 Twelve
          month periods ended December 31, 2006 and December 31,
          2005
 
  2006
                  
                  2005**Cash
                      Flows From Operating Activities**Loss
                      for the year
                  
                  $
                  (2,904,936
                  )
                  $
                  (2,725,200
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Depreciation
                      and amortization
                  
                  
                  325,652
                  
                  
                  15,407Loss
                      on sale of securities
                  
                  
                  19,014
                  
                  
                  588,573Employee
                      stock option compensation
                  
                  
                  207,567
                  
                  
                  —Bonus
                      paid in stock
                  
                  
                  265,000
                  
                  
                  —Foreign
                      exchange loss (gain)
                  
                  
                  33,711
                  
                  
                  (30,059
                  )Gain
                      on settlement and write off of accounts payable
                  
                  
                  (35,567
                  )
                  
                  —Stock
                      based compensation
                  
                  
                  —
                  
                  
                  39,000Change
                      in value of derivative instruments
                  
                  
                  (1,182,776
                  )
                  
                  —Accretion
                      of interest expense
                  
                  
                  564,799
                  
                  
                  —Common
                      stock and warrants issued for services
                  
                  
                  306,015
                  
                  
                  250,079Earnout
                      on sale of battery business
                  
                  
                  —
                  
                  
                  (82,500
                  )Loss
                      on write off of receivable
                  
                  
                  7,530
                  
                  
                  —Provision
                      for allowance for doubtful accounts
                  
                  
                  (27,366
                  )
                  
                  —Marketable
                      securities received for services rendered
                  
                  
                  (17,500
                  )
                  
                  (32,500
                  )Expenses
                      paid in marketable securities
                  
                  
                  —
                  
                  
                  53,250Increase
                      (decrease) in cash flows as a result of changes in asset and
                      liability
                      account balances:Accounts
                      receivable
                  
                  
                  (5,189
                  )
                  
                  (26,819
                  )Investment
                      tax credit receivable
                  
                  
                  (241,686
                  )
                  
                  218,681Prepaid
                      expenses and other receivables
                  
                  
                  43,236
                  
                  
                  12,127Accounts
                      payable and accrued liabilities
                  
                  
                  129,433
                  
                  
                  154,076Unearned
                      revenue
                  
                  
                  (37,800
                  )
                  
                  51,963Net
                      cash used in operating activities
                  
                  
                  (2,550,863
                  )
                  
                  (1,513,922
                  )**Cash
                      Flows From Investing Activities**Proceeds
                      from the sale of marketable securities
                  
                  
                  5,000
                  
                  
                  860,065Purchase
                      of fixed assets
                  
                  
                  (987
                  )
                  
                  —Purchase
                      of short term investments
                  
                  
                  (516,293
                  )
                  
                  —Proceeds
                      from the sale of short term investments
                  
                  
                  516,293
                  
                  
                  —Net
                      cash provided by investing activities
                  
                  
                  4,013
                  
                  
                  860,065**Cash
                      Flows From Financing Activities**Proceeds
                      from exercise of stock options
                  
                  
                  6,394
                  
                  
                  —Costs
                      incurred to secure financing
                  
                  
                  (275,280
                  )
                  
                  —Issuance
                      of senior convertible notes
                  
                  
                  2,642,000
                  
                  
                  —Securities
                      subscriptions received
                  
                  
                  —
                  
                  
                  858,000Proceeds
                      from short term borrowing
                  
                  
                  85,680
                  
                  
                  —Repayment
                      of short term borrowing
                  
                  
                  (85,680
                  )
                  
                  —Repayment
                      of capital lease obligations
                  
                  
                  (20,639
                  )
                  
                  (30,997
                  )Repayment
                      of short term borrowings
                  
                  
                  (45,171
                  )
                  
                  (223,136
                  )Proceeds
                      from issuance of common stock
                  
                  
                  —
                  
                  
                  300,000Net
                      cash provided by financing activities
                  
                  
                  2,307,304
                  
                  
                  903,867**(Decrease)
                      increase in cash**
                  
                  
                  (239,546
                  )
                  
                  250,010**Cash,
                      beginning of year**
                  
                  
                  269,410
                  
                  
                  19,400**Cash,
                      end of year**
                  
                  $
                  29,864
                  
                  $
                  269,410
 See
        notes
        to consolidated financial statements
 
 F-7
  **Phantom
          Fiber Corporation**
  Consolidated
          Statements of Cash Flows (continued)
 Twelve
          month periods ended December 31, 2006 and December 31, 2005
 2006
              
              2005**Interest
                  paid**
              
              $
              49,668
              
              $
              97,167**Non
                  cash transactions:**Marketable
                  securities disposed of in settlement ofdebt
              
              
              —
              
              
              53,250Common
                  shares issued on conversion of debenture (2005 includesaccrued
                  interest of $26,670)
              
              
              449,500
              
              
              93,170Common
                  shares issued in settlement of accounts payable
              
              
              446,173
              
              
              197,706Common
                  shares issued in settlement of short term borrowings
              
              
              —
              
              
              118,072Stock-based
                  compensation recorded as deferred finance expense
              
              
              187,719
              
              
              23,800Common
                  shares received for settlement of receivable
              
              
              57,942
              
              
              —Note
                  payable applied to other receivable (includes interestof
                  $14,000
              
              
              —
              
              
              66,225Property,
                  plant and equipment through capital leases
              
              
              21,416
              
              
              7,370Investments
                  marked to market
              
              
              8,985
              
              
              —Marketable
                  securities received for services rendered
              
              
              —
              
              
              32,500Stock
                  based compensation
              
              
              —
              
              
              39,000Common
                  shares used in settlement of short term borrowings
              
              
              —
              
              
              260,424Earnout
                  on sale of battery business
              
              
              —
              
              
              82,500
  See
        notes
        to consolidated financial statements
 
 F-8


**Phantom
      Fiber Corporation**




Notes
      to
      the Consolidated Financial Statements


December
      31, 2006 and 2005





**Note
      1.**  **Description
      of Business and Basis of Presentation**





a)
            Description
                of Business





The
      business of Phantom Fiber Corporation (the “Company”) (formerly known as Pivotal
      Self Service Technologies Inc, Wireless Ventures Inc. and Hycomp, Inc.) is
      conducted through its wholly-owned Canadian subsidiary Phantom Fiber Inc.
      headquartered in Toronto, Canada.





The
      Company is engaged in the business of the sale and licensing of its proprietary
      wireless software platform and integration services. Phantom Fiber uses its
      software platform to extend the rich multimedia content and user experience
      of
      its customers’ existing Internet web sites securely and instantly to the
      Personal Digital Assistants (“PDA’s) and cell phones of mobile users.





Phantom
      Fiber derives its revenue from direct sales of various licensing and revenue
      sharing plans that allow its revenues to grow based upon the adoption rate
      of
      its customer’s end users.





b)
            Reverse
                Acquisition Transaction





On
      July
      7, 2004, Pivotal Self-Service Technologies Inc. (“Pivotal") completed a reverse
      acquisition of privately held Phantom Fiber Corporation, an Ontario corporation.
      The merger was effected pursuant to a Share Exchange Agreement dated April
      21,
      2004 (the " Agreement") by and among the Company and Pivotal. In accordance
      with
      the terms of the Agreement, Pivotal merged with and into Phantom Fiber
      Corporation, with Phantom Fiber Corporation remaining as the surviving
      corporation.





