U S SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

**FORM 10-KSB/A1**

 

(Mark One)

 

xAnnual Report Pursuant to Section 13 or            15(d) of the Securities Exchange Act of 1934

 

oTransitional            Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2006

 

Commission file number: 0-28031

 

**PACIFIC FUEL CELL CORP.**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                                                      | **80-0043875**                       |
|-----------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of

incorporation or organization) | (I.R.S. Employer Identification No.) |

 

 

**131 N. Tustin Ave.**

**Suite 100**

**Tustin, CA 92780**

**(714) 564-1693** 

(Address, including zip code and telephone number, including            area

code, of registrant’s executive offices)

 

Securities registered under Section 12(b) of the Exchange            Act:

none

 

Securities registered under to Section 12(g) of the Exchange            Act:

 

**Common Stock**

(Title of class)

 

Check whether the issuer (1) filed all reports required to be filed by            Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12            months (or for such shorter period that the Company was required to file such reports),            and (2) has been subject to such filing requirements for the past 90 days. Yes            __X__ No____  

 

(Continued on Following Page)

 

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

 

State issuer’s revenues for its most recent fiscal year.            $-0-

 

State the aggregate market value of the voting and non-voting common            equity held by non-affiliates computed by reference to the price at which the common            equity was sold, or the average bid and asked price of such common equity, as of a            specified date within the past 60 days: $10,408,619 as of March 30, 2007.

 

State the number of shares outstanding of each of the issuer’s            classes of common equity, as of the latest practicable date: As of March 30, 2007,            69,795,396 shares of Common Stock were issued and outstanding.

 

Documents incorporated by reference: None

 

 

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**TABLE OF CONTENTS**

 

**FORM 10-KSB ANNUAL REPORT**

 

**PACIFIC FUEL CELL CORP.**

 

|   | PAGE |
|--------|------|

 

Facing Page

Index

 

PART I

| Item 1. | Description of Business | 4 |
|---------|-------------------------|---|

| Item 2. | Description of Property | 12 |
|---------|-------------------------|----|

| Item 3. | Legal Proceedings | 13 |
|---------|-------------------|----|

| Item 4. | Submission of Matters to a Vote of Security                            Holders | 13 |
|---------|--------------------------------------------------------------------------------|----|

 

PART II

| Item 5. | Market for the Registrant’s Common Equity and                            Related Stockholder Matters | 13 |
|---------|------------------------------------------------------------------------------------------------------------|----|

| Item 6. | Management’s Discussion and Analysis of Financial                            Condition |
|---------|----------------------------------------------------------------------------------------------|

|   | and Results of Operations | 14 |
|--------|---------------------------|----|

| Item 7. | Financial Statements | 21 |
|---------|----------------------|----|

| Item 8. | Changes in and Disagreements on Accounting and Financial                            Disclosure | 38 |
|---------|------------------------------------------------------------------------------------------------|----|

| Item 8A. | Controls and Procedures | 38 |
|----------|-------------------------|----|

 

 

PART III

| Item 9. | Directors, Executive Officers, Promoters and Control                            Persons; |
|---------|------------------------------------------------------------------------------------------|

|   | Compliance with Section 16(a) of the Exchange                            Act | 38 |
|--------|------------------------------------------------------------------------------|----|

| Item 10. | Executive Compensation | 39 |
|----------|------------------------|----|

| Item 11. | Security Ownership of Certain Beneficial Owners and                            Management | 40 |
|----------|-------------------------------------------------------------------------------------------|----|

| Item 12. | Certain Relationships and Related                            Transactions | 41 |
|----------|---------------------------------------------------------------------------|----|

 

PART IV

| Item 13. | Exhibits and Reports on Form 8-K | 41 |
|----------|----------------------------------|----|

| Item 14. | Principal Accountant Fees and Services | 43 |
|----------|----------------------------------------|----|

 

| SIGNATURES | 45 |
|------------|----|

 

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**PART I**

 

**ITEM            1. DESCRIPTION OF BUSINESS.**

 

**HISTORY**

 

Pacific Fuel Cell Corp. (“we, “us,” “our,”            or the “Company”) was incorporated under the laws of the State of Nevada on            May 5, 1998, under the original name “Magnum Ventures Inc.” We changed our            name on May 18, 1999 to “RadioTower.com, Inc.” Thereafter, in August 2001,            we changed our name to our current name.

 

On July 2, 2001, we entered into a definitive agreement with Fullerene            USA, Inc. (“Fullerene”), a privately held Nevada corporation, which            contained various conditions subsequent prior to effectiveness, including completion of            due diligence activities and other matters (the “Fullerene Agreement”).            These conditions were subsequently satisfied. Effective August 28, 2001, we closed an            acquisition of certain assets previously owned by Fullerene. The terms of the Fullerene            Agreement provide for us to acquire an exclusive worldwide license (except for Japan)            in Fullerene’s proprietary fuel cell technology, including certain future            acquired intellectual property, for use in transportation applications (the            “Assets”). The licensing agreement expires upon the expiration of the            underlying patent application, which is 17 years following the approval of the patent            by the US Patent and Trademark Office. Relevant thereto, on March 16, 2004, the United            States Patent and Trademark Office issued Patent No. 6,706,431 to Fullerene.

 

In exchange for the Assets, we issued 30,100,000 shares of our            “restricted” Common Stock, equal to ownership of approximately 51% of our            then outstanding stock. The number of our authorized common shares was increased to            200,000,000 in July 2001 in conjunction with the Fullerene transaction.

 

Our initial business plan was to develop and produce low cost fuel cells            for transportation. During 2002, we revised our business plan to emphasize the            development and production of low cost fuel cells for personal electronics or other            applications requiring small size and longevity of use. We revised our original            business plan as a result of the costs associated with developing transportation            related fuel cells, which exceeded our available capital. We may reinstate the elements            of the original business plan if our current business plan proves successful, of which            there can be no assurance. As of the date of this Report, we are focused on improving            the production capability of our nanoMEA (described below), enhancing product            performance, reducing product costs, designing market-ready products, developing            volume-manufacturing capability, building customer and supplier relationships and            marketing it to potential customers. We are also continuing research to refine and            improve our current nanoMEA.

 

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**DESCRIPTIONOFCURRENTBUSINESS**

 

On August 21, 2002, we entered into an agreement with the University of            California (“UCR”), to develop a commercially viable fuel cell, exploiting            our proprietary technology. On May 4, 2004, this agreement was extended through April            30, 2006, so long as we continued to make payments. On October 13, 2006, an amendment            was executed with UCR requiring payments of $135,876, of which $50,229 has been paid as            of the date of this Report. The balance of $50,252 was due on or before January 31,            2007, with an additional payment of $35,395 due on or before February 28, 2007.            However, pursuant to the terms of this agreement, we are not obligated to tender            payment until we receive an applicable invoice for the same. As of the date of this            Report, we have not received any invoices from UCR for these payments. Once received,            we intend to tender all amounts due. It is not anticipated that we will be required to            make any additional payments for any future extensions. In order to allow us to make            the aforesaid payments, we borrowed funds from Fullerene, which were subsequently            repaid in full. UCR, through its SMART program, provides matching funds for all direct            costs applicable to development of the project. We applied for additional matching            funds through this SMART program and have obtained a favorable decision and expect a            grant of approximately $120,000 to be provided over the next two years. This also            provides a multi-year relationship with UCR. All information we provide to UCR has been            deemed confidential for a period of one (1) year after expiration or termination of the            agreement.

 

As a result of the relationship with UCR, on November 10, 2003, we            announced that a research team headed by Professor Yushan Yan of UCR had successfully            developed a fuel cell using carbon nanotube-based electrodes. As a result of our            research and development activities with UCR, we expect that the use of multi-walled            carbon nanotubes as a platinum support for proton exchange membrane fuel cells will            reduce the manufacturing cost of fuel cells through a decreased use of platinum.            Current technology uses platinum, a precious metal, as the catalyst for hydrogen to            separate into a proton and electron. Since platinum is a high cost metal in very            limited production, it is cost prohibitive, preventing fuel cells from being            economically viable even at high volume production. Our proposed method of producing            fuel cells is expected to minimize or eliminate the use of platinum. If successful, the            result will be low cost fuel cells at high volume production levels.

 

On September 22, 2005, we announced that we completed the prototype of            our proprietary nanostructured Membrane Electrode Assembly (“nanoMEA”), and            thereafter began looking for partners for nanoMEA production. The new carbon            nanomaterial based MEAs have shown excellent performance for both hydrogen and methanol            fuel cells. For example, this technology uses 75% less platinum while exceeding the            performance of current state of the art MEAs for methanol fuel cells. The carbon            nanomaterials are used as the support of platinum or platinum alloy catalysts. Another            major advantage of these carbon nanomaterials is their higher corrosion resistance and            thus longer lifetime than carbon black.

 

On November 3, 2005, we announced that we had entered into an agreement            with Bourns, Inc. (“Bourns”) to scale-up PFCE’s new process for            making electro-catalyst and nanoMEA products to commercial scale. Bourns, headquartered            in Riverside, California, has been a manufacturer of electronics industry components            for over 50 years. Their products are

 

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used            by the industrial, automotive, telecommunications, audio/visual, aerospace and other            electronic industries.

 

On March 16, 2006, we announced that we had delivered production scale            prototype nanoMEAs to an undisclosed customer. The delivered prototypes were produced            in conjunction with our collaborative manufacturer, Bourns, Inc. The Bourns team,            working with our scientific staff, successfully engineered our innovative process for            making nanoMEA’s to commercial scale. Based upon the success of our development            efforts, we are currently engaged in discussions with Bourns to increase the scope and            intensity of our collaborative efforts. However, as of the date of this Report, the            terms of a definitive agreement have not been reached.

 

As of the date of this Report, we are focused on improving the            production capability of our nanoMEA and marketing it to potential customers. We are            also continuing research to refine and improve our current nanoMEA.

 

In December 2004, we opened our own laboratory. We pay $3,059 per month            rent on this facility. We were able to accomplish this as a result of a financing            described below. We are continuing our work with UCR and believe we have made            significant progress. In April 2005, we announced that we had acquired certain rights            to a new Carbon Nanotube Membrane Electrode Assembly (“MEA”) for hydrogen            and methanol fuel cells. We filed a provisional patent application in the name of the            co-inventors, Professor Yushan Yan, Dr. Wenzhen Li, Dr. Xin Wang, Mr. Zhongwei Chen,            Mr. Mahesh Waje, Professor William Goddard and Dr. Weiqiao Deng, to protect this            intellectual property. This new technology uses 75% less platinum, while significantly            exceeding the performance of current state of the art MEA’s for direct methanol            fuel cells. MEA’s can be assembled into a stack that consists of multiple layers            of MEA’s and a support structure, dependent on the fuel cell application. Overall            performance of such fuel cells are expected to be well above industry norm data shown            by other manufacturers. Additional development will continue in our laboratory at the            UCR Research Park, utilizing this and other proprietary technologies owned or licensed            by us.

 

On August 4, 2006, we closed a private offering of restricted shares of            our Common Stock (the “Shares”). We received proceeds of $338,500 from the            sale of 2,417,858 Shares ($0.14 per share). The Shares were sold to a total of 17            investors, including 2 “accredited investors” as that term is defined under            Rule 501(a) of Regulation D as promulgated under the Securities Act of 1933, as            amended.

 

**Acquisition of Equipment**

 

Effective December 18, 2006, pursuant to an Assignment and Assumption of            Equipment Purchase Agreement, we were assigned all rights of TDM, L.L.C. relating to an            Agreement dated August 22, 2006, as amended December 20, 2006, between SGL Technic            Inc., a wholly owned subsidiary of SGL Technologies GmbH, a German company            (“SGL’), and TDM, L.L.C. (“TDM”), wherein we acquired certain            equipment on an “as is” basis. This equipment consists of two press machine            sets (200 and 800 ton) plus auxiliary equipment, which is used for manufacturing of            bi-polar plates. We have been developing the MEA business segment of the

 

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fuel            cell industry and have nanoMEA technology to enhance performance and durability. A fuel            cell stack (essentially an electricity generator) consists of an MEA, GDL (gas            diffusion layer) and bipolar plates. As such, management believes that this acquisition            of equipment fits in with our proprietary technology.

 

The purchase price of the equipment was $200,000. As of the date of this            Report, we have paid an aggregate of $100,000; $5,000 was previously paid by TDM. The            balance of $95,000 shall become due on or before June 30, 2007. We intend to utilize            the proceeds received from our recent private offering described below to pay this            obligation.

 

This equipment acquisition allows us to expand our current business plan            to begin to manufacture bipolar plates, which will provide us with the capability of            marketing our own fuel cell components for the industry. We have moved the equipment to            a new location approximately 5 miles from the equipment’s previous location in            Willoughby, Ohio, and have retained manufacturing personnel. We have retained the            services of two new employees, a director of sales and a director of manufacturing,            both of whom have direct experience in the fuel cell business and manufacturing of            bi-polar plate components. We are also engaged in discussions with various parties who            have expressed an interest in providing us with additional equity capital to allow us            to move forward.

             

To assist us in this business and allow us to meet our financial            obligations that we assumed when we acquired these assets, we are currently engaged in            a private offering of our Common Stock, wherein we are attempting to raise up to            $300,000. Relevant thereto, as of the date of this Report we have issued an aggregate            of 2,214,285 “restricted” shares of our Common Stock and received proceeds            of $300,000 from the sale thereof ($0.14 per share). The Shares were sold to a total of            10 investors, all of whom were “accredited investors” as that term is            defined under Rule 501(a) of Regulation D as promulgated under the Securities Act of            1933, as amended.

 

SGL Technic Inc. (“SGL”) discontinued its bi-polar plate            manufacturing business. Current customers of SGL for the bipolar plates consist of many            of the top fuel cell companies in the world, almost all of whom are potential customers            for our MEA. In the event we are able to transfer sales and begin manufacturing, of            which there can be no assurance, we expect to supply many of these            customers.

 

**Other Business**

 

In April 2004, we, through PFCE Acquisition Corp, a Nevada corporation            and our wholly owned subsidiary (“Sub”), and Cellfoods Corporation, a            Nevada corporation (“Cellfoods “), entered into an Agreement and Plan of            Merger whereby Sub merged with and into Cellfoods, which survived as our wholly owned            subsidiary. This merger was consummated on or about May 17, 2004.

 

Cellfoods is a development stage corporation that was organized in            January 2003 engaged in the business of developing soybean powder for use in food            preparation. This business was operated by Messrs. Koji Suzuki, the president of            Cellfoods, Hiroyuki Igarashi, the

 

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vice            president, and Ken Inouye, our former officer and director. Effective March 2005, we            discontinued the Cellfoods operations due primarily to insufficient funds available to            allow us to develop this business. Because we had limited funds, our management elected            to devote our limited financial resources to our principal business of developing our            fuel cell technology. We may, however, elect to reestablish Cellfoods business plan if            management believes we have sufficient funds to do so in the future, of which there is            no assurance. As of the date of this report, we intend to devote our financial            resources to our existing businesses described elsewhere in this Report.

 

Prior to the merger, Cellfoods reached an agreement with HEM Mutual            Assurance LLC, Minneapolis, Minnesota, an accredited investor (as that term is defined            under Rule 501, Regulation D, promulgated under the Securities Act of 1933, as amended)            to issue up to $1,000,000 in aggregate principal amount of convertible debentures            pursuant to Rule 504 of Regulation D under the Securities Act of 1933, as amended.            These Debentures were to be issued by Cellfoods in two separate convertible debentures            of $997,000 and $3,000, respectively (hereinafter referred to in the aggregate as the            “Debentures”). As a result of the merger, we assumed the obligations and            benefits of Cellfoods, including Cellfoods’ obligation to issue the            Debentures.

 

Because the conversion price of the Debentures was not fixed, and            imposing the limit of 2,000,000 shares would require us to redeem any outstanding            Debentures at a premium, we were required to bifurcate the embedded conversion option            and account for it separately as a derivative instrument liability. This conversion            option was initially valued at $423,634, using the Black-Scholes option pricing model.            In valuing the option, we used an estimate of the volatility of our Common Stock price            of 90%, based on a review of the historical volatility, an expected dividend yield of            0% and a risk-free rate of return of 3.92%, based on constant maturity rates published            by the U.S. Federal Reserve, applicable to the remaining life of the            Debentures.

 

The bifurcated embedded derivative instrument is marked to market at            each reporting date, with any changes in its fair value charged or credited to income.            On conversion, a pro rata portion of the bifurcated derivative instrument liability,            marked to market as of the conversion date, together with the carrying value of the            portion of the Debenture being converted, was credited to additional paid-in            capital.

 

We received net proceeds of $863,100 after payment of deferred Debenture            costs of $136,900. These deferred costs are initially being amortized over the            five-year term of the Debentures. On conversion, a pro rata portion of the unamortized            costs was deducted from the deemed proceeds of conversion that are credited to            additional paid-in capital.

 

We had the right to redeem the Debentures on 30 days’ notice for            125% of the principal amount of the outstanding Debentures, plus accrued and unpaid            interest. Relevant thereto, on October 24, 2005, we redeemed the remaining outstanding            convertible Debentures placed with HEM. As a result, 26,992,462 shares of our Common            Stock, representing the remaining shares being held in escrow under the debenture            agreement were returned to us and were canceled. We issued an aggregate of 3,007,538            shares of our Common Stock from the conversion of these Debentures during the time they            were outstanding.

 

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We utilized the proceeds from this Debenture offering to open our own            lab for purposes of developing the fuel cell prototype. In mid December 2004, our            laboratory was ready for occupancy. It took much longer to complete modification and            improvement inside the laboratory due to many elements, including mostly electrical            power requirements, gas exhaust equipment and many other elements needed to be approved            in inspections done by local officials.

 

**Industry Overview**

 

We believe that a fuel cell unit can replace conventional batteries            because a fuel cell unit should provide longer usage at lower consumer cost. While no            assurances can be provided that this development will result in our generating            revenues, our development to date is considered by management to be a significant step            forward in the use of fuel cell technology.

 

Fuel cell acceptance appears to be accelerating. Large and small            corporations, as well as the United States government, all appear convinced of the            value of fuel cell technology. Despite all this activity, we have still not seen a            commercial product that, in our opinion, is competitively priced with other forms of            energy. We believe that, while fuel cell products will begin to proliferate, market            acceptance will come only when prices fall to competitive levels.

 

There are currently several different technologies in use for fuel cell            power generation. Each of these processes differs in methodology, suitable scale and            efficiency. Our interest (and patent applications) is in the Proton Exchange Membrane            (“PEM”) method that is very suitable for low temperature operation and            Direct Methanol fuel cell (“DMFC”).

 

We have also entered into preliminary discussions with potential            strategic partners to utilize our current technology position in order to assume a            market leadership position in our target market of micro fuel cells. We have been            seeking strategic partners, but we did not have conclusive data regarding our MEA            prototype and we could not proceed to actual negotiations. Now that we have improved            our prototype data, we intend to resume seeking potential strategic partners. However,            as of the date of this Report, no agreements have been entered into and there are no            assurances that such discussions or any such agreement will occur in the foreseeable            future.

 

We have also investigated the possibility of using our proprietary fuel            cell technology to provide electricity for small commercial establishments and            households. Although we do not currently have the rights to utilize our fuel cell            technology in this market, we believe that, if we decide to pursue this market, we can            acquire such rights from Fullerene on advantageous terms. However, there can be no            assurances that we will be able to acquire such rights in the future.

 

We believe our next step in the implementation of our business plan is            to focus on improving the production capability of our nanoMEA and marketing it to            potential customers Our initial marketing is expected to be through attendance at trade            shows with follow up sales calls from our in-house staff.

 

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In order to help jump-start the market for fuel cells and increase our            manufacturing capability, we decided to begin manufacturing fuel cell            components.

             

Fuel cell manufacturers have incurred unwarranted expense and diversion            of management time in trying to manufacture each of the several components needed for            their fuel cells. PFCE believes that our Company can create a viable, profitable            business by utilizing proven manufacturing techniques in a dedicated environment. To            this end we have started manufacturing bipolar plates in our plant in Willoughby, Ohio.            We expect that our customers will include many prominent industrial firms, as well as            leading independent fuel cell companies.

 

In July 2004, we received notice that we had been selected by the United            States Department of Energy for a Phase I STTR (Small Business Technology Transfer)            grant. The initial grant in the amount of $100,000 was received in December 2004. We            intend to apply for additional grant money from the United States government, as well            as other potential sources, in the future. There are no assurances that our            applications will be approved.

 

We also may seek to acquire additional related intellectual property.            However, as of the date of this Report, no definitive agreements to acquire the same            have been reached with any third party, other than previously reported.

 

In order to implement our business plan, we require additional funding            and there is no assurance that adequate funds, whether through equity financing, debt            financing or other sources, will be available when needed or on terms acceptable to us.            As of the date of this Report, we have no definitive agreement with any investment            banking firm, venture capital firm or any other source of funds who have made any            commitment to us to provide any funding. Further, any such funding may result in            significant dilution to existing stockholders. The inability to obtain sufficient funds            from external sources when needed will have a material adverse affect on our results of            operations and financial condition.

 

**COMPETITION**

 

Our major competitors and their respective products include, but are not            limited to, the following:

 

| **COMPANY**         |   | **PRODUCT(S)**      |
|---------------------|--------|---------------------|
|                |   |                |
| Dana Corporation    |   | Bipolar plate       |
| ElectroChem, Inc.   |   | MEA                 |
| Entegris, Inc.      |   | Bipolar plate       |
| GenCell Corporation |   | Bipolar plate       |
| GrafTech            |   | Bipolar plate       |
| Gore Fuel Cell      |   | MEA                 |
| Hoku Scientific     |   | MEA and membrane    |
| Ion Power, Inc.     |   | MEA                 |
| Manhattan Science   |   | Portable fuel cells |
| PEMEAS              |   | MEA and membrane    |

 

 

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| Superior MicroPowders |   | Micro MEA |
|-----------------------|--------|-----------|

 

This group of companies specializes in MEA for Proton Exchange Membrane            (PEM) Fuel Cells and Bipolar plate manufacturers and are therefore direct technology            competitors

 

We have not included automobile companies such as Mitsubishi, General            Motors Ford, Toyota, Nissan and others since their focus is directed towards            transportation. Likewise, large industrial companies such as Siemans AG, UTC Fuel Cells            (a United Technologies Company) and Teledyne Energy Systems were not included since            their main focus appears to be larger power systems. Fuel cell system manufactures such            as Plug Power, Hytrogen LLC, Hydrogenics, and Ballard are possible customers of ours.            However, Dana and Entegris are our only current competitors. Any major company listed            here should be considered a potential, if not actual, competitor because of its            size.

 

We are a relative newcomer to this group, but, while no assurances can            be provided, we believe that our R&D strategy positions us to leapfrog the            competition and finalize a commercially viable manufacturing prototype MEA in the next            six months while continuing to improve the quality of our product, provided that we can            raise the necessary capital to allow us to continue our research and development            efforts. There are no assurances that we will be able to raise this additional            capital.

 

**TRADEMARKS/TRADENAMES**

 

In November 2004, we filed a United States patent application with the            United States Patent Office, Patent Pending Serial No. 60/622,732, bearing the title of            “Methanol Resistant Cathodic Catalyst for Direct Methanol Fuel Cells” to            patent a process of developing a fuel cell membrane using methanol. We filed a            non-provisional (USSN 11/262,027) patent on October 27, 2005, which claimed priority to            provisional patent application USSN 60/622,732. On that same date we filed a PCT            (international) patent application claiming priority to that provisional patent            application. Our application is currently in the patent pending stage.

             

In addition, during our fiscal year ended December 31, 2006, we            submitted an additional patent application, USSN 60/661,770, filed March 15, 2005            (provisional), titled “Carbon Nanotube Based Electrocatalysts for Fuel            Cells.” Our application is currently in the patent pending stage.

             

We currently do not have any registered trademarks or tradenames,            although we expect this to change as we move towards the commercialization of our            technology.

 

**GOVERNMENTREGULATIONS**

 

We are not subject to any extraordinary governmental regulations            relating to our business.

 

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**EMPLOYEES**

 

As of the date of this Report, we have 10 employees, including our two            current officers, two managerial employees who are responsible for our new operations            described above in “PART I, Item 1, Description of Business,” plus three            independent contractors. Our operations are non-union. There has been no history of            labor strikes or unrest at any of our facilities. We believe that our relationship with            our employees is satisfactory. In addition, management believes that the available            labor force in the geographic areas where our facilities are located are sufficient to            support the expansion anticipated over the next 12 months. If and when we are in the            financial position to do so, we intend to hire additional employees in the areas of            research and development and marketing.

 

**ITEM            2. DESCRIPTION OF PROPERTY.**

 

We operate from our principal executive offices at 131 N. Tustin Ave.,            Suite 100, Tustin, CA 92780. We share this space pursuant to a verbal, month-to-month            lease, with Belltec Industries, a company owned by George Suzuki, our President and a            director. Our monthly rent is $600. This space consists of 700 square feet of executive            office space. See “PART III, Item 12, Certain Relationships and Related            Transactions.”

 

In addition, since December 2004, we have operated our own laboratory at            1201 Research Park Drive, Unit 500, Riverside CA 92507, which is in the UCR Research            Park. This location consists of approximately 2,500 square feet. Approximately 50% of            this leased space is used for actual laboratory floor, with the balance used for            supporting offices and accommodations. The lease expires in September 2007. The monthly            rent is $3,059.