Pursuant
      to the Agreement, the outstanding shares of common stock of Phantom Fiber
      Corporation, converted into an aggregate of 8,370,537 (167,410,735 pre-split,
      see Note 6(c)) shares of the Company's common stock, which represented 64
      percent of the Company's outstanding voting stock after giving effect to the
      merger. An aggregate of 1,374,107 (pre-split, see Note 6(c)) shares had been
      placed in escrow for a period of one year following the date of closing of
      the
      transaction in support of indemnifications by the pre-merger stockholders of
      Phantom Fiber Corporation to Pivotal Self-Service Technologies Inc. The
      transaction is recorded as a reverse acquisition since the Phantom Fiber
      Corporation stockholders became the controlling stockholders of the Company.
      Accordingly, the transaction is accounted for as the issuance of stock by
      Phantom Fiber Corporation for the net monetary assets of the Company accompanied
      by a recapitalization of Phantom Fiber Corporation and no goodwill or any
      intangible assets are recorded. Prior period results and comparatives are those
      of Phantom Fiber Corporation and its subsidiary. Based on the price of the
      Company's common stock on July 7, 2004 of $1.60 per share (being $0.08 per
      share
      restated for a 1 for 20 reverse stock split which became effective May 5, 2005)
      , the purchase price approximated $13,393,000. In connection with the merger,
      the Company changed its name from "Pivotal Self-Service Technologies Inc."
      to
      "Phantom Fiber Corporation".





Pursuant
      to the terms of the share exchange agreement between the Company and Phantom
      Fiber, upon Closing on July 7, 2004, the holders of an aggregate of CAD
      $1,200,000 (approximately $919,750) principal amount of convertible debentures
      of Phantom Fiber Corporation received warrants exercisable until the second
      anniversary of the Closing to purchase 750,000 (after consolidation of shares)
      shares of the Company's common stock at an exercise price of $1.68 per share
      (being $0.084 per share restated for a 1 for 20 reverse stock split (see Note
      6(c)).





The
      Company also issued stock options to replace 2,000,000 Phantom Fiber Corporation
      stock options existing prior to the merger. Each stock option will allow the
      holder to .275 post-merger common shares (550,000 common shares in aggregate)
      for an exercise price equal to the exercise price of the Phantom Fiber
      Corporation stock options previously held divided by .275, and with an expiry
      date and vesting provisions similar to those of the previously outstanding
      stock
      options.




F-9





**Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements
 December
        31, 2006 and 2005





**Note
      1.**  **Description
      of Business and Basis of Presentation (continued)**





c)
            Going
                Concern and Basis of Presentation





These
      financial statements have been prepared on the going concern basis, which
      assumes the realization of assets and liquidation of liabilities in the normal
      course of business, notwithstanding the continuing operating losses and the
      accumulated deficit of $8,126,810 as at December 31, 2006. The ability of the
      Company to continue as a going concern is dependent on the Company's ability
      to
      generate future profitable operations and receive continued support from its
      lenders, shareholders and raise external financing. Management recognizes this
      and is currently going through the process of securing additional capital to
      allow the company to continue operations unhindered. Over the past 90 days
      Management has been in discussion with a number of potential investors to
      provide short term and long term financing to meet the ongoing capital
      requirements of the Company. Management is currently negotiating with these
      investors in order to ensure the Company receives the optimal terms on these
      deals. Management has also taken measures to decrease its monthly ongoing
      expenses. Management’s efforts have also been directed towards the development
      and implementation of a plan to generate sufficient ongoing revenues to cover
      all of its present and future costs and expenses. It has amended its pricing
      model to increase customization fees and has recently secured a number of
      contracts which it expects will generate sufficient ongoing revenue to sustain
      its profitability. These projects will be integrated throughout the upcoming
      year.





**Note
      2.**  **Summary
      of Significant Accounting Policies**





a)
            Basis
                of presentation





The
      accompanying audited financial statements as of, and for the years ended
      December 31, 2006 and 2005, have been prepared in conformity with accounting
      principles generally accepted in the United States of America. These financial
      statements include the accounts of the Company and its wholly owned subsidiary.
      All intercompany transactions have been eliminated on
      consolidation.





b)
            Use
                of estimates





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosures of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenue and
      expenses during the year. Actual results may differ from these
      estimates.





c)
            Allowance
                for doubtful accounts





The
      Company records an allowance for doubtful accounts based on specifically
      identified amounts that management believes to be uncollectible. The criteria
      for allowance provision are determined based on historical experience and the
      Company’s assessment of the general financial conditions affecting its customer
      base. If the Company’s actual collections experience changes, revisions to the
      allowance may be required.





d)
            Revenue
                recognition





The
      Company recognizes software licensing revenues in accordance with all applicable
      accounting regulations, including the American Institute of Certified Public
      Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition”,
      SOP 98-9, "Modification of SOP 97-2 Software Revenue Recognition With Respect
      to
      Certain Transactions" and Securities and Exchange Commission Staff Accounting
      Bulletin (“SAB”) 104. Following the requirements of these accounting
      pronouncements, the Company recognizes license revenues when all of the
      following conditions are met:





F-10


**Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements
 December
        31, 2006 and 2005


**Note
      2.**  **Summary
      of Significant Accounting Policies (continued)**





·
            there
                is a signed license agreement with the
                customer;





·
            the
                software product has been delivered to the
                customer;





·
            the
                amount of the fees to be paid by the customer is fixed or determinable;
                and





·
            collection
                of these fees is probable.





The
      Company generally negotiates formal license agreements with its customers.
      Each
      of the license agreements includes provisions for receipt of an up-front license
      fee and royalties. Generally, service providers pay these royalty fees either
      in
      the form of a one-time payment or as an on-going monthly fee. On-going royalties
      are recognized monthly based on the number of subscribers at month end. One-time
      royalties are recognized based on the number of new subscribers at the end
      of
      each period.





The
      Company may also negotiate license agreements that allow for the payment of
      the
      initial license fee to be made in future installments over a period of less
      than
      a year. Revenues recognized in advance of the installments being due are
      recorded as unbilled revenues in the balance sheet.





Maintenance
      and technical support revenues are recognized ratably over the applicable
      service period, which is usually one year. Revenues derived from professional
      services are recognized upon performance of the related services. Revenues
      derived from license agreements containing multiple deliverables, such as
      product licenses, maintenance and technical support and other services, are
      allocated among the various deliverables based on the fair value of each
      deliverable. Payments received from customers prior to the completion of
      services are recorded as unearned revenue.





e)
            Investments





The
      Company’s investment in marketable securities is classified as available for
      sale securities and is recorded at their fair value. Unrealized holding gains
      and losses are reported as a net amount in a separate component of stockholders’
equity until realized.





f)
            Income
                taxes





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. Under SFAS
      No. 109, deferred tax assets and liabilities are determined based on temporary
      differences between the financial statement and tax bases of assets and
      liabilities and net operating loss and credit carryforwards using enacted tax
      rates in effect for the year in which the differences are expected to reverse.
      Valuation allowances are established when necessary to reduce deferred tax
      assets to the amounts expected to be realized. A provision for income tax
      expense is recognized for income taxes payable for the current period, plus
      the
      net changes in deferred tax amounts (see Note 9).




g)
            Financial
                instruments




Fair
      value





The
      carrying values of cash, accounts receivable, marketable securities, prepaid
      expenses and other receivables, accounts payable and accrued liabilities,
      unearned revenue and short term loans approximate their fair values due to
      the
      relatively short periods to maturity of the instruments.




F-11





**Phantom
      Fiber Corporation**




Notes
      to
      the Consolidated Financial Statements


December
      31, 2006 and 2005







**Note
      2.**  **Summary
      of Significant Accounting Policies (continued)**





The
      Company also has senior convertible notes and derivative financial instruments
      the fair value of which are estimated for disclosure purposes (below) based
      upon
      the present value of the estimated cash flows at market interest rates
      applicable to similar instruments. At December 31, 2006, estimated fair value
      and respective carrying values of the Company’s senior convertible notes and
      derivative instruments are as follows:





Instrument
            
            Note
            
            Fair
                Value
            
            Carrying
                ValueConvertible
                notes payable
            
            
            7
            
            $
            2,825,000
            
            $
            3,050,500Derivative
                instruments
            
            
            7
            
            
            2,317,224
            
            
            2,317,224





Credit
      risk





Credit
      risk arises from the potential that a counter party will fail to perform its
      obligations. The Company’s exposure to credit risk consists principally of cash
      and accounts receivable. The Company from time to time may maintain cash
      balances which exceed the Federal Depository Insurance coverage limit. The
      Company performs reviews of the relative credit rating of its bank to lower
      its
      risk. With respect to accounts receivable, the Company constantly monitors
      its
      payments from its customers and based on payment trends determines if the full
      receivable will be paid. Accordingly a 100% reserve is made when there is doubt
      that customers will not pay the amounts due.





Interest
      rate risk





Interest
      rates, maturities and security affecting the interest risk of the Company’s
      financial assets and liabilities have been disclosed in notes 5, 6 and
      7.





h)
            Cash
                and cash equivalents





For
      purposes of the consolidated financial statements, the Company considers all
      highly liquid investments with a remaining maturity of three months or less
      when
      purchased to be cash equivalents.





i)
            Net
                loss per share





Basic
      income (loss) per share is computed by dividing net income (loss) attributable
      to common stockholders by the weighted-average number of common shares
      outstanding for the period. Diluted income (loss) per share reflects the
      potential dilution from the exercise or conversion of other securities into
      common stock, but only if dilutive. All per share amounts reflect the effect
      of
      the 1 for 20 reverse stock split effective May 5, 2005. Diluted loss per share
      for the twelve months ended December 31, 2006 and 2005 is the same as basic
      loss
      per share, since the effect of including such potential common stock equivalents
      was anti-dilutive as the Company incurred losses for these periods. Such
      securities, shown below, presented on a common share equivalent basis and
      outstanding as at December 31, 2006 and 2005, have been excluded from the per
      share computations:





December
                31,
              2006
            
            December
                31,
              2005Stock
                Options
            
            
            1,903,471
            
            
            567,500Warrants
            
            
            8,852,094
            
            
            1,731,538Convertible
                Notes Payable
            
            
            6,101,000
            
            
            —





F-12


**Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements
 December
        31, 2006 and 2005




**Note
      2.**  **Summary
      of Significant Accounting Policies (continued)**





j)
            Foreign
                currency





The
      functional currency of the company is the U.S. dollar and the functional
      currency of the wholly owned subsidiary located in Canada is the Canadian
      dollar. Assets and liabilities of this subsidiary are translated to U.S. dollars
      at year-end exchange rates and income statement items are translated at the
      average exchange rate for the year. Resulting translation adjustments, if
      material, are recorded as a separate component of accumulated other
      comprehensive income, a component of stockholders’ equity/(deficiency).





k)
            Investment
                tax credits





The
      Company’s subsidiary claims credits from the Canadian government for scientific
      research and development which are earned as a percentage of eligible research
      and development expenditures incurred in each taxation year.





Such
      credits earned relate to research and development expenses and property, plant
      and equipment purchases and are accounted for as a reduction of the respective
      expenses and the cost of such assets.





l)
            Advertising
                costs





The
      Company expenses ordinary advertising and promotion costs as incurred.
      Advertising and promotion costs were $16,470 and $50,827, for the years ended
      December 31, 2006 and 2005, respectively.





m)
            Comprehensive
                income (loss)





Comprehensive
      income (loss) includes the net exchange differences arising from the translation
      of Canadian dollar denominated subsidiaries into US dollars and accumulated
      unrealized holding gains and losses on the Company’s available for sale
      securities.





Unrealized
                Gain (Loss) on Marketable Securities
            
            Foreign
                Exchange Translation Gain (Loss)
            
            Total
                Gain (Loss)Balance
                January 1, 2005
            
            $
            (535,378
            )
            $
            37,331
            
            $
            (498,047
            )Unrealized
                loss
            
            
            519,364
            
            
            -
            
            
            519,364Foreign
                exchange translation loss
            
            
            -
            
            
            (30,059
            )
            
            (30,059
            )Balance,
                December 31, 2005
            
            
            (16,014
            )
            
            7,272
            
            
            (8,742
            )Realized
                loss on sale of security
            
            
            16,014
            
            
            -
            
            
            16,014Unrealized
                loss
            
            
            (24,999
            )
            
            -
            
            
            (24,999
            )Foreign
                exchange translation gain
            
            
            -
            
            
            33,711
            
            
            33,711Balance
                December 31, 2006
            
            $
            (24,999
            )
            $
            40,983
            
            $
            15,984





n)
            Deferred
                financing costs





Costs
      directly identifiable with the raising of debt are recorded as deferred
      financing costs. These deferred costs are amortized over the term of the debt
      financing to which the costs relate. Deferred financing costs consist primarily
      of corporate finance fees and legal fees. Amortization expense charged to
      operations for the years ended December 31, 2006 and 2005 was $313,387 and
      $0,
      respectively.





F-13





**Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements
 December
        31, 2006 and 2005





**Note
      2.**  **Summary
      of Significant Accounting Policies (continued)**





o)
            Stock
                options





On
      January 1, 2006, the Company adopted SFAS No. 123(R), “Share Based Payments”
(“SFAS 123(R)”), an amendment to SFAS No. 123 “Accounting for Stock-Based
      Compensation, (“SFAS 123”), using the modified prospective method. SFAS 123(R)
      requires the Company to recognize compensation expense in an amount equal to
      the
      fair value of share based payments granted to employees. (see note
      6(d)).





p)
            Recent
                accounting pronouncements affecting the
                Company:





SEC
      Staff Accounting Bulletin 108 (“SAB 108”), Considering the Effects of Prior Year
      Misstatements when Qualifying Misstatements in Current Year Financial
      Statements:





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
      "Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements." SAB 108 was issued in
      order
      to eliminate the diversity of practice surrounding how public companies quantify
      financial statement misstatements.





Traditionally,
      there have been two widely-recognized methods for quantifying the effects of
      financial statement misstatements: the “roll-over” method and the “iron curtain”
method. The roll-over method focuses primarily on the impact of a misstatement
      on the income statement—including the reversing effect of prior year
      misstatements—but its use can lead to the accumulation of misstatements in the
      balance sheet. The iron-curtain method, on the other hand, focuses primarily
      on
      the effect of correcting the period-end balance sheet with less emphasis on
      the
      reversing effects of prior year errors on the income statement.