 

**Subsequent Event**

 

Effective January 24, 2007, we entered into a lease agreement to lease            property at 4413 Hamann Parkway, Willoughby, Ohio, where our new operations described            in “PART I, Item 1, Description of Business” are now located. This space            consists of 23,886 square feet of commercial space, including approximately 22,386            square feet of manufacturing space and approximately 1,500 for executive offices. The            applicable lease term runs through February 28, 2009. Until February 1, 2008, our base            monthly rent for this location is $5,994.75, plus utilities and taxes. On March 1,            2008, the base rent increases to $8,465.58 per month. The relevant lease provides for            an option for us to renew this lease for an additional three (3) year term, provided            that we have made rental payments in a timely manner. It also provides us with an            option to purchase this location. To do, so, we are obligated to provide the lessor of            our intent to exercise this option in writing on or before Feb. 29, 2012. The purchase            price is $925,000, provided that we exercise our option to renew.

 

|   | We have no other properties. |
|--------|------------------------------|

 

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**ITEM            3. LEGAL PROCEEDINGS**

 

We have been named as a defendant in a lawsuit pending in the Court of            Common Pleas for Lake County, Ohio, captioned “*SKRL Tool            & Die, Inc., et al. v. William Berwald, et al.*, Case No.            07-CV-000567.” The case was filed on February 28, 2007.

             

In their complaint, Plaintiffs allege that two of their former employees            – current employees of ours in our Willoughby, Ohio, manufacturing facility            – possess confidential and proprietary trade secrets of SKRL pertaining to the            manufacturing of bipolar plates for fuel cells. Plaintiffs have asserted against these            employees and us claims for, among other things, unfair competition, misappropriation            of trade secrets and tortious interference with business relationships and seek            compensatory and punitive damages, as well as injunctive relief that would preclude the            two former SKRL employees from continuing to be employed by us.

 

We believe these claims are without merit, in that the employees possess            no trade secrets of SKRL, and moreover, we would have no use for such trade secrets, as            our current employees (other than the two defendants) possess far more technological            and marketing information in the industry than the SKRL employees would ever have been            privy to. We are therefore vigorously defending the Company’s interests, and            believe the defense will ultimately be successful.

 

We are not a party to any other pending legal proceedings, nor are we            aware of any other pending or threatened claims.

 

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

 

No matters were submitted to our shareholders during the three-month            period ended December 31, 2006, or subsequent thereto.

 

**PART II**

 

**ITEM            5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER            MATTERS**

 

Our Common Stock currently is listed for trading on the OTC BB under the            symbol “PFCE.” The table below sets forth the reported high and low bid            prices for the periods indicated. The bid prices shown reflect quotations between            dealers, without adjustment for markups, markdowns or commissions, and may not            represent actual transactions in the Company’s securities.

 

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|               |   |   |   | **Bid Price** |   |
|--------------------|--------|--------|--------|---------------|--------|
|               |   |   |   |          |   |   |   |   |   |
| **Quarter Ended**  |   |   |   | **High**      |   |   |   | **Low** |   |
|               |   |   |   |          |   |   |   |   |   |   |   |
| March 31, 2005     |   |   |   | $             | 0.31   |   |   |   | $ | 0.18 |   |
| June 30, 2005      |   |   |   | $             | 0.23   |   |   |   | $ | 0.11 |   |
| September 30, 2005 |   |   |   | $             | 0.47   |   |   |   | $ | 0.09 |   |
| December 31, 2005  |   |   |   | $             | 0.67   |   |   |   | $ | 0.31 |   |
|               |   |   |   |          |   |   |   |   |   |   |   |
| March 31, 2006     |   |   |   | $             | 0.46   |   |   |   | $ | 0.19 |   |
| June 30, 2006      |   |   |   | $             | 0.34   |   |   |   | $ | 0.13 |   |
| September 30, 2006 |   |   |   | $             | 0.37   |   |   |   | $ | 0.18 |   |
| December 31, 2006  |   |   |   | $             | 0.30   |   |   |   | $ | 0.19 |   |

 

|   | As of March 20, 2007, the closing bid price of our                            Common Stock was $0.28. |
|--------|-------------------------------------------------------------------------------------------------------|

 

(b) Holders. We have approximately 60 holders of record of our Common            Stock as of March 30, 2007, not including those shares held in “street            name.”

 

(c) Dividends. We did not pay any dividends on our Common Stock during            the two years ended December 31, 2006. Pursuant to the laws of the State of Nevada, a            corporation may not issue a distribution if, after giving its effect, the corporation            would not be able to pay its debts as they became due in the usual course of business,            or such corporation’s total assets would be less than the sum of their total            liabilities plus the amount that would be needed, if the corporation were to be            dissolved at the time of the distribution, to satisfy the preferential rights upon            dissolution of shareholders whose preferential rights are superior to those receiving            the distribution. As a result, management does not foresee that we will have the            ability to pay a dividend on our Common Stock in the fiscal year ended December 31,            2007. See “PART II, Item 7, Financial Statements.”

 

**ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL            CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion should be read in conjunction with our audited            financial statements and notes thereto included herein. In connection with, and because            we desire to take advantage of, the “safe harbor” provisions of the Private            Securities Litigation Reform Act of 1995, we caution readers regarding certain forward            looking statements in the following discussion and elsewhere in this report and in any            other statement made by, or on our behalf, whether or not in future filings with the            Securities and Exchange Commission. Forward looking statements are statements not based            on historical information and which relate to future operations, strategies, financial            results or other developments. Forward looking statements are necessarily based upon            estimates and assumptions that are inherently subject to significant business, economic            and competitive uncertainties and contingencies, many of which are beyond our control            and many of which, with respect to future business decisions, are subject to change.            These uncertainties and contingencies can affect actual results and could cause actual            results to

 

14 

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differ materially from those expressed in any forward looking statements            made by, or on our behalf. We disclaim any obligation to update forward looking            statements.

 

We generated nominal revenues of $52,076 and $0.00 during our fiscal            years ended December 31, 2005 and 2006, respectively. All of these revenues were            generated through the operations of Cellfoods.

 

During our fiscal year ended December 31, 2006, we incurred costs and            expenses totaling$492,850, compared to costs and expenses of $572,572 during our fiscal            year ended December 31, 2005, a decrease of $79,722. In this regard, our general and            administrative costs increased during our fiscal year ended December 31, 2006 from            $317,944 in 2005 to $431,699 during 2006 due to our efforts to acquire our new business            operations described above “PART I, Item 1, Description of Business.”            Research and development costs decreased from $122,135 in 2005 to $50,229 during 2006            due primarily to deferred costs due UCR. However, during our fiscal year ended December            31, 2005, we incurred $62,021 in costs of sales attributable to Cellfoods operations,            as well as charges of $36,000 due to stock compensation, $16,706 in extinguishment of            outstanding debentures and $17,557 (net) resulting from a change in value of derivative            instruments, which charges were not incurred during 2006.

 

As a result, we incurred a net loss of ($492,134) (approximately $0.01            per share), compared to a net loss of ($521,064) during our fiscal year ended December            31, 2005 (approximately $0.01 per share). Because we generated nominal revenues during            the year ended December 31, 2006 and 2005, the following is our Plan of Operation,            rather than a comparison of results of operations.

 

**PLANOFOPERATION**

 

Our initial business plan was to develop and produce low cost fuel cells            for transportation. During 2002, we revised our business plan to emphasize the            development and production of low cost fuel cells for personal electronics or other            applications requiring small size and longevity of use. We have revised our original            business plan as a result of the costs associated with developing transportation            related fuel cells, which exceeded our available capital. We may reinstate the elements            of the original business plan if our current business plan proves successful, of which            there can be no assurance. As of the date of this Report, we are focused on improving            the production capability of our nanoMEA, enhancing product performance, reducing            product costs, designing market-ready products, developing volume-manufacturing            capability, and building customer and supplier relationships and marketing it to            potential customers. We are also continuing research to refine and improve our current            nanoMEA.

             

On August 21, 2002, we entered into an agreement with the University of            California (“UCR”), to develop a commercially viable fuel cell, exploiting            our proprietary technology. On May 4, 2004, this agreement was extended through April            30, 2006, so long as we continued to make payments. On October 13, 2006, an amendment            was executed with UCR requiring payments of $135,876, of which $50,229 has been paid as            of the date of this Report. The balance of $50,252 was due on or before January 31,            2007, with an additional payment of

 

15 

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$35,395 due on or before February 28, 2007. However, pursuant to the            terms of this agreement, we are not obligated to tender payment until we receive an            applicable invoice for the same. As of the date of this Report, we have not received            any invoices from UCR for these payments. Once received, we intend to tender all            amounts due. It is not anticipated that we will be required to make any additional            payments for any future extensions. In order to allow us to make the aforesaid            payments, we borrowed funds from Fullerene, which were subsequently repaid in full.            UCR, through its SMART program, provides matching funds for all direct costs applicable            to development of the project. We applied for additional matching funds through this            SMART program and have obtained a favorable decision and expect a grant of            approximately $120,000 to be provided over the next two years. This also provides a            multi-year relationship with UCR. All information we provide to UCR has been deemed            confidential for a period of one (1) year after expiration or termination of the            agreement.

 

As a result of the relationship with UCR, on November 10, 2003, we            announced that a research team headed by Professor Yushan Yan of UCR had successfully            developed a fuel cell using carbon nanotube-based electrodes. As a result of our            research and development activities with UCR, we expect that the use of multi-walled            carbon nanotubes as a platinum support for proton exchange membrane fuel cells will            reduce the manufacturing cost of fuel cells through a decreased use of platinum.            Current technology uses platinum, a precious metal, as the catalyst for hydrogen to            separate into a proton and electron. Since platinum is a high cost metal in very            limited production, it is cost prohibitive, preventing fuel cells from being            economically viable even at high volume production. Our proposed method of producing            fuel cells is expected to minimize or eliminate the use of platinum. We expect to            produce low cost fuel cells at high volume production levels.

 

**Acquisition of Equipment**

 

Effective December 18, 2006, pursuant to an Assignment and Assumption of            Equipment Purchase Agreement, we were assigned all rights of TDM, L.L.C. relating to an            Agreement dated August 22, 2006, as amended December 20, 2006, between SGL Technic            Inc., a wholly owned subsidiary of SGL Technologies GmbH, a German company            (“SGL’), and TDM, L.L.C. (“TDM”), wherein we acquired certain            equipment on an “as is” basis. This equipment consists of two press machine            sets (200 and 800 ton) plus auxiliary equipment, which is used for manufacturing of            bi-polar plates. We have been developing the MEA business segment of the fuel cell            industry and have nanoMEA technology to enhance performance and durability. A fuel cell            stack (essentially an electricity generator) consists of an MEA, GDL (gas diffusion            layer) and bipolar plates. As such, management believes that this acquisition of            equipment fits in with our proprietary technology.

             

The purchase price of the equipment was $200,000. As of the date of this            Report, we have paid an aggregate of $100,000; $5,000 was previously paid by TDM. The            balance of $95,000 shall become due on or before June 30, 2007. We intend to utilize            the proceeds received from our recent private offering described below to pay this            obligation.

             

This equipment acquisition allows us to expand our current business plan            to begin to manufacture bipolar plates, which will provide us with the capability of            marketing our own fuel

 

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cell            components for the industry. We have moved the equipment to a new location            approximately 5 miles from the equipment’s previous location in Willoughby, Ohio,            and have retained manufacturing personnel. We have retained the services of two new            employees, a director of sales and a director of manufacturing, both of whom have            direct experience in the fuel cell business and manufacturing of bi-polar plate            components. We are also engaged in discussions with various parties who have expressed            an interest in providing us with additional equity capital to allow us to move            forward.

             

SGL Technic Inc. (“SGL”) discontinued its bi-polar plate            manufacturing business. Current customers of SGL for the bipolar plates consist of many            of the top fuel cell companies in the world, almost all of whom are potential customers            for our MEA. In the event we are able to transfer sales and begin manufacturing, of            which there can be no assurance, we expect to supply many of these            customers.

             

**LIQUIDITYANDCAPITALRESOURCES**

 

|   | At December 31, 2006, we had $113,727 in                            cash. |
|--------|---------------------------------------------------------------------------|

 

In August 2006, we closed a private offering of restricted shares of our            Common Stock (the “Shares”). We received proceeds of $338,500 from the sale            of 2,417,858 Shares ($0.14 per share). The Shares were sold to a total of 17 investors,            including 2 “accredited investors” as that term is defined under Rule            501(a) of Regulation D as promulgated under the Securities Act of 1933, as            amended.

 

In April 2004, we, through PFCE Acquisition Corp, a Nevada corporation            and our wholly owned subsidiary (“Sub”), and Cellfoods Corporation, a            Nevada corporation (“Cellfoods “), entered into an Agreement and Plan of            Merger whereby Sub merged with and into Cellfoods, which survived as our wholly owned            subsidiary. This merger was consummated on or about May 17, 2004.