In
      SAB
      108, the SEC staff established an approach that requires quantification of
      financial statement misstatements based on the effects of the misstatements
      on
      each of the company's financial statements and the related financial statement
      disclosures. This model is commonly referred to as a "dual approach" because
      it
      requires quantification of errors under both the iron curtain and the roll-over
      methods. SAB 108 permits existing public companies to initially apply its
      provisions either by (i) restating prior financial statements as if the "dual
      approach" had always been used or (ii) recording the cumulative effect of
      initially applying the "dual approach" as adjustments to the carrying values
      of
      assets and liabilities as of January 1, 2006 with an offsetting adjustment
      recorded to the opening balance of retained earnings.





Financial
      Accounting Standards Board (FASB) Interpretation No. 48; Accounting for
      Uncertainty in Income Taxes (“FIN 48”)





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109 (FIN 48), which provides clarification related to the process
      associated with accounting for uncertain tax positions recognized in
      consolidated financial statements. FIN 48 prescribes a more-likely-than-not
      threshold for financial statement recognition and measurement of a tax position
      taken, or expected to be taken, in a tax return. FIN 48 also provides guidance
      related to, among other things, classification, accounting for interest and
      penalties associated with tax positions, and disclosure requirements. We are
      required to adopt FIN 48 effective January 1, 2007, although early adoption
      is
      permitted. We are currently evaluating the impact of adopting FIN 48 on our
      consolidated financial statements.




F-14


**Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements
 December
        31, 2006 and 2005





**Note
      2.**  **Summary
      of Significant Accounting Policies (continued)**





p)
            Recent
                accounting pronouncements affecting the Company
                (continued):





Statement
      of Financial Accounting Standard 158, Fair Value Measurements (“SFAS
      158”):





On
      September 15, 2006, the Financial Accounting Standard Board issued a standard
      that provides enhanced guidance for using fair value to measure assets and
      liabilities. The standard applies whenever other standards require (or permit)
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value in any new circumstances. This Statement is effective
      for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. Earlier application is
      encouraged, provided that the reporting entity has not yet issued financial
      statements for that fiscal year, including financial statements for an interim
      period within that fiscal year. The Company will adopt this pronouncement
      effective January 1, 2008. We are currently evaluating the impact of adopting
      this pronouncement on our financial statements.





FSP
      FAS 123(R )-5, Amendment of FASB Staff Position FAS 123(R)-1:





FSP
      FAS
      123(R)-5 was issued on October 10, 2006. The FSP provides that instruments
      that
      were originally issued as employee compensation and then modified, and that
      modification is made to the terms of the instrument solely to reflect an equity
      restructuring that occurs when the holders are no longer employees, no change
      in
      the recognition or the measurement (due to a change in classification) of those
      instruments will result if both of the following conditions are met:





(a).
      There is no increase in fair value of the award (or the ratio of intrinsic
      value
      to the exercise price of the award is preserved, that is, the holder is made
      whole), or the antidilution provision is not added to the terms of the award
      in
      contemplation of an equity restructuring; and





(b).
      All
      holders of the same class of equity instruments (for example, stock options)
      are
      treated in the same manner. The provisions in this FSP shall be applied in
      the
      first reporting period beginning after the date the FSP is posted to the FASB
      website. We will evaluate whether the adoption will have any impact on our
      financial statements.





q)
            Property
                and equipment





Property
      and equipment are carried at cost less accumulated depreciation. Depreciation
      is
      calculated using the declining-balance method as follows.


Computer
                  equipment
              
              
              30
              %Office
                  furniture
              
              
              20
              %


Additions
      during the year are depreciated at one-half the usual rate.





r)
            Capital
                leases





Leases
      that transfer the substantial obligations and benefits of ownership are recorded
      as capital assets and a related obligation under capital leases.





s)
            Research
                and Development





Research
      and development costs are expensed as incurred. Research and development
      expenses consist primarily of salaries and related personnel costs, as well
      as
      stock compensation related to these costs.




F-15




**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2006 and 2005




**Note
      2.**  **Summary
      of Significant Accounting Policies (continued)**





t)
            Business
                Segment and Geographic Information





The
      Company operates in one dominant industry segment that is defined as the
      software industry. The Company’s international business represents over 95% of
      the Company’s revenue. The Company’s physical assets are located in its offices
      in Toronto, Canada. The Company currently has one customer in Panama that
      provided 27% and 31% of its revenue during the years ended December 31, 2006
      and
      2005, respectively. At December 31, 2006 and 2005, accounts receivable from
      this
      customer amounted to $21,364 and $40,511, respectively.




**Note
      3.**  **Marketable
      Securities**





The
      Company’s available for sale marketable securities consist of the
      following:


**Number**
                
                **OriginalCost**
                
                **CarryingValue**
                
                **Unrealized(Loss)**December
                    31, 2006:Midland
                    International Corporation
                
                
                1,000,000
                
                $
                50,000
                
                $
                25,001
                
                $
                (24,999
                )$
                50,000
                
                $
                25,001
                
                $
                (24,999
                )December
                    31, 2005:Midland
                    International Corporation
                
                
                650,000
                
                $
                32,500
                
                $
                32,500
                
                $
                nilWireless
                    Age Communications Inc.
                
                
                25,000
                
                $
                24,014
                
                $
                8,000
                
                $
                (16,014
                )$
                56,514
                
                $
                40,500
                
                $
                (16,014
                )





**Note
      4.**  **Property
      and Equipment**





Property
      and equipment comprises the following:


2006
              
              2005Computer
                  equipment
              
              $
              70,559
              
              $
              50,997Office
                  furniture
              
              
              29,314
              
              
              28,04499,873
              
              
              79,041Less:
                  accumulated depreciation and amortization
              
              
              (44,584
              )
              
              (33,890
              )$
              55,289
              
              $
              45,151




Depreciation
      expense charged to operations for the years ended December 31, 2006 and 2005
      was
      $12,265 and $15,407, respectively.





Included
      in the above property and equipment are computer equipment and office furniture
      under capital leases with costs of $82,385 (December 31, 2005: $70,638) and
      accumulated depreciation and amortization of  $34,930
      (December 31, 2005: $27,083). These leases bear interest at varying rates from
      5%-42%. The specific assets  covered
      by the  capital
      leases have been pledged as security to the leasing company until the complete
      lease has been repaid.




F-16





**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2006 and 2005




**Note
      4.**  **Property
      and Equipment (continued)**





The
      future minimum payments due under these capital leases are as
      follows:


2007
              
              $
              22,8942008
              
              
              12,0222009
              
              
              3,012$
              37,928Less
                  interest portion
              
              
              7,07230,856Less
                  current portion
              
              
              17,758$
              13,098




Amortization
      expense under capital leases is included in depreciation expense and amounted
      to
      $11,175 and $12,532 for the years ended December 31, 2006 and 2005,
      respectively.