 

Cellfoods is a development stage company that was organized in January            2003, engaged in the business of developing soybean powder for use in food preparation.            This business was operated by Messrs. Koji Suzuki, the president of Cellfoods, Hiroyuki            Igarashi, the vice president, and Ken Inouye, our former officer and director.            Effective March 2005, we discontinued the Cellfoods operations due primarily to            insufficient funds available to allow us to develop this business. Because we had            limited funds, our management elected to devote our limited financial resources to our            principal business of developing our fuel cell technology. We may, however, elect to            reestablish Cellfoods business plan if management believes we have sufficient funds to            do so in the future, of which there is no assurance. As of the date of this report, we            intend to devote our financial resources to our existing businesses described elsewhere            in this Report.

 

Prior to the merger, Cellfoods reached an agreement with HEM Mutual            Assurance LLC, Minneapolis, Minnesota, an accredited investor (as that term is defined            under Rule 501, Regulation D, promulgated under the Securities Act of 1933, as amended)            to issue up to $1,000,000 in aggregate principal amount of convertible debentures            pursuant to Rule 504 of

 

17 

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Regulation D under the Securities Act of 1933, as amended. These            Debentures were to be issued by Cellfoods in two separate convertible debentures of            $997,000 and $3,000, respectively (hereinafter referred to in the aggregate as the            “Debentures”). As a result of the merger, we assumed the obligations and            benefits of Cellfoods, including Cellfoods’ obligation to issue the            Debentures.

 

The conversion price for the Debentures was (a) the lesser of $0.75 and            one hundred twenty-five percent (125%) of the average of the closing bid price per            share of our Common Stock during the five (5) trading days immediately preceding the            Closing (as defined in the Purchase Agreement); and (b) one hundred percent (100%) of            the average of the five (5) lowest closing bid prices per share of our Common Stock            during the forty (40) trading days immediately preceding the Conversion Date; provided,            however, that the aggregate maximum number of shares of Common Stock that the First            Debenture and Second Debenture may be converted into is Two Million (2,000,000) shares            (the “Maximum Conversion”); and further provided, however, that upon the            Maximum Conversion, we could (a) increase the Maximum Conversion or (b) redeem the            unconverted amount of the First Debenture and Second Debenture in whole or in part at            one hundred fifteen percent (115%) of the unconverted amount of such Debentures being            redeemed plus accrued interest thereon. The conversion price and number of shares of            Common Stock issuable upon conversion of the Debentures was subject to adjustment for            stock splits and combinations and other dilutive events. The Debentures could not be            converted, however, if after conversion the holder would beneficially own more than 5%            of our outstanding Common Stock, unless the holder waives this limitation by giving us            75 days notice of the waiver.

 

The Debentures bore interest at 1% per year and would have matured in            five years. Interest was payable in cash or shares of our Common Stock, at the option            of the holders of the Debentures. We had the right to redeem the Debentures on 30            days’ notice for 125% of the principal amount of the outstanding Debentures, plus            accrued and unpaid interest. Relevant thereto, on October 24, 2005, we redeemed the            remaining outstanding convertible debentures placed with HEM. As a result, 26,992,462            shares of our Common Stock, representing the remaining shares being held in escrow            under the debenture agreement were returned to us and were canceled. We issued an            aggregate of 3,007,538 shares of our Common Stock from the conversion of these            Debentures.

 

We believe that we currently have sufficient funds available for us to            continue to implement our business plan for the next 12 months. However, we estimate            that we will require an additional $2.5 million in additional debt or equity capital to            fully implement our business plan in the future and there are no assurances that we            will be able to raise this capital when needed. However, while there are no definitive            agreements in place as of the date of this Report, we are currently engaged in various            discussions with interested parties to provide these funds or otherwise enter into a            strategic alliance to provide such funding. The inability to obtain sufficient funds            from external sources when needed will have a material adverse affect on our results of            operations and financial condition.

 

18 

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**Subsequent Event**

 

In January 2007, we issued an aggregate of 2,214,285            “restricted” shares of our Common Stock (the “Shares”). We            received proceeds of $300,000 from the sale thereof ($0.14 per share). The Shares were            sold to a total of 10 investors, all of whom were “accredited investors” as            that term is defined under Rule 501(a) of Regulation D as promulgated under the            Securities Act of 1933, as amended. We relied upon the exemption from registration            afforded by Regulation D and Section 4/2, promulgated under the Securities Act of 1933,            as amended, to issue the Shares. The proceeds from this offering have been used for our            new operations described in “PART I, Item 1, Description of Business”            above.

 

On January 24, 2007, the Company entered into a new lease agreement for            23,886 square feet of commercial space located at 4413 Hamann Parkway, Willoughby,            Ohio. The lease is for two years starting on March 1, 2007 and ending February 28,            2009. The future minimum payments received under the lease are $59,947, $96,644 and            $16,931 for 2007, 2008 and 2009, respectively.

 

In March of 2007, the Company entered into a settlement arrangement            regarding a deposit on equipment in the amount of $101,239. The Company returned the            equipment to the vendor for a restocking fee of $31,239, which is recorded in general            and administrative expense as of December 31, 2006, and the difference of $70,000 will            be remitted to the Company in 2007.

 

**CRITICALACCOUNTINGPOLICIESANDESTIMATES**

 

We have identified critical accounting policies that, as a result of            judgments, uncertainties, uniqueness and complexities of the underlying accounting            standards and operations involved, could result in material changes to our financial            position or results of operations under different conditions or using different            assumptions. The most critical accounting policies and estimates are:

 

|   | **•** | The preparation of financial statements in conformity                            with accounting principles generally accepted in the United States of                            America requires management to make estimates and assumptions that                            affect the reported amounts of assets and liabilities and disclosure of                            contingent assets and liabilities at the date of the financial                            statements and the reported amounts of revenue and expenses during the                            reporting period. Actual results could differ from those                            estimates. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Fair value of instruments. Our financial instruments                            consist of accounts receivable, accounts payable and long term debt.                            The fair value of financial instruments approximate their recorded                            values. Fair value of loans payable to stockholders and balances of                            bank lines of credit, in the circumstances, are not reasonably                            determinable. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Details regarding our use of these policies and the related estimates            are described in the accompanying consolidated financial statements as of December 31,            2006 and for the years

 

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ended December 31, 2006 and 2005. During the year ended December 31,            2006, there have been no material changes to our critical accounting policies that            impacted our consolidated financial condition or results of operations.

 

**TRENDS**

 

Since our announcement of the successful development of a carbon            nanotube support base fuel cell electrode in November 2003, we have been receiving a            significant amount of attention from the investment community. Stock volume has            increased and we have received indications of interest from investors. There have also            been significant hits on our web site from investment firms. In this regard, while            there are no assurances, we are hopeful that we will be able to raise approximately            $2.5 million in additional funding in order to allow us to produce and demonstrate to            fuel cell manufacturers a commercially viable prototype. See “Liquidity and            Capital Resources,” above.

 

We are currently in preliminary discussions with entities that have told            us they can raise funds for our Company. However, there can be no assurance that any            investment will materialize.

 

We also expect that our new laboratory will continue to function as a            hub to attract additional researchers from the University of California at Riverside,            which is on the path to become a leader in the nano-technology field. We believe that            there are many potential useful applications of nano-technology that can be expected in            the immediate future, including fuel cells and flat panel displays. Also at this            laboratory, functional prototypes will be made before bringing in manufacturers. Our            plan is to have the manufacturers inspect the prototype, once completed, in order to            generate their own test production unit. If successful, manufacturing can commence            producing products in quantity in less than 12 months. We foresee the initial            application to be a battery replacement for cell phones, mobile notebook            computers/laptops and other applicable applications. This segment is known as the micro            fuel cell market. We expect that these fuel cells will eventually be produced like            modular computer chips and components.

 

In order to help jump-start the market for fuel cells and increase our            manufacturing capability, in late 2006 we decided to begin manufacturing fuel cell            components.

             

Fuel cell manufacturers have incurred unwarranted expense and diversion            of management time in trying to manufacture each of the several components needed for            their fuel cells. We believe that we can create a viable, profitable business by            utilizing proven manufacturing techniques in a dedicated environment. To this end we            have started manufacturing bipolar plates in our plant in Willoughby, Ohio. We expect            that our customers will include many prominent industrial firms, as well as leading            independent fuel cell companies.

 

We believe that the reason that the fuel cell market is not rapidly            expanding at this time is due to high manufacturing costs and lack of successful            applications. We believe that a robust fuel cell market is inevitable, due to the            advantages of low pollution and independence from fossil fuels. Major automobile,            industrial and power supply companies are heavily involved in research and development            activities of fuel cell technology and many have announced prototypes

 

20 

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and            commercial models. However, there has not been a major commercial breakthrough, which            we attribute to the high cost of the products and the lack of consumer proven            reliability. While no assurances can be provided, once the problem of high costs is            resolved, we expect the micro fuel cell market to increase significantly.

 

**INFLATION**

 

Although our operations are influenced by general economic conditions,            we do not believe that inflation had a material affect on our results of operations            during 2006.

 

**ITEM            7. FINANCIAL STATEMENTS**

 

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**PACIFIC FUEL CELL CORP.**

**(A            DEVELOPMENT STAGE COMPANY)**

**TABLE OF CONTENTS**

 

|   | Page |
|--------|------|

 

| Report of Independent Registered Public Accounting                            Firm | 1 |
|------------------------------------------------------------------------------------|---|

 

| Balance Sheet | 2 |
|---------------|---|

 

| Statements of Operations | 3 |
|--------------------------|---|

 

| Statement of Changes in Stockholders’ Equity                            (Deficit) | 4 |
|-----------------------------------------------------------------------------------------|---|

 

| Statements of Cash Flows | 5 |
|--------------------------|---|

 

| Notes to Financial Statements | 6-15 |
|-------------------------------|------|

 

 

             

             

             

             

             

             

             

             

             

             

             

             

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Shareholders and Board of Directors

Pacific Fuel Cell Corp.

 

We            have audited the accompanying consolidated balance sheet of Pacific Fuel Cell Corp. (a            development stage company) as of December 31, 2006, and the related statements of            operations, changes in stockholders’ equity, and cash flows for the years ended            December 31, 2006 and 2005, and the period from May 5, 1998 (inception) to December 31,            2006. These financial statements are the responsibility of the Company’s            management. Our responsibility is to express an opinion on these financial statements            based on our audits.

 

We            conducted our audits in accordance with the standards of the Public Company Accounting            Oversight Board (United States). Those standards require that we plan and perform the            audits to obtain reasonable assurance about whether the financial statements are free            of material misstatement. An audit includes examining, on a test basis, evidence            supporting the amounts and disclosures in the financial statements. An audit also            includes assessing the accounting principles used and significant estimates by            management, as well as evaluating the overall financial statement presentation. We            believe that our audits provide a reasonable basis for our opinion.

 

The            accompanying financial statements have been prepared assuming that the Company will            continue as a going concern. The Company has suffered significant losses from            operations. This factor raises substantial doubt about the Company’s ability to            continue as a going concern. The financial statements do not include any adjustments            that might result from the outcome of this uncertainty.

 

In            our opinion, the financial statements referred to above present fairly, in all material            respects, the financial position of Pacific Fuel Cell Corp. (a development stage            company) as of December 31, 2006, and the results of its operations, and its cash flows            for the years ended December 31, 2006 and 2005, and the period from May 5, 1998            (inception) to December 31, 2006, in conformity with accounting principles generally            accepted in the United States of America.

 

Stark Winter Schenkein & Co., LLP

 

s/Stark Winter Schenkein & Co., LLP

 

Denver, Colorado

March 22, 2007

 

1

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**PACIFIC FUEL CELL CORP.**

**(A            DEVELOPMENT STAGE COMPANY)**

**CONSOLIDATED BALANCE SHEET**

**DECEMBER 31, 2006**

 

| **ASSETS**                                                                    |   |   |       |
|-------------------------------------------------------------------------------|--------|--------|------------|
|                                                                          |   |   |       |   |
| CURRENT ASSETS                                                                |   |   |       |   |
| Cash                                                                          |   | $      | 113,727    |   |
| Prepaid expense                                                               |   |   | 3,059      |   |
| Total current assets                                                          |   |   | 116,786    |   |
|                                                                          |   |   |       |   |
| Property and Equipment, net                                                   |   |   | 33,345     |   |
|                                                                          |   |   |       |   |
| Other Assets                                                                  |   |   |       |   |
| Rent security deposit                                                         |   |   | 3,059      |   |
| Deposit on equipment                                                          |   |   | 170,000    |   |
|                                                                          |   |   |       |   |
|                                                                          |   | $      | 323,190    |   |
|                                                                          |   |   |       |   |
| **LIABILITIES AND STOCKHOLDERS’                            EQUITY**     |   |   |       |   |
|                                                                          |   |   |       |   |
| CURRENT LIABILITIES                                                           |   |   |       |   |
| Accounts payable                                                              |   | $      | 27,880     |   |
| Total current liabilities                                                     |   |   | 27,880     |   |
|                                                                          |   |   |       |   |
| STOCKHOLDERS’ EQUITY                                                    |   |   |       |   |
| Preferred stock, $0.01 par value,                                             |   |   |       |   |
| 1,000,000 shares authorized, none outstanding                                 |   |   | —    |   |
| Common stock, $0.001 par value, 200,000,000                                   |   |   |       |   |
| shares authorized, 69,795,396 shares issued                                   |   |   | 69,795     |   |
| Additional paid in capital                                                    |   |   | 3,239,917  |   |
| Deferred stock compensation                                                   |   |   | (45,000    | ) |
| (Deficit) accumulated during the development                            stage |   |   | (2,969,402 | ) |
|                                                                          |   |   | 295,310    |   |
|                                                                          |   |   |       |   |
|                                                                          |   | $      | 323,190    |   |
|                                                                          |   |   |       |   |

 

 

2

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**PACIFIC FUEL CELL CORP.**

**(A            DEVELOPMENT STAGE COMPANY)**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

|                                                                         |   | **YEAR ENDED****DECEMBER 31,****2006** |       |   |   | **YEAR ENDED****DECEMBER 31,****2005** |   |       |   | **FOR THE PERIOD****MAY 5, 1998****(INCEPTION) TO****DECEMBER 31, 2006** |   |
|------------------------------------------------------------------------------|--------|----------------------------------------|------------|--------|--------|----------------------------------------|--------|------------|--------|--------------------------------------------------------------------------|--------|
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| REVENUE                                                                      |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| Sales                                                                        |   | $                                      | —    |   |   |                                   | $      | 52,076     |   |                                                                     |   | $ | 71,988 |   |
| Grants                                                                       |   |                                   | —    |   |   |                                   |   | —    |   |                                                                     |   |   | 99,901 |   |
|                                                                         |   |                                   | —    |   |   |                                   |   | 52,076     |   |                                                                     |   |   | 171,889 |   |
| COSTS AND EXPENSES                                                           |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| Cost of goods sold                                                           |   |                                   | —    |   |   |                                   |   | 62,021     |   |                                                                     |   |   | 82,287 |   |
| General and administrative                                                   |   |                                   | 431,699    |   |   |                                   |   | 307,712    |   |                                                                     |   |   | 1,396,218 |   |
| Research and development                                                     |   |                                   | 50,229     |   |   |                                   |   | 122,135    |   |                                                                     |   |   | 300,556 |   |
| Stock compensation                                                           |   |                                   | —    |   |   |                                   |   | 36,000     |   |                                                                     |   |   | 312,800 |   |
| Depreciation and amortization                                                |   |                                   | 10,922     |   |   |                                   |   | 10,441     |   |                                                                     |   |   | 33,218 |   |
| Change in value of derivative instruments,                            net    |   |                                   | —    |   |   |                                   |   | 17,557     |   |                                                                     |   |   | 460,498 |   |
| Loss on extinguishment of debentures                                         |   |                                   | —    |   |   |                                   |   | 16,706     |   |                                                                     |   |   | 16,706 |   |
| Loss on asset impairment                                                     |   |                                   | —    |   |   |                                   |   | —    |   |                                                                     |   |   | 510,667 |   |
| Loss on disposal of property and equipment                                   |   |                                   | —    |   |   |                                   |   | —    |   |                                                                     |   |   | 3,391 |   |
|                                                                         |   |                                   | 492,850    |   |   |                                   |   | 572,572    |   |                                                                     |   |   | 3,116,341 |   |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| OPERATING (LOSS)                                                             |   |                                   | (492,850   | )      |   |                                   |   | (520,496   | )      |                                                                     |   |   | (2,944,452 | ) |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| OTHER INCOME (EXPENSE)                                                       |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| Interest income                                                              |   |                                   | 1,091      |   |   |                                   |   | 4,050      |   |                                                                     |   |   | 7,601 |   |
| Interest expense                                                             |   |                                   | (375       | )      |   |                                   |   | (4,618     | )      |                                                                     |   |   | (66,709 | ) |
| Foreign currency transaction gain (loss)                                     |   |                                   | —    |   |   |                                   |   | —    |   |                                                                     |   |   | (168 | ) |
| Other                                                                        |   |                                   | —    |   |   |                                   |   | —    |   |                                                                     |   |   | (1,175 | ) |
|                                                                         |   |                                   | 716        |   |   |                                   |   | (568       | )      |                                                                     |   |   | (60,451 | ) |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| NET (LOSS) BEFORE EXTRAORDINARY ITEM                                         |   |                                   | (492,134   | )      |   |                                   |   | (521,064   | )      |                                                                     |   |   | (3,004,902 | ) |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| EXTRAORDINARY ITEM, Gain on forgiveness                                      |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| of debt, net of income taxes of $12,070                                      |   |                                   | —    |   |   |                                   |   | —    |   |                                                                     |   |   | 23,430 |   |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| NET (LOSS) BEFORE INCOME TAX EXPENSE                            (BENEFIT)    |   |                                   | (492,134   | )      |   |                                   |   | (521,064   | )      |                                                                     |   |   | (2,981,472 | ) |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                                                 |   |                                   | —    |   |   |                                   |   | —    |   |                                                                     |   |   | (12,070 | ) |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| NET (LOSS)                                                                   |   | $                                      | (492,134   | )      |   |                                   | $      | (521,064   | )      |                                                                     |   | $ | (2,969,402 | ) |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| PER SHARE INFORMATION:                                                       |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING                                          |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| BASIC AND DILUTED                                                            |   |                                   | 67,844,828 |   |   |                                   |   | 66,593,264 |   |                                                                     |   |   | 46,115,903 |   |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| NET (LOSS) PER COMMON SHARE (BASIC &                            DILUTED) |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |
| (Loss) from operations                                                       |   | $                                      | (0.01      | )      |   |                                   | $      | (0.01      | )      |                                                                     |   | $ | (0.06 | ) |
| Extraordinary item                                                           |   | $                                      | —    |   |   |                                   | $      | —    |   |                                                                     |   | $ | — |   |
|                                                                         |   | $                                      | (0.01      | )      |   |                                   | $      | (0.01      | )      |                                                                     |   | $ | (0.06 | ) |
|                                                                         |   |                                   |       |   |   |                                   |   |       |   |                                                                     |   |   |   |   |

 

3

 

25 

----

**PACIFIC FUEL CEL CORP.**

**(A            DEVELOPMENT STAGE COMPANY)**

**CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY            (DEFICIT)**

**MAY 5, 1998 (INCEPTION) THROUGH DECEMBER 31, 2006**

 

|                                                                                |   | **Common Stock** |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |
|-------------------------------------------------------------------------------------|--------|------------------|--------|--------|--------|------------|---------|--------|--------|-------------------------------------|--------|-----------|--------|--------------------------------------|--------|--------|---------|-------------------------------------|--------|--------|--------|-----------------------------------------------------------------------|
|                                                                                |   | **Shares**       |   |   |   | **Amount** |    |   |   | **Additional**

**Paid in Capital** |   |      |   | **Deferred Stock**

**Compensation** |   |   |    | **Common Stock**

**Subscriptions** |   |   |   | **(Deficit)**

**Accumulated**

**During the**

**Development Stage** |   |   |   | **Total** |   |
| Issuance of stock for cash at $0.006 per                            share           |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| (net of issuance costs)                                                             |   | 3,000,000        |   |   |   | $          | 3,000   |   |   |                                | $      | 15,118    |   |                                 |   | $      | — |                                |   |   | $      | —                                                               |   |   |   | $ | — |   |   |   | $ | 18,118 |   |
| Issuance of stock for repayment of advances                                         |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| at $0.007 per share                                                                 |   | 2,250,000        |   |   |   |       | 2,250   |   |   |                                |   | 12,750    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 15,000 |   |
| Net (loss) for the period                                                           |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (31,065 | ) |   |   |   | (31,065 | ) |
| Balance at December 31, 1998                                                        |   | 5,250,000        |   |   |   |       | 5,250   |   |   |                                |   | 27,868    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (31,065 | ) |   |   |   | 2,053 |   |
|                                                                                |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of stock for purchase of domain                                            |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| name at $0.007 per share                                                            |   | 9,750,000        |   |   |   |       | 9,750   |   |   |                                |   | 55,250    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 65,000 |   |
| Issuance of stock for                                                               |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| cash at $0.007 per share                                                            |   | 3,750,000        |   |   |   |       | 3,750   |   |   |                                |   | 21,250    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 25,000 |   |
| Issuance of stock subscriptions for                                                 |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| cash at $0.007 per share                                                            |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | 19,000                                                                |   |   |   |   | — |   |   |   |   | 19,000 |   |
| Issuance of stock subscriptions as                                                  |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| payment of wages at $0.007 per share                                                |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | 11,000                                                                |   |   |   |   | — |   |   |   |   | 11,000 |   |
| Net (loss) for the year                                                             |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (156,309 | ) |   |   |   | 156,309 | ) |
| Balance at December 31, 1999                                                        |   | 18,750,000       |   |   |   |       | 18,750  |   |   |                                |   | 104,368   |   |                                 |   |   | — |                                |   |   |   | 30,000                                                                |   |   |   |   | (187,374 | ) |   |   |   | (34,256 | ) |
|                                                                                |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of stock pursuant to stock                                                 |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| subscriptions                                                                       |   | 4,500,000        |   |   |   |       | 4,500   |   |   |                                |   | 25,500    |   |                                 |   |   | — |                                |   |   |   | (30,000                                                               | ) |   |   |   | — |   |   |   |   | — |   |
| Net (loss) for the year                                                             |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (278,728 | ) |   |   |   | (278,728 | ) |
| Balance at December 31, 2000                                                        |   | 23,250,000       |   |   |   |       | 23,250  |   |   |                                |   | 129,868   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (466,102 | ) |   |   |   | (312,984 | ) |
|                                                                                |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of stock for license                                                       |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| agreement at $0.015 per share                                                       |   | 30,100,000       |   |   |   |       | 30,100  |   |   |                                |   | 421,400   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 451,500 |   |
| Cancellation of common stock as                                                     |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| condition of license agreement                                                      |   | (2,000,000       | )      |   |   |       | (2,000  | )      |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | (2,000 | ) |
| Issuance of stock for cash at $0.001 per                            share           |   | 6,000,000        |   |   |   |       | 6,000   |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 6,000 |   |
| Stock compensation related to issuance                                              |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| of stock below fair market value                                                    |   | —          |   |   |   |       | — |   |   |                                |   | 84,000    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 84,000 |   |
| Stock compensation related to issuance                                              |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| of stock warrant to acquire license                                                 |   | —          |   |   |   |       | — |   |   |                                |   | 100,000   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 100,000 |   |
| Issuance of stock for cash at $0.10 per share                                       |   | 520,000          |   |   |   |       | 520     |   |   |                                |   | 51,480    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 52,000 |   |
| Issuance of stock for debt forgiveness                                              |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| from shareholders at $0.094 per share                                               |   | 1,070,000        |   |   |   |       | 1,070   |   |   |                                |   | 99,980    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 101,050 |   |
| Liabilities converted into contributed                                              |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| capital                                                                             |   | —          |   |   |   |       | — |   |   |                                |   | 179,610   |   |                                 |   |   | — |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   | 179,610 |   |
| Net (loss) for the year                                                             |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (219,441 | ) |   |   |   | (219,441 | ) |
| Balance at December 31, 2001                                                        |   | 58,940,000       |   |   |   |       | 58,940  |   |   |                                |   | 1,066,338 |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (685,543 | ) |   |   |   | 439,735 |   |
|                                                                                |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of stock for cash at $0.047 per                            share           |   | 1,000,000        |   |   |   |       | 1,000   |   |   |                                |   | 45,819    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 46,819 |   |
| Issuance of stock for services at $0.03 per                            share        |   | 1,500,000        |   |   |   |       | 1,500   |   |   |                                |   | 43,500    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 45,000 |   |
| Issuance of stock for cash at $0.05 per share                                       |   | 2,000,000        |   |   |   |       | 2,000   |   |   |                                |   | 98,000    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 100,000 |   |
| Discount on loan payable - related party                                            |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| recorded as contributed capital                                                     |   | —          |   |   |   |       | — |   |   |                                |   | 8,300     |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 8,300 |   |
| Net (loss) for the year                                                             |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (579,912 | ) |   |   |   | (579,912 | ) |
| Balance at December 31, 2002                                                        |   | 63,440,000       |   |   |   |       | 63,440  |   |   |                                |   | 1,261,957 |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (1,265,455 | ) |   |   |   | 59,942 |   |
|                                                                                |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) for the year                                                             |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (103,382 | ) |   |   |   | (103,382 | ) |
| Balance at December 31, 2003                                                        |   | 63,440,000       |   |   |   |       | 63,440  |   |   |                                |   | 1,261,957 |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (1,368,837 | ) |   |   |   | (43,440 | ) |
|                                                                                |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Debenture conversion @ $0.01 per share                                              |   | 300,008          |   |   |   |       | 300     |   |   |                                |   | 111,486   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 111,786 |   |
| Debenture conversion @ between $0.30 and $0.48 per                            share |   | 2,657,246        |   |   |   |       | 2,657   |   |   |                                |   | 1,018,043 |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 1,020,700 |   |
| Contributed services to capital                                                     |   | —          |   |   |   |       | — |   |   |                                |   | 6,000     |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 6,000 |   |
| Purchase of Cellfoods                                                               |   | —          |   |   |   |       | — |   |   |                                |   | 53,196    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 53,196 |   |
| Shares issued for services @ $0.46 per share                                        |   | 80,000           |   |   |   |       | 80      |   |   |                                |   | 36,720    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 36,800 |   |
| Net (loss) for the year                                                             |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (587,367 | ) |   |   |   | (587,367 | ) |
| Balance at December 31, 2004 (restated)                                             |   | 66,477,254       |   |   |   |       | 66,477  |   |   |                                |   | 2,487,402 |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (1,956,204 | ) |   |   |   | 597,675 |   |
|                                                                                |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Contributed services to capital                                                     |   | —          |   |   |   |       | — |   |   |                                |   | 6,000     |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 6,000 |   |
| Conversion of stock agreement @ $0.25 per                            share          |   | 100,000          |   |   |   |       | 100     |   |   |                                |   | 24,900    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 25,000 |   |
| Debenture conversion @ $0.215 per share                                             |   | 50,284           |   |   |   |       | 50      |   |   |                                |   | 160,784   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 160,834 |   |
| Shares issued for services @ $0.43 per share                                        |   | 50,000           |   |   |   |       | 50      |   |   |                                |   | 21,450    |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 21,500 |   |
| Net (loss) for the year                                                             |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (521,064 | ) |   |   |   | (521,064 | ) |
| Balance at December 31, 2005                                                        |   | 66,677,538       |   |   |   |       | 66,677  |   |   |                                |   | 2,700,536 |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (2,477,268 | ) |   |   |   | 289,945 |   |
|                                                                                |   |             |   |   |   |       |    |   |   |                                |   |      |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Contributed services                                                                |   | —          |   |   |   |       | — |   |   |                                |   | 6,000     |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 6,000 |   |
| Issuance of stock for cash at $0.14 per share                                       |   | 2,417,858        |   |   |   |       | 2,418   |   |   |                                |   | 336,081   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 338,499 |   |
| Shares issued for services @ $0.30 per share                                        |   | 200,000          |   |   |   |       | 200     |   |   |                                |   | 59,800    |   |                                 |   |   | (45,000 | )                                   |   |   |   | —                                                               |   |   |   |   | — |   |   |   |   | 15,000 |   |
| Shares issued for services @ $0.276 per share                                       |   | 500,000          |   |   |   |       | 500     |   |   |                                |   | 137,500   |   |                                 |   |   |    |                                |   |   |   |                                                                  |   |   |   |   |   |   |   |   |   | 138,000 |   |
| Net (loss) for the period                                                           |   | —          |   |   |   |       | — |   |   |                                |   | —   |   |                                 |   |   | — |                                |   |   |   | —                                                               |   |   |   |   | (492,134 | ) |   |   |   | (492,134 | ) |
| Balance at December 31, 2006                                                        |   | 69,795,396       |   |   |   | $          | 69,795  |   |   |                                | $      | 3,239,917 |   |                                 |   | $      | (45,000 | )                                   |   |   |   | —                                                               |   |   |   | $ | (2,969,402 | ) |   |   | $ | 295,310 |   |