**Note
      5.**  **Short
      Term Borrowings - Related Party**


2006
              
              2005Advance
                  from a shareholder, repayable on demand,unsecured
                  and non-interest bearing
              
              $
              —
              
              $
              45,171
  **Note
      6.**  **Capital
      Structure**





a)
            Authorized:


10,000,000
      (2005 - 2,000) preferred shares, $0.001 par value


400,000,000
      voting common shares, $0.001 par value


Issued
      and outstanding (Number of shares pursuant to a 1 for 20 reverse stock split
      effective May 5, 2005) at December 31, 2006: 16,617,504 (December 31, 2005:
      13,890,464)





b)
            Warrants:




The
      Company has granted 8,852,093 (post reverse split, see Note 6(c)) warrants
      to
      purchase an aggregate of 8,852,094 (post reverse split) common shares. All
      warrants are vested.




F-17





**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2006 and 2005





**Note
      6.**  **Capital
      Structure (continued)**





b)
            Warrants:




The
      composition and exercise prices of the warrants outstanding at December 31,
      2006
      are as follows:


WeightedNumber
              
              averageof
                  warrants
              
              exercise
                  price
              
              Expiry
                  dateJanuary
                  1, 2005
              
              
              875,404
              
              $
              3.85
              
              
              -Warrants
                  granted
              
              
              968,633
              
              
              2.58
              
              
              -Warrants
                  expired
              
              
              (112,500
              )
              
              (0.62
              )
              
              -December
                  31, 2005
              
              
              1,731,537
              
              $
              2.25
              
              
              -Warrants
                  granted
              
              
              7,983,460
              
              
              1.04
              
              
              -Warrants
                  expired
              
              
              (862,904
              )
              
              (1.96
              )
              
              -December
                  31, 2006
              
              
              8,852,093
              
              $
              1.19
              
              
              -Comprised
                  of:200,000
              
              
              1.51
              
              
              November
                  30, 200718,633
              
              
              10.00
              
              
              March
                  6, 2008100,000
              
              
              1.10
              
              
              May
                  25, 2008300,000
              
              
              2.00
              
              
              July
                  20, 2008250,000
              
              
              4.00
              
              
              December
                  15, 2010 (a)3,891,730
              
              
              0.56
              
              
              January
                  9, 20093,891,730
              
              
              1.50
              
              
              January
                  9, 2009100,000
              
              
              1.00
              
              
              February
                  1, 2007100,000
              
              
              2.00
              
              
              February
                  1, 20078,852,093
              
              $
              1.19
              
              
              -




(a) Warrants
      issued on December 15, 2005 to the President and Chief Executive Officer in
      connection with satisfaction of terms specified in an employment agreement
      dated
      February 4, 2004.




(c)
            Equity
                Transactions





Effective
      May 5, 2005, the Company approved a 1:20 reverse stock split. All transactions
      during the fiscal year ended December 31, 2005, described below, are presented
      as though the reverse stock split occurred on January 1, 2005.





In
      February 2005, the Company issued 169,073 unrestricted shares of common stock
      valued at $220,757 for payment of accounts payable. The Company also issued
      25,000 restricted shares of common stock valued at $22,500 to Neil Greenburg
      as
      consideration for partial repayment of a loan. This transaction was exempt
      from
      registration requirement pursuant to Section 4(2) of the Securities Act. Loans
      payable to Wade Kennedy and Alon Ossip were paid with 61,154 and 31,250
      unrestricted shares of common stock, respectively. These shares were valued
      at
      $76,822 and $41,250, respectively.





F-18


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
            31, 2006 and 2005


**Note
      6.**  **Capital
      Structure (continued)**




(c)
            Equity
                Transactions (continued)





In
      March
      2005, the Company issued 64,559 unrestricted shares of common stock for services
      rendered and were valued at $60,874. The Company also issued 18,634 restricted
      shares of common stock to various holders of senior subordinated convertible
      debentures which matured and were automatically converted in accordance with
      their terms. This transaction was exempt from registration requirement pursuant
      to Section 4(2) of the Securities Act.





In
      May
      2005, the Company issued 36,962 unrestricted shares of common stock for services
      rendered valued at $36,962.





In
      July
      2005, the Company issued 300,000 restricted shares of common stock in connection
      with a private placement and received $300,000. The Company also issued 14,500
      unrestricted shares of common stock valued at $13,050 for services
      rendered.





In
      August
      2005, the Company issued 92,800 unrestricted shares of common stock for services
      rendered. These shares were valued at $75,490. The Company also issued 13,000
      restricted shares of common stock for services rendered valued at $11,050.





In
      September 2005, the Company issued 29,078 unrestricted shares of common stock
      valued at $17,448 for services rendered.





On
      January 9, 2006, the Company sold (a) $3,500,000 principal amount of senior
      convertible notes, and (b) warrants to purchase 7,000,000 shares of common
      stock, to 16 accredited investors. Participants in a private placement which
      closed on December 8, 2005 for gross proceeds of $858,000 exchanged the
      securities they previously purchased for an investment in the senior convertible
      notes and warrants based on the dollar amount of their prior investment,
      bringing the total gross proceeds from the transactions to $3,500,000. The
      senior convertible notes bear interest at 1% per annum payable semi-annually,
      they mature two years from the date of issuance and are convertible into shares
      of common stock at the investors’ option at $0.50 per share, subject to
      adjustment. The interest rate becomes 15% per annum for the period in which
      interest is overdue and reverts back to 1% when payment is made or the notes
      are
      converted into common stock. The Company has accrued $194,891 for overdue
      interest as at December 31, 2006. The warrants are exercisable until three
      years
      from the date of issuance. Half of the warrants are exercisable at a purchase
      price of $1.50 per share and the other half of the warrants are exercisable
      at a
      purchase price of $0.56 per share. The investors may exercise the warrants
      on a
      cashless basis if the shares of common stock underlying the warrants are not
      then registered pursuant to an effective registration statement. This
      transaction was exempt from registration pursuant to Section 4(2) of the
      Securities Act and Rule 506 promulgated thereunder.





Oberon
      Securities, LLC acted as placement agent in connection with the sale of
      $2,642,000 principal amount of the senior convertible notes and related warrants
      on January 9, 2006 and was paid $224,618 cash compensation and issued 483,460
      non-assignable compensation warrants in March 2006 valued at $187,719,
      exercisable until three years after the date of issuance, with one-half of
      such
      compensation warrants entitling the holder to purchase shares of common stock
      at
      $1.50 per share and the other half of the compensation warrants entitling the
      holder to purchase shares of common stock at a purchase price of $0.56 per
      share. The Company also granted other placement agents in connection with the
      sale of $858,000 principal amount of the senior convertible notes and related
      warrants compensation in the form of 72,000 restricted shares of common stock.
      These shares were issued on June 22, 2006 and were valued at $43,200. These
      issuances were exempt from registration requirement pursuant to Section 4(2)
      of
      the Securities Act.





F-19


**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
            31, 2006 and 2005


**Note
      6.**  **Capital
      Structure (continued)**




(c)
            Equity
                Transactions (continued)





In
      February and March, 2006, the Company issued 632,043 restricted common shares
      for the settlement of professional services, accrued payroll expenses and
      prepaid services. These services included 61,593 restricted common shares issued
      on February 17, 2006 for in-house accounting services, 25,000 restricted common
      shares were issued on March 27, 2006 for management consulting fees, 500,000
      restricted common shares were issued for accrued employee bonuses to the CEO
      for
      milestones met through 2004 and 2005, and 45,450 restricted common shares were
      issued on March 13, 2006 for public document filing services. These shares
      were
      valued at the fair market value on the date of grant. A total of $358,139 was
      charged to operations with a corresponding credit to equity.