4

 

26 

----

**PACIFIC FUEL CELL CORP.**

**(A            DEVELOPMENT STAGE COMPANY)**

**STATEMENTS OF CASH FLOWS**

 

|                                                                                                          |   |   |   | **YEAR ENDED****DECEMBER 31,****2006** |     |   |   | **YEAR ENDED****DECEMBER 31, 2005** |   |     |   | **FOR THE PERIOD****MAY 6, 1998****(INCEPTION) TO****DECEMBER 31, 2006** |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------------------------------------|----------|--------|--------|-------------------------------------|--------|----------|--------|--------------------------------------------------------------------------|--------|
| OPERATING ACTIVITIES                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| Net (loss)                                                                                                    |   |   |   | $                                      | (492,134 | )      |   |                                | $      | (521,064 | )      |                                                                     |   | $ | (2,969,402 | ) |   |
| Adjustments to reconcile net (loss) to net                            cash                                    |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| (used) in operating activities:                                                                               |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| Stock compensation                                                                                            |   |   |   |                                   | 153,000  |   |   |                                |   | 36,000   |   |                                                                     |   |   | 465,800 |   |   |
| Amortization of discount on loan payable                                                                      |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | 5,239 |   |   |
| Contributed services to capital                                                                               |   |   |   |                                   | —  |   |   |                                |   | 6,000    |   |                                                                     |   |   | 12,000 |   |   |
| Reserve for uncollectible accounts receivable                                                                 |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | 36,298 |   |   |
| Extraordinary item                                                                                            |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | 35,500 |   |   |
| Loss on disposal of property and equipment                                                                    |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | 3,391 |   |   |
| Non cash derivative debenture costs                                                                           |   |   |   |                                   | —  |   |   |                                |   | 182,477  |   |                                                                     |   |   | 657,465 |   |   |
| Depreciation and amortization                                                                                 |   |   |   |                                   | 10,922   |   |   |                                |   | 10,441   |   |                                                                     |   |   | 33,824 |   |   |
| Interest expense converted to loan payable                                                                    |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | 12,684 |   |   |
| Deposit - restocking fee                                                                                      |   |   |   |                                   | 31,239   |   |   |                                |   |     |   |                                                                     |   |   | 31,239 |   |   |
| Loss on impairment of assets                                                                                  |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | 510,167 |   |   |
| Changes in:                                                                                                   |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| Prepaid research and development                                                                              |   |   |   |                                   | —  |   |   |                                |   | 18,752   |   |                                                                     |   |   | — |   |   |
| Inventory held by vendor                                                                                      |   |   |   |                                   | —  |   |   |                                |   | 9,621    |   |                                                                     |   |   | — |   |   |
| Discount on loan                                                                                              |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | 3,061 |   |   |
| Prepaid expense                                                                                               |   |   |   |                                   | 2,486    |   |   |                                |   | 3,860    |   |                                                                     |   |   | (2,559 | ) |   |
| Accounts receivable                                                                                           |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | (3,059 | ) |   |
| Accounts payable                                                                                              |   |   |   |                                   | (2,414   | )      |   |                                |   | (7,900   | )      |                                                                     |   |   | 58,850 |   |   |
| Net cash (used in) operating activities                                                                       |   |   |   |                                   | (296,902 | )      |   |                                |   | (261,813 | )      |                                                                     |   |   | (1,109,502 | ) |   |
|                                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| INVESTING ACTIVITIES                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| Purchase of fixed assets                                                                                      |   |   |   |                                   | —  |   |   |                                |   | (54,708  | )      |                                                                     |   |   | (59,599 | ) |   |
| Cash received in purchase of Cellfoods                                                                        |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | 16,898 |   |   |
| Deposit on equipment                                                                                          |   |   |   |                                   | (100,000 | )      |   |                                |   | 44,761   |   |                                                                     |   |   | (201,239 | ) |   |
| Investment in mineral claims                                                                                  |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | (5,000 | ) |   |
| Net cash (used in) investing activities                                                                       |   |   |   |                                   | (100,000 | )      |   |                                |   | (9,947   | )      |                                                                     |   |   | (248,940 | ) |   |
|                                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| FINANCING ACTIVITIES                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| Proceeds from loans payable –                            shareholders                                   |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | 285,462 |   |   |
| Payments on loans payable –                            shareholders                                     |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | (11,083 | ) |   |
| Deferred debenture costs                                                                                      |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | (136,000 | ) |   |
| (Payments) proceeds of convertible redeemable                            debentures                           |   |   |   |                                   | —  |   |   |                                |   | (223,145 | )      |                                                                     |   |   | 776,855 |   |   |
| Payments on loan payable - related parties                                                                    |   |   |   |                                   | —  |   |   |                                |   | —  |   |                                                                     |   |   | (60,000 | ) |   |
| Proceeds from stock sales, net of issuance                            costs                                   |   |   |   |                                   | 344,498  |   |   |                                |   | 15,500   |   |                                                                     |   |   | 616,935 |   |   |
| Net cash provided by (used in) financing                            activities                                |   |   |   |                                   | 344,498  |   |   |                                |   | (207,645 | )      |                                                                     |   |   | 1,472,169 |   |   |
|                                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| Net increase (decrease) in cash                                                                               |   |   |   |                                   | (52,403  | )      |   |                                |   | (479,405 | )      |                                                                     |   |   | 113,727 |   |   |
|                                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| CASH AT BEGINNING OF PERIOD                                                                                   |   |   |   |                                   | 166,130  |   |   |                                |   | 645,535  |   |                                                                     |   |   | — |   |   |
|                                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| CASH AT END OF YEAR                                                                                           |   |   |   | $                                      | 113,727  |   |   |                                | $      | 166,130  |   |                                                                     |   | $ | 113,727 |   |   |
|                                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| SUPPLEMENTAL CASH FLOW INFORMATION                                                                            |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| Cash paid for interest                                                                                        |   |   |   | $                                      | 375      |   |   |                                | $      | —  |   |                                                                     |   | $ | 375 |   |   |
| Cash paid for income taxes                                                                                    |   |   |   | $                                      | 2.400    |   |   |                                | $      | —  |   |                                                                     |   | $ | 2,400 |   |   |
|                                                                                                          |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH                            FINANCING AND INVESTING ACTIVITIES |   |   |   |                                   |     |   |   |                                |   |     |   |                                                                     |   |   |   |   |   |
| Discount on loan payable - related party                                                                      |   |   |   | $                                      | —  |   |   |                                | $      | —  |   |                                                                     |   | $ | 8,300 |   |   |
| Issuance of stock for purchase of license                            agreement                                |   |   |   | $                                      | —  |   |   |                                | $      | —  |   |                                                                     |   | $ | 451,500 |   |   |
| Accrued interest                                                                                              |   |   |   | $                                      | —  |   |   |                                | $      | (129     | )      |                                                                     |   | $ | (1,679 | ) |   |
| Convertible redeemable debentures                                                                             |   |   |   | $                                      | —  |   |   |                                | $      | (15,000  | )      |                                                                     |   | $ | (808,728 | ) |   |
| Conversion of accrued interest into contributed                            capital                            |   |   |   | $                                      | —  |   |   |                                | $      | —  |   |                                                                     |   | $ | 179,610 |   |   |
| Cancellation of 2,000,000 shares at par value                                                                 |   |   |   | $                                      | —  |   |   |                                | $      | —  |   |                                                                     |   | $ | 2,000 |   |   |
| Issuance of stock for repayment of advances                                                                   |   |   |   | $                                      | —  |   |   |                                | $      | —  |   |                                                                     |   | $ | 116,050 |   |   |
| Conversion of accrued interest into promissory                            notes                               |   |   |   | $                                      | —  |   |   |                                | $      | —  |   |                                                                     |   | $ | 12,684 |   |   |
| Issuance of stock for purchase of domain                            asset                                     |   |   |   | $                                      | —  |   |   |                                | $      | —  |   |                                                                     |   | $ | 65,000 |   |   |
|                                                                                                               |        |        |        |                                        |          |        |        |                                     |        |          |        |                                                                          |        |  |  |  |  |  |  |  |  |

 

5

27 

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**PACIFIC FUEL CELL CORP.**

**(A            DEVELOPMENT STAGE COMPANY)**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2006**

             

**Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Organization**

 

Pacific Fuel Cell Corp. (the “Company”) was incorporated in            the State of Nevada on May 5, 1998. During 1999 the Company purchased the domain name            “Radiotower.com” to use as an internet portal that provided free online            directories of radio stations. During 2001 the Company abandoned this business            plan.

             

Effective August 3, 2001 the Company acquired a license from Fullerene            USA, Inc. (“Fullerene”), a related party, in exchange for 30,100,000 shares            of common stock. Subsequently, it was determined the carrying value of the license            exceeded its fair value and accordingly, loss on impairment was recorded. Subsequent to            this acquisition the Company changed its name to Pacific Fuel Cell Corp.

             

In April, 2004, the Company, through PFCE Acquisition Corp, a Nevada            corporation and our wholly owned subsidiary (“Sub”), and Cellfoods            Corporation, a Nevada corporation (“Cellfoods “), entered into an Agreement            and Plan of Merger whereby Sub merged with and into Cellfoods, which survived as our            wholly owned subsidiary. This merger was consummated on or about May 17,            2004.

 

Cellfoods is a development stage company that was organized in January            2003, engaged in the business of developing soybean powder for use in food preparation.            Cellfoods had assets and liabilities as of the acquisition date of cash of            $16,898.

             

**Consolidation**

             

The            consolidated financial statements include the accounts of the Company and its wholly            owned subsidiary. All intercompany accounts and balances have been eliminated in            consolidation

 

**Use of estimates**

 

The            preparation of financial statements in conformity with accounting principles generally            accepted in the United States of America requires management to make estimates and            assumptions that affect the amounts reported in the financial statements and            accompanying notes. Actual results could differ from those estimates.

 

**Cash and cash equivalents**

 

For            purposes of balance sheet classification and the statements of cash flows, the Company            considers all highly liquid investments purchased with an original maturity of three            months or less to be cash equivalents.

 

6

 

28 

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**Revenue recognition**

 

In            general, the Company records revenue when persuasive evidence of an arrangement exists,            services have been rendered or product delivery has occurred, the sales price to the            customer is fixed or determinable, and collectability is reasonably assured.

 

To            date the Company has not generated significant operating revenues.

 

**Research and development**

 

Research and development costs are charged to operations when incurred.            For the years ended December 31, 2006, 2005, and the period May 5, 1998 (inception) to            December 31, 2006, the Company incurred research and development costs of $50,229,            $122,135 and $300,556, respectively (see Note 4).

 

**Stock-based compensation**

 

The            Company accounted for equity-based compensation arrangements in accordance with the            provisions of Accounting Principles Board (“APB”) Opinion No. 25,            “Accounting for Stock Issued to Employees,” and related interpretations,            and complied with the disclosure provisions of SFAS No. 123, “Accounting for            Stock-Based Compensation.” All equity-based awards to non-employees were            accounted for at their fair value in accordance with SFAS No. 123. Under APB No. 25,            compensation expense was based upon the difference, if any, on the date of grant,            between the fair value of the Company’s stock and the exercise price. Pro forma            information regarding the Company’s net (loss) and net (loss) per share was            required by SFAS No. 123 and had been determined as if the Company had accounted for            its employee stock options under the fair value method prescribed by SFAS No.            123.

 

Effective the beginning of the first quarter of the year ended December            31, 2006, the Company adopted the provisions of SFAS 123R. It had no effect on the            Company.

 

**Fair value of financial instruments**

 

Fair            value estimates discussed herein are based upon certain market assumptions and            pertinent information available to management as of December 31, 2006. The respective            carrying value of certain on-balance-sheet financial instruments approximated their            fair values. These financial instruments include cash and accounts payable. Fair values            were assumed to approximate carrying values for financial instruments because they are            short term in nature, their carrying amounts approximate fair values, and they are            payable on demand

 

7

 

29 

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**Net (loss) per common share**

 

The            Company follows SFAS 128, “Earnings Per Share”. Basic earnings (loss) per            common share calculations are determined by dividing net income (loss) by the weighted            average number of shares of common stock outstanding during the year. Diluted earnings            (loss) per common share calculations are determined by dividing net income (loss) by            the weighted average number of common shares and dilutive common share equivalents            outstanding. During the periods when they are anti-dilutive, common stock equivalents,            if any, are not considered in the computation.

 

**Segment information**

 

The            Company follows SFAS 131, “Disclosure about Segments of an Enterprise and Related            Information”. Certain information is disclosed, per SFAS 131, based on the way            management organizes financial information for making operating decisions and assessing            performance. The Company currently operates in one business segment and will evaluate            additional segment disclosure requirements as it expands operations.

 

**Impairment of long-lived assets**

 

The            Company periodically reviews the carrying amount of its identifiable intangible assets            to determine whether current events or circumstances warrant adjustments to such            carrying amounts. If an impairment adjustment is deemed necessary, such loss is            measured by the amount that the carrying value of such assets exceeds their fair value.            Considerable management judgment is necessary to estimate the fair value of assets;            accordingly, actual results could vary significantly from such estimates. Assets to be            disposed of are carried at the lower of their financial statement carrying amount or            fair value less costs to sell.

 

**Equipment**

 

Equipment is stated at cost. Depreciation is provided by the Company on            the straight line method over the assets’ estimated useful lives of five years.            During the years ended December 31, 2005 and 2006, depreciation amounted to $10,441 and            $10,922 respectively.

 

The            Company entered into a settlement arrangement regarding a deposit on equipment in the            amount of $101,239. The Company returned the equipment to the vendor for a restocking            fee of $31,239, which is recorded in general and administrative expense as of December            31, 2006, and the difference of $70,000 will be remitted to the Company in            2007.

 

8

             

30 

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**Income Taxes**

 

The            Company follows SFAS 109 “Accounting for Income Taxes” for recording the            provision for income taxes. Deferred tax assets and liabilities are computed based upon            the difference between the financial statement and income tax basis of assets and            liabilities using the enacted marginal tax rate applicable when the related asset or            liability is expected to be realized or settled. Deferred income tax expenses or            benefits are based on the changes in the asset or liability each period. If available            evidence suggests that it is more likely than not that some portion or all of the            deferred tax assets will not be realized, a valuation allowance is required to reduce            the deferred tax assets to the amount that is more likely than not to be realized.            Future changes in such valuation allowance are included in the provision for deferred            income taxes in the period of change.

 

**Recent Pronouncements**

 

In            June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48,            “Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement            No. 109,” which seeks to reduce the diversity in practice associated with the            accounting and reporting for uncertainty in income tax positions. This Interpretation            prescribes a comprehensive model for the financial statement recognition, measurement,            presentation and disclosure of uncertain tax positions taken or expected to be taken in            an income tax return. FIN 48 presents a two-step process for evaluating a tax position.            The first step is to determine whether it is more-likely-than-not that a tax position            will be sustained upon examination, based on the technical merits of the position. The            second step is to measure the benefit to be recorded from tax positions that meet the            more-likely-than-not recognition threshold, by determining the largest amount of tax            benefit that is greater than 50 percent likely of being realized upon ultimate            settlement, and recognizing that amount in the financial statements. FIN 48 is            effective for fiscal years beginning after December 15, 2006. The Company is currently            in the process of evaluating the effect, if any, the adoption of FIN 48 will have on            its consolidated results of operations, financial position, or cash flows.

 

In            September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”            which provides enhanced guidance for using fair value to measure assets and            liabilities. SFAS No. 157 provides a common definition of fair value and establishes a            framework to make the measurement of fair value in generally accepted accounting            principles more consistent and comparable. SFAS No. 157 also requires expanded            disclosures to provide information about the extent to which fair value is used to            measure assets and liabilities, the methods and assumptions used to measure fair value,            and the effect of fair value measures on earnings. SFAS No. 157 is effective for            financial statements issued in fiscal years beginning after November 15, 2007 and to            interim periods within those fiscal years. The Company is currently in the process of            evaluating the effect, if any, the adoption of SFAS No. 157 will have on its            consolidated results of operations, financial position, or cash flows.

 

9

 

31 

----

In            September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin            (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements            when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108            was issued in order to eliminate the diversity in practice surrounding how public            companies quantify financial statement misstatements. SAB No. 108 requires that            registrants quantify errors using both a balance sheet (iron curtain) approach and an            income statement (rollover) approach then evaluate whether either approach results in a            misstated amount that, when all relevant quantitative and qualitative factors are            considered, is material. SAB No. 108 is effective for fiscal years ending after            November 15, 2006. The Company has adopted the bulletin during 2006. The adoption did            not have a material effect on its consolidated results of operations, financial            position, or cash flows.

             

**Note 2. GOING CONCERN**

 

The            accompanying financial statements have been prepared assuming the Company will continue            as a going concern. The Company reported net losses of $492,134 and $521,064 and for            the years ended December 31, 2006 and 2005 respectively, as well as reporting net            losses of $ $2,969,402 from inception (May 5, 1998) to December 31, 2006. Additional            capital and/or borrowings will be necessary in order for the Company to continue in            existence until attaining and sustaining profitable operations.

 

The            financial statements do not include any adjustments to reflect the possible future            effects on the recoverability and classification of assets or the amounts and            classification of liabilities that may result from the possible inability of the            Company to continue as a going concern.

 

**Note 3. LICENSE**

 

The            Company signed a licensing agreement on August 28, 2001, with Fullerene for an            exclusive worldwide license (excluding Japan) to make, use, and sell fuel cells solely            for use in transportation applications. The licensing agreement expires upon the            expiration of the underlying patent application, which is 17 years upon the approval of            the patent by the United States Patent and Trademark Office. As of the date of the            audit report the patent application had not been approved. In exchange, the Company            issued 30,100,000 shares of common stock to Fullerene. The asset was recorded at the            fair market value of the shares of $451,500 and was subsequently written off as an            impairment loss.

 

**Note            4. RESEARCH AND DEVELOPMENT AGREEMENT**

 

On            August 21, 2002, the Company entered into an agreement with the University of            California (the “University”) to develop a commercially viable fuel cell,            exploiting the Company’s proprietary technology. The Company advanced the            University $70,000 for the first phase, which was completed during February 2003.            During March 2003 the Company advanced the University an additional $61,266 to begin            work on the second phase of the research and development agreement.

 

10

 

32 

----

On October 13, 2006, a new amendment was executed specifying $50,229            that was to be paid upon signing, which has been paid. $50,252 for the period of May 1,            2006 to April 30, 2007 will be due on January 31, 2007; and, $35,395 for the period            June 29, 2005 to May 10, 2007 will be due on February 28, 2007. However, pursuant to            the terms of this agreement, we are not obligated to tender payment until we receive an            applicable invoice for the same. As of the date of this report, we have not received            any invoices from UCR for these payments. Once received, we intend to tender all            amounts due. To date, the Company has paid UCR a total of $268,996.The Company will            renegotiate the remaining amounts and due dates. Also, no invoices have been presented            by UCR to the Company. UCR, through its SMART program, provides matching funds for all            direct costs applicable to development of the project. The Company has applied for            additional matching funds through this SMART program and has obtained a favorable            decision and expects a grant of approximately $120,000 to be provided over the next two            years. This also provides a multi-year relationship with UCR. All information the            Company provides to UCR has been deemed confidential for a period of one (1) year after            expiration or termination of the agreement.

 

For            the years ended December 31, 2006, 2005 and the period from inception to December 31,            2006, the Company has charged $50,229, $122,135, and $330,556 respectively, to            operations related to this agreement.

 

**Note 5. STOCKHOLDERS’ (DEFICIT)**

 

Common            stock

 

During the period May 5, 1998 (inception) to December 31, 1998 the            following equity transactions occurred:

 

|   | **•** | Issued 3,000,000 shares of common stock to various                            investors for cash of $20,000 in a private placement pursuant to                            Regulation D, Rule 504. Issuance costs were $1,882. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Issued 2,250,000 shares of common stock for repayment of                            advances aggregating $15,000. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------|

 

During the year ended December 31, 1999 the following equity            transactions occurred:

 

|   | **•** | Issued 9,750,000 shares of common stock in consideration                            for the domain asset and domain name RadioTower.com. These shares were                            valued at $65,000, which was the fair market value of the shares on the                            date the shares were issued. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Issued 3,750,000 shares of common stock to various                            investors for cash of $25,000 in a private placement pursuant to                            Regulation D, Rule 504. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Stock subscriptions for 2,850,000 shares of common stock                            were accepted for cash of $19,000 pursuant to Regulation S. These                            shares were issued during February 2000. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

11

 

33 

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|   | **•** | Stock subscriptions for 1,650,000 shares of common stock                            were accepted in exchange for unpaid wages of $11,000 pursuant to                            Regulation S. These shares were issued during February 2000. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

During the year ended December 31, 2001 the following equity            transactions occurred:

 

|   | **•** | Issued 30,100,000 shares of common stock in exchange for                            a license agreement (Note 3). One of the conditions in the license                            agreement was that certain shareholders had to surrender 2,000,000                            shares of common stock for cancellation. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Issued 6,000,000 shares of common stock for cash of                            $6,000 to a related party. Because the stock was issued below its fair                            market value on the date the agreement was reached the Company                            recognized compensation expense of $84,000. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Issued 520,000 shares of common stock at $0.10 a share                            for cash of $52,000. |
|--------|------------|--------------------------------------------------------------------------------------------------------|

|   | **•** | Recorded stock compensation expense of $100,000 related                            to a licensing agreement (Note 3). |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------|

|   | **•** | Issued 1,070,000 shares of common stock in exchange for                            debt forgiveness of $101,050. |
|--------|------------|------------------------------------------------------------------------------------------------------------------|

|   | **•** | Shareholders of the Company converted $179,610 of                            liabilities into contributed capital. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------|

 

During the year ended December 31, 2002 the following equity            transactions occurred:

 

|   | **•** | Issued 1,000,000 shares of common stock for cash                            aggregating $46,819. |
|--------|------------|--------------------------------------------------------------------------------------------------|

|   | **•** | Entered into a six-month agreement with a former officer                            of the Company for investor relation services in exchange for 1,500,000                            shares of its common stock. These shares were valued at their fair                            market value of $45,000 on the date the Company agreed to issue the                            shares. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Issued 2,000,000 shares of common stock for cash                            aggregating $100,000. |
|--------|------------|---------------------------------------------------------------------------------------------------|

|   | **•** | The Company recorded the original discount on loan                            payable – related party as a capital contribution of                            $8,300. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

During the year ended December 31, 2003, the Company had no equity            transactions.