On
      March
      27, 2006, the Company issued 500,000 restricted common shares to the CEO in
      fulfillment of a bonus stemming from previous efforts. These shares were valued
      at the fair market value of $0.53 per share and were charged to operations
      with
      a corresponding credit to equity.





On
      February 17, 2006 a previous employee exercised his option agreement to purchase
      20,625 restricted common shares which had previously vested. A total of $6,394
      was received with a corresponding credit to equity.





In
      March,
      2006, as part of an agreement for public relations services, investor relations
      services and document filing services the Company issued warrants to purchase
      500,000 restricted common shares. The warrants which were valued at $123,375,
      range in exercise prices from $0.56 to $2.00 and expire in 1 to 10
      years.





On
      June
      23, 2006, at a duly held Annual Meeting of the shareholders of the Company,
      the
      shareholders approved the authorization of 10,000,000 preferred shares. None
      of
      these shares have been issued or are outstanding.





On
      June
      27, 2006, for full and final consideration of a receivable owing in the amount
      of approximately $54,575 and a payable of $70,866, the Company accepted the
      return of 185,000 common shares of the Company which were then returned to
      the
      transfer agent and removed from circulation.





On
      June
      27, 2006, the Company returned 25,000 shares of its common stock to the transfer
      agent and they were removed from circulation. The shares were being held as
      final payment for consulting services originating from an agreement signed
      in
      August, 2005. The agreement has expired and therefore the shares have been
      returned to the transfer agent.





In
      September 2006, as part of an agreement to settle amounts due for legal services
      of $14,240, the Company recorded the issuance of 17,800 shares.





In
      November 2006, the Company issued 899,000 restricted shares to senior
      convertible debt holders who exercised their right to convert to common shares
      at $0.50 per share.





F-20





**Phantom
            Fiber Corporation**
  Notes
            to
            the Consolidated Financial Statements
 December
            31, 2006 and 2005


**Note
      6.**  **Capital
      Structure (continued)**




(c)
            Equity
                Transactions (continued)





In
      December 2006, as part of an agreement for public relations services valued
      at
      $159,000, the Company issued 600,572 restricted shares and 195,000 unrestricted
      shares.




(d)
            Share
                - Based Payments:





In
      connection with the Reverse Acquisition described in note 1(b), the Company’s
      stock option plan was amended to increase the number of options to be issued
      under the plan from a maximum of 150,000 (post reverse split, see Note 6(c))
      options to a maximum of 2,000,000 (post reverse split) options. Effective
      January 1, 2006, the Company’s Plan is accounted for in accordance with the
      recognition and measurement provisions of Statement of Financial Accounting
      Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"),
      which replaces FAS No. 123, Accounting for Stock-Based Compensation, and
      supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for
      Stock Issued to Employees, and related interpretations. FAS 123 (R) requires
      compensation costs related to share-based payment transactions, including
      employee stock options, to be recognized in the financial statements. In
      addition, the Company adheres to the guidance set forth within Securities and
      Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, which
      provides the Staff's views regarding the interaction between SFAS No. 123(R)
      and
      certain SEC rules and regulations and provides interpretations with respect
      to
      the valuation of share-based payments for public companies.





Prior
      to
      January 1, 2006, the Company accounted for similar transactions in accordance
      with APB No. 25 which employed the intrinsic value method of measuring
      compensation cost. Accordingly, compensation expense was not recognized for
      fixed stock options if the exercise price of the option equaled or exceeded
      the
      fair value of the underlying stock at the grant date.





While
      FAS
      No. 123 encouraged recognition of the fair value of all stock-based awards
      on
      the date of grant as expense over the vesting period, companies were permitted
      to continue to apply the intrinsic value-based method of accounting prescribed
      by APB No. 25 and disclose certain pro-forma amounts as if the fair value
      approach of SFAS No. 123 had been applied. In December 2002, FAS No. 148,
      Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
      of SFAS No. 123, was issued, which, in addition to providing alternative methods
      of transition for a voluntary change to the fair value method of accounting
      for
      stock-based employee compensation, required more prominent pro-forma disclosures
      in both the annual and interim financial statements. The Company complied with
      these disclosure requirements for all applicable periods prior to January 1,
      2006.




In
      adopting FAS 123(R), the Company applied the modified prospective approach
      to
      transition. Under the modified prospective approach, the provisions of FAS
      123
      (R) are to be applied to new awards and to awards modified, repurchased, or
      cancelled after the required effective date. Additionally, compensation cost
      for
      the portion of awards for which the requisite service has not been rendered
      that
      are outstanding as of the required effective date shall be recognized as the
      requisite service is rendered on or after the required effective date. The
      compensation cost for that portion of awards shall be based on the grant-date
      fair value of those awards as calculated for either recognition or pro-forma
      disclosures under FAS 123.





F-21


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2006 and 2005




**Note
      6.**  **Capital
      Structure (continued)**




(d)
            Share
                - Based Payments (continued):





As
      a
      result of the adoption of FAS 123 (R), the Company's results for the year ended
      December 31, 2006 include share-based compensation expense totaling
      approximately $300,967. Of this amount, $165,826 represents the expense related
      to options granted to employees. The options were granted on July 14, 2006
      and
      the vesting period ranges from immediately to 3 years. The compensation expense
      for these options will be recognized ratably over the vesting period. These
      amounts have been included in the Consolidated Statements of Operations within
      operating expenses. No income tax benefit has been recognized in the income
      statement for share-based compensation arrangements due to a history of
      operating losses. Stock compensation expense of $39,000 was recorded under
      APB
      No. 25 for the twelve months ended December 31, 2005.





Stock
      option compensation expense in 2006 is the estimated fair value of options
      granted amortized on a straight-line basis over the requisite service period
      for
      the entire portion of the award.





During
      2006, the Company took into consideration guidance under SFAS 123R and SEC
      Staff
      Accounting Bulletin No. 107 (SAB 107) when reviewing and updating
      assumptions. The expected volatility is based upon historical volatility of
      our
      stock and other contributing factors. The expected term is based upon
      observation of actual time elapsed between date of grant and exercise of options
      for all employees. The fair value of options granted during the twelve month
      periods was estimated using the Black-Scholes option pricing model with the
      following assumptions:





The
      following table illustrates the effect on net income and earnings per share
      as
      if the fair value recognition provisions of FAS No. 123 R had been applied
      to
      all outstanding and unvested awards in the prior year comparable period.





For
                the year ended
              December
                31, 2005Net
                loss, as reported
            
            $
            (2,725,200
            )Add:
                Stock-based compensation included in reported net loss
            
            
            —Deduct:
                Total stock based compensation expense determined under the fair
                value
                based method for all awards (no tax effect)
            
            
            57,000Pro
                forma net loss
            
            $
            (2,782,200
            )Net
                loss per share:Basic
                and diluted loss per share - as reported
            
            $
            (0.20
            )Basic
                and diluted loss per share - pro forma
            
            $
            (0.20
            )





Year
                ended December 31, 2006
            
            Year
                ended December 31, 2005Expected
                term (in years)
            
            1.33
                to 3.50
            
            5Expected
                stock price volatility
            
            113%
                to 157%
            
            86%Risk
                free interest rate
            
            4.76%
                to 5.29%
            
            4.00%Expected
                dividend yield
            
            0%
            
            0%





F-22


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2006 and 2005




**Note
      6.**  **Capital
      Structure (continued)**




(d)
            Share
                - Based Payments (continued):





A
      summary
      of the changes in the Company’s stock option plan for the years ended December
      31, 2006 and December 31, 2005 is as follows:




Number
                  of shares
            
            Weighted
              average
              exercise
                price
            
            Weighted
                Average Remaining Contractual Term (years)
            
            Aggregate
                Intrinsic ValueBalance
                at January 1, 2005
            
            
            580,000
            
            $
            0.35
            
            
            4.46
            
            $
            62,282Options
                granted
            
            
            75,000
            
            
            1.03
            
            
            0.96
            
            
            —Options
                cancelled
            
            
            (87,500
            )
            
            (0.50
            )
            
            —
            
            
            —Balance
                at December 31, 2005
            
            
            567,500
            
            
            0.41
            
            
            3.43
            
            $
            62,282Options
                granted
            
            
            1,641,862
            (a)
            
            0.51
            
            
            5.65
            
            
            —Options
                cancelled
            
            
            (285,266
            )
            
            0.61
            
            
            —
            
            
            —Options
                exercised
            
            
            (20,625
            )
            
            (0.31
            )
            
            —
            
            
            —**Balance,
                December 31, 2006**
            
            
            **1,903,471**
            
            
            **0.47**
            
            
            **4.78**
            
            
            **62,282****Exercisable,
                December 31, 2006**
            
            
            **886,368**
            
            **$**
            **0.43**
            
            
            **3.51**
            
            **$**
            **62,282**




(a) Options
      have been granted to the CEO and certain employees and will only vest should
      the
      company be profitable for the year ended December 31, 2006. The amount of
      options is 150,000 and profitability is defined as earnings before interest,
      taxes, depreciation and amortization.




The
      fair
      value of the 1,641,862 employee stock options granted during the year ended
      December 31, 2006 was $487,193. As of December 31, 2006, there was $222,625
      of
      unamortized compensation costs, net of estimated forfeitures, related to non
      vested stock options, which is expected to be recognized over a weighted average
      period of approximately 2.75 years.





Exercise
                Price
            
            Number
              of
                options
              outstanding
            
            Average
              remaining
                life (years)
            
            Weighted
              average
              exercise
              price
            
            Weighted
              Number
              of
                options
              exercisable
            
            Weighted
              average
              exercise
                price$
            0.23
            
            
            409,750
            
            
            2.12
            
            $
            0.23
            
            
            409,750
            
            $
            0.230.50
            
            
            434,894
            (a)
            
            4.65
            
            
            0.50
            
            
            —
            
            
            0.500.51
            
            
            795,007
            (b)
            
            5.99
            
            
            0.51
            
            
            212,798
            
            
            0.510.53
            
            
            238,820
            (c)
            
            0.22
            
            
            0.53
            
            
            238,820
            
            
            0.532.00
            
            
            25,000
            
            
            4.66
            
            
            2.00
            
            
            25,000
            
            
            2.00$
            0.23
                - 2.00
            
            
            1,903,471
            
            
            5.68
            
            $
            0.49
            
            
            886,368
            
            $
            0.46




(a)
            Includes
                225,000 options issued on May 1, 2006 to an employee. Also 209,894
                options
                were issued to directors.




(b)
            Options
                issued on July 14, 2006 to employees and directors. Also includes
                125,000
                options which have been issued and will vest only if the company
                is
                profitable for the year ended December 31,
                2006.




(c)
            Options
                issued to previous directors accrued for in
                2005.




F-23





**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2006 and 2005




**Note
      7.**  **Senior
      Convertible Notes**





On
      December 8, 2005, the Company received subscriptions of $858,000 for the sale
      of
      1,560,000 shares of common stock and warrants from accredited investors. The
      common stock and warrants were sold as units, with each unit consisting of
      one
      share of common stock and a warrant to purchase one share of common stock,
      for a
      per unit purchase price of $0.55. Each warrant entitles the holder to purchase
      one share of common stock at $1.10 per share, exercisable for a period of three
      years. Each of the investors had the right to exchange their units for any
      equity securities or other security which may be sold by the Company during
      the
      period ending 45 days after closing of the transaction. Each of the investors
      exercised their right to exchange their units for securities sold by the Company
      in a private placement (see below) which closed on January 9, 2006. The rights
      to the warrants described in this note were also exchanged in favor of warrants
      attached to the January 9, 2006 financing. At December 31, 2005 these funds
      were
      recorded as securities subscriptions pending completion of the January 5, 2006
      transaction.





On
      January 5, 2006, the Company entered into a Securities Purchase Agreement with
      accredited investors for the sale of (i) $3,500,000 principal amount of senior
      convertible notes (the “notes”) and (ii) warrants to purchase up to 7,000,000
      shares of common stock. The sale of the senior convertible notes and warrants
      closed on January 9, 2006. Participants in the private placement which closed
      on
      December 8, 2005 for gross proceeds of $858,000 exchanged the securities they
      previously purchased for an investment in the senior convertible notes and
      warrants based on the dollar amount of their prior investment, bringing the
      total gross proceeds from this private placement to $3,500,000.





The
      notes
      totaling $3,500,000 have a stated maturity date of January 9, 2008 with an
      option to the holder to extend the date in case of an event of default (as
      specified) and on change of control as defined. These notes are convertible
      into
      common shares at $0.50 with a reset provision to 75% of the conversion rate
      in
      the event that certain performance targets and stock price levels specified
      in
      the notes agreement are not met by December 31, 2006. The notes are redeemable
      earlier at the option of the holder in case any of the specified events of
      default occur or on change of control. The redemption amount is to be calculated
      in accordance with the formula specified in the notes agreement. The notes
      bear
      interest at 1% per annum. The
      interest rate becomes
      15% per annum for the period in which interest is overdue and reverts back
      to 1%
      when payment is made or the notes are converted into common stock. .
      The
      Company has accrued $21,065 representing the 1% interest due and $173,826 for
      overdue interest at 14% per annum as of December 31, 2006.  The
      notes also have two separate warrants to purchase common stock of the Company.
      Warrant A entitles the holders to purchase up to 3,500,000 common shares at
      $1.50 per share and Warrant B entitles the holders to purchase up to 3,500,000
      common shares at $0.56 per share. These warrants are exercisable until January
      9, 2009.





The
      Company paid $241,730 cash compensation to the placement agent and a lawyer
      in
      connection with the sale of $2,642,000 principal amount portion of the senior
      convertible notes and related warrants and issued 483,460 non-assignable
      compensation warrants exercisable until three years after the date of issuance,
      with one-half of such compensation warrants entitling the holder to purchase
      shares of common stock at $1.50 per share and the other half of the compensation
      warrants entitling the holder to purchase shares of common stock at a purchase
      price of $0.56 per share. The Company also compensated other placement agents
      and a lawyer in connection with the sale of the $858,000 principal amount
      portion of the senior convertible notes and related warrants, compensation
      in
      the form of 72,000 restricted shares valued at $43,200.





Registration
      Rights Agreements require the Company to register and maintain the registration
      of the shares underlying the aforementioned notes and the warrants. The Company
      will incur cash penalties if it fails to do so.





F-24


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2006 and 2005




**Note
      7.**  **Senior
      Convertible Notes (continued)**





The
      Company has accounted for the conversion option in the notes as an embedded
      derivative under the provisions of FAS 133: Accounting
      for Derivative Instruments and Hedging Activities. Pursuant to the provisions
      of
      Statement of Financial Accounting Standards No. 133, and EITF 00-19: “Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock” (“EITF 00-19”), the Company has recorded initially the
      value of the warrants and conversion option at $3,042,290 and $2,983,856,
      respectively. As the proceeds of the notes of $3,500,000 are less than the
      combined fair value of the warrants and the conversion option, the initial
      difference of $2,526,146 has been charged to interest expense on derivative
      instruments, a non-operating expense, in the consolidated statements of
      operations. The note is determined to have no value and has been recorded with
      a
      debt discount of $3,500,000, the value of the notes. The debt discount is being
      amortized using the effective interest rate method over the life of the
      underlying debt accordingly; the effective interest rate for the debt is 507%.
      The cash paid of $300,720, the value of the warrants of $211,519 and the shares
      issued of $43,200 to the private agents and lawyers have been accounted as
      deferred financing cost and the warrants have been accounted as additional
      paid
      in capital. The deferred financing costs are being amortized on a straight
      line
      basis over the life of the underlying convertible note.





The
      Company revalued the conversion option and the warrants as of December 31,
      2006
      at $1,041,944 and $1,275,280, respectively. During the twelve months ended
      December 31, 2006, the Company has recorded income of $1,182,776 from the change
      in value of these derivative instruments.




**Note
      8.**  **Related
      Party Transactions**





An
      officer of the Company had provided a loan with a balance of $45,171 at December
      31, 2005 (see Note 5). This loan was unsecured, non-interest bearing, had no
      formal repayment terms and was therefore disclosed as a current liability under
      short term borrowings. In January 2006, a person related to the Chief Executive
      Officer provided a short term loan to the Company of $85,680. These amounts
      were
      paid in full in the second quarter of the fiscal year.





Included
      in accounts payable and accruals at December 31, 2005, is an amount of $4,589
      owing to a company directly controlled by the spouse of the CEO for legitimate
      services rendered. This was paid in full in the first quarter of 2006. Also
      included in accounts payable and accrued liabilities to related parties is
      an
      amount of $137,671 ($434,008 - December 31, 2005) due to an officer for services
      rendered during the period, representing unpaid compensation due to the
      officer.




**Note
      9.**  **Income
      Taxes**





The
      Company files US Federal income tax returns for its US operations. Separate
      income tax returns are filed, as locally required, for each of its foreign
      subsidiaries.





There
      was
      no provision for income taxes for the years ended December 31, 2006 and
      2005.





F-25


**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2006 and 2005




**Note
      9.**  **Income
      Taxes (continued)**





The
      total
      provision for income taxes differs from that amount which would be computed
      by
      applying the income tax rate to income (loss) before provision for income taxes.
      The reasons for these differences are as follows:





2006
            
            2005Amount
            
            %
            
            Amount
            
            %Statutory
                income tax rate (recovery)
            
            $
            (1,049,300
            )
            
            (36
            )
            $
            (984,300
            )
            
            (36
            )Non-deductible
                items and temporary differences
            
            
            988,300
            
            
            35
            
            
            496,300
            
            
            18Other,
                including valuationAllowance
                adjustment
            
            
            61,000
            
            
            1
            
            
            488,000
            
            
            18Net
                taxes (recovery) and effective rate
            
            $
            —
            
            
            0
            
            $
            —
            
            
            0





The
      Company recognizes deferred tax liabilities and assets for the expected future
      tax consequences of temporary differences between the carrying amounts and
      the
      tax basis of assets and liabilities and net operating loss carry-forwards.
      Temporary differences and carry-forwards, which give rise to deferred tax assets
      and liabilities are as follows:





2006
            
            2005Component
            
            Tax
                Effect
            
            Component
            
            Tax
                EffectNet
                operating losses - domestic
            
            $
            2,392,000
            
            $
            813,000
            
            $
            2,682,000
            
            $
            912,000Less
                valuation allowance
            
            
            (2,392,000
            )
            
            (813,000
            )
            
            (2,682,000
            )
            
            (912,000
            )Net
                deferred tax asset
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                operating losses - foreign
            
            $
            7,326,000
            
            $
            2,646,000
            
            $
            4,335,000
            
            $
            1,566,000Less
                valuation allowance
            
            
            (7,326,000
            )
            
            (2,646,000
            )
            
            (4,335,000
            )
            
            (1,566,000
            )Net
                deferred tax asset
            
            
            —
            
            
            —
            
            
            —
            
            
            —





As
      December 31, 2006, the Company had cumulative net operating loss carry-forwards
      of approximately $2,392,000 and $7,326,000 in the United States and Canada
      respectively. These amounts will expire in various years through 2027. The
      related deferred tax assets have been completely offset by a valuation
      allowance. The Company has no significant deferred tax liabilities.




**Note
      10.**  **Accrued
      liabilities**




The
      composition of accrued liabilities is as follows:





2006
            
            2005Professional
                fees
            
            $
            260,871
            
            $
            314,271Director
                compensation
            
            
            69,583
            
            
            74,620Interest
                on senior convertible debt
            
            
            194,891
            
            
            —Salary
                and related costs
            
            
            36,252
            
            
            12,918Other
            
            
            16,774
            
            
            126,141Total
            
            $
            578,371
            
            $
            527,950







F-26




**Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2006 and 2005




**Note
      11.**  **Commitments**




(a)
            The
                Company leases its corporate executive office in Toronto, Canada
                and a
                sales office in Costa Rica under operating leases which expire in
                various
                years through October 31, 2009. In addition, the Company has an office
                in
                New York which it rents on a monthly basis for $285 per month. The
                future
                minimum payments under these leases for each of the years ended December
                31, and in the aggregate are as
                follows:




2007
              
              $
              81,0002008
              
              
              86,0002009
              
              
              40,000





Rent
      expense charged to operations for the years ended December 31, 2006 and 2005
      amounted to $128,787 and $90,752, respectively.




(b)
            The
                Company’s CEO/President has an employment contract under which the annual
                salary is $250,000.




**Note
      12.**  **Subsequent
      Events**





In
      February 2007, the Company entered into a factoring agreement with a financing
      company to provide funds equal to 90% of the receivable due from the Canadian
      government related to tax credits generated from the Scientific Research and
      Experimental Development program. These funds which have been fully drawn down
      as of April 9, 2007 bear interest at a rate of 36.5% per annum and is secured
      by
      a promissory note, general security agreement over intangible and tangible
      assets, specific assignment over past, present and future tax credit claims,
      guarantee and postponement of claim.





In
      February 2007, the Company issued 80,000 unrestricted shares of common stock
      for
      services to be rendered during the next twelve months.




In
      March
      2007, the Company issued 265,000 restricted shares to senior convertible debt
      holders who exercised their right to convert to common shares at $0.50 per
      share.




**Note
      13.**  **Comparative
      Figures**





Certain
      comparative figures have been reclassified to conform to the financial statement
      presentation adopted in the current year.




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