 

During the year ended December 31, 2004, the following equity            transactions occurred.

 

|   | **•** | Escrowed 30,000,000 shares of common stock for debenture                            conversion of which 2,957,254 shares were valued at a fair market value                            of $1,132,486 inclusive of derivative costs for $793,728 of debentures                            converted. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Issued 80,000 shares for legal services valued at their                            fair market value of $36,800. |
|--------|------------|------------------------------------------------------------------------------------------------------------------|

|   | **•** | Received cash of $16,898 and receivables of $36,298 in                            Cellfoods acquisition |
|--------|------------|---------------------------------------------------------------------------------------------------------|

|   | **•** | Services with a value of $6,000 were contributed to                            capital. |
|--------|------------|-----------------------------------------------------------------------------------------|

             

12

 

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During the year ended December 31, 2005, the following equity            transactions            occurred.      

 

|   | **•** | Stock option was exercised for 100,000 shares of common                            stock for the option price of $5,000. The difference between the fair                            market value of $25,000 and the option price is deemed to be stock                            compensation expense for research and development costs. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | Services with a value of $6,000 were contributed to                            capital. |
|--------|------------|-----------------------------------------------------------------------------------------|

 

|   | **•** | Issued 50,000 shares to Websoft LLC for services at                            market value, or $21,500. |
|--------|------------|----------------------------------------------------------------------------------------------------------|

 

|   | **•** | Debenture conversion of $160,834. |
|--------|------------|-----------------------------------|

 

During the year ended December 31, 2006, the following equity            transactions occurred.

 

|   | **•** | Services with a value of $6,000 were contributed to                            capital. |
|--------|------------|-----------------------------------------------------------------------------------------|

 

|   | **•** | Issued 2,417,858 shares of common stock for cash                            aggregating $338,500. |
|--------|------------|---------------------------------------------------------------------------------------------------|

 

|   | **•** | Issued 700,000 shares of common stock for services                            totaling $197,300 of which ($45,000) is deferred. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------|

             

**Note 6. INCOME TAXES**

 

The Company accounts for income taxes under SFAS 109, “Accounting            for Income Taxes,” which requires use of the liability method. SFAS 109 provides            that deferred tax assets and liabilities are recorded based on the differences between            the tax bases of assets and liabilities and their carrying amounts for financial            reporting purposes, referred to as temporary differences. Deferred tax assets and            liabilities at the end of each period are determined using the currently enacted tax            rates applied to taxable income in the periods in which the deferred tax assets and            liabilities are expected to be settled or realized.

 

Reconciliation of the Federal statutory income tax rate of 34% to the            effective rate is as follows:

 

| Federal statutory income tax rate |   | 34.00%          |
|-----------------------------------|--------|-----------------|
| Valuation allowance               |   | (34.00)%        |
|                              |   | ——% |

 

The tax effects of temporary differences and net operating losses that            give rise to significant portions of deferred tax assets and liabilities consisted of            the following:

 

13

 

35 

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|                              |   |   |   | **2006** |           |
|-----------------------------------|--------|--------|--------|----------|----------------|
| Deferred Tax assets (liabilities) |   |   |   |     |           |   |
| Net operating loss carry forward  |   | $      |   |     | 577,927        |   |
| Less valuation allowance          |   |   |   |     | (577,927       | ) |
| **Net deferred tax asset**        |   | $      |   |     | —— |   |

 

 

At            December 31, 2006, the Company has Federal net operating loss carry forwards of            approximately $1,699,786, which expire through 2025. The change in the valuation            allowance for the deferred tax asset during the year ended December 31, 2006, was            $157,126.

 

**Note            7. RELATED PARTY TRANSACTIONS**

 

During the period from May 5, 1998 (inception) to December 31, 1998,            business associates of the then sole officer and director of the Company (“sole            officer”), advanced the Company $15,000. The funds were used to pay for            management fees, a legal retainer and to reduce the other payable to a related party.            These advances were repaid through the issuance of 2,250,000 shares.

 

During the period from May 5, 1998 (inception) to December 31, 2001            shareholders of the Company loaned the Company an aggregate of $225,462. During the            year ended December 31, 2000, the Company converted these advances into promissory            notes, bearing interest at 9% and due on June 30, 2001. The face value of the            promissory notes includes accrued interest of $12,684. During 2001, $101,050 was            converted into common stock and $179,610 was contributed to capital.

 

During the year ended December 31, 2003, the Company had $3,652, of for            travel and administrative expenses paid by an officer and director on behalf of the            Company. The $3,652 was paid to the officer and director during the year ended December            31, 2004.

 

During the years ended December 31, 2006 and 2005, the Company paid            Fullerene USA $6,000 per quarter for financial management services.

 

**Note 8. COMMITMENTS AND CONTINGENCIES**

 

Effective December 18, 2006, pursuant to an Assignment and Assumption of            Equipment Purchase Agreement, the Company was assigned all rights of TDM, LLC relating            to an Agreement dated August 22, 2006, as amended December 20, 2006, between SGL            Technic Inc., a wholly owned subsidiary of SGL Technologies GmbH, a German company            (SGL), and TDM, LLC (TDM) wherein the Company acquired certain equipment on an            “as is” basis. This equipment consists of two press machine sets (200 and            800 ton) plus auxiliary equipment, which is used for manufacturing of bi-polar plates.            The purchase price of the equipment is $200,000. To date, the Company has paid            $100,000. The balance of $100,000 is due on or before June 30, 2007.

 

14

 

36 

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The            Company has an operating lease for its laboratory through September 2007. future            minimum lease payments for 2007 are $27,530.

 

**Note 9. SUBSEQUENT EVENTS**

 

On            January 24, 2007, the Company sold an aggregate of 2,214,285 “restricted”            shares of Common Stock at approximately $0.14 per share for proceeds of            $300,000.

On            February 28, 2007 the Company was named as a defendant in a lawsuit pending in the            Court of Common Pleas for Lake County, Ohio, captioned            “*SKRL Tool & Die, Inc., et al. v. William Berwald,            et al.*, Case No. 07-CV-000567.” In their complaint,            Plaintiffs allege that two of their former employees – current employees of the            Company in Willoughby, Ohio, manufacturing facility – possess confidential and            proprietary trade secrets of SKRL pertaining to the manufacturing of bipolar plates for            fuel cells. Plaintiffs have asserted against these employees and us claims for, among            other things, unfair competition, misappropriation of trade secrets and tortuous            interference with business relationships and seek compensatory and punitive damages, as            well as injunctive relief that would preclude the two former SKRL employees from            continuing to be employed by the Company . The Company believes these claims are            without merit, in that the employees possess no trade secrets of SKRL, and moreover,            the Company would have no use for such trade secrets, as its current employees (other            than the two defendants) possess far more technological and marketing information in            the industry than the SKRL employees would ever have been privy to. The Company is,            therefore, vigorously defending the Company’s interests, and believe the defense            will ultimately be successful. The Company also intends to file a counterclaim against            the Plaintiffs in this matter.

 

On            January 24, 2007 the Company entered into a new lease agreement for 23,886            square feet of commercial space located at 4413 Hamann Parkway, Willoughby, Ohio. The            lease is for two years starting on March 1, 2007 and ending February 28, 2009. The            future minimum payments required under the lease are $59,947, $96,644 and $16,931 for            2007, 2008 and 2009 respectively.

 

 

 

 

 

 

 

 

 

15

 

 

37 

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

 

|   | None. |
|--------|-------|

 

**ITEM            8A. CONTROLS AND PROCEDURES**

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule            13a-14(c) and Rule 15d-14(c) of the Exchange Act) designed to ensure that information            required to be disclosed in our reports filed under the Exchange Act is recorded,            processed, summarized, and reported within the required time periods. Our Chief            Executive Officer and Chief Financial Officer have concluded, based upon their            evaluation of these disclosure controls and procedures as of the date of this Report,            that, as of the date of their evaluation, these disclosure controls and procedures were            effective at ensuring that the required information will be disclosed on a timely basis            in our reports filed under the Exchange Act.

 

Changes in Internal Controls

 

We maintain a system of internal controls that is designed to provide            reasonable assurance that our books and records accurately reflect our transactions and            that our established policies and procedures are following. There were no significant            changes to our internal controls or in other factors that could significantly affect            such internal controls subsequent to the date of the evaluation of such internal            controls by our Chief Executive Officer and Chief Financial Officer, including any            corrective actions with regard to significant deficiencies and material            weaknesses.

 

**PART III**

 

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

 

|   | Our directors and officers as of the date of this Report                            are as follows: |
|--------|-----------------------------------------------------------------------------------------------------|

 

|   | **Name** | **Age** | **Position****_________**   |
|--------|----------|---------|---------------------------------------|

 

|   | George Suzuki | 64 | President, Secretary, |
|--------|---------------|----|-----------------------|

Treasurer and Director

 

Directors are elected for one-year terms or until the next annual            meeting of shareholders and until their successors are duly elected and qualified. Our            officers are appointed by our Board of Directors and serve at the pleasure of the            Board, subject to any rights under employment agreements.

 

38 

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There are no family relationships among the officers and directors.            There is no arrangement or understanding between us (or any of our directors or            officers) and any other person pursuant to which such person was or is to be selected            as a director or officer.

 

**RESUMES**

 

***George Suzuki***assumed his positions            with us upon effectiveness of the Fullerene Agreement in August 2001. In addition to            his positions with us, since January 1991, Mr. Suzuki has been CEO of Beltec            Industries, Inc., Tustin, CA, a privately held company engaged in the sale of air            purification systems. Also, from August 1986 through September 1996, Mr. Suzuki was            President of Unibell International Co. Ltd., Tustin, CA, a privately held real estate            company engaged in land development and investment. Mr. Suzuki devotes approximately            90% of his business time to our business affairs.

 

**MEETINGSOFTHEBOARDOFDIRECTORS**

**ANDCOMMITTEESOFTHEBOARDOFDIRECTORS**

 

Our operations are managed under the supervision of our Board of            Directors, which has the ultimate responsibility for the establishment and            implementation of our general operating philosophy, objectives, goals and            policies.

 

During fiscal 2006, our Board of Directors did not have any formal            meetings, but did take action in four (4) instances by unanimous consent. However, our            directors, who are also our officers, work together on a daily basis.

 

During fiscal 2006, the Board of Directors had no committees. Management            intends to establish both an Audit Committee and Compensation Committee once we begin            to generate significant revenues in the future.

 

**ITEM 9B. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE            ACT**

 

Section 16(a) of the Securities Exchange Act of 1934 requires the            Company’s officers, directors and person who own more than 10% of the            Company’s Common Stock to file reports of ownership and changes in ownership with            the Securities and Exchange Commission. All of the aforesaid persons are required by            SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.            During our fiscal year ended December 31, 2006, there were no changes in the holdings            of any of our officers and directors, or our principal shareholders. Therefore, no            reports were required to be filed.

 

**ITEM 10. EXECUTIVE COMPENSATION.**

 

**REMUNERATION**

 

The following table reflects all forms of compensation for services to            us for the years ended December 31, 2006, 2005 and 2004, of our chief executive            officer, as well as those

 

39

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persons who received in excess of $100,000 in annual compensation from            us during the aforesaid time.

 

**SUMMARY COMPENSATION TABLE**

 

|                                    |   |   |   | Annual       |   | Long-Term Compensation |   |                        |          |                    |   |
|-----------------------------------------|--------|--------|--------|--------------|--------|------------------------|--------|-----------------------------|---------------|-------------------------|--------|
|                                    |   |   |   | Compensation |   | Awards                 |   |                        |          |                    |   |
| Name and Principal Position             |   | Year   |   | Salary ($)   |   | Bonus ($)              |   | Restricted Stock Awards ($) |          | Stock Option Awards ($) |   | Securities underlying options/ SARS (#) |   | Non-Equity Incentive Plan Compensation |   | Non-qualified Deferred Compensation Earnings |   | All Other Compensation ($) |   | Total Compensation ($) |   |
| George Suzuki, President, CEO, director |   |   | 2006   |         |   | 0                 |   |                        | $15,000  |                    |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |   | $15,000  |   |
|                                    |   |   | 2005   |         |   | 0                 |   |                        | 0        |                    |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |
|                                    |   |   | 2004   |         |   | 0                 |   |                        | 0        |                    |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |   | 0  |   |

 

During our fiscal years ended December 31, 2005 and 2006, we paid            Fullerene USA $6,000 per calendar quarter for financial management expenses. Messrs.            Suzuki and Inouye, two of our officers and each of whom is a director, each own 40.2%            of Fullerene’s issued and outstanding common stock.

 

We have adopted a policy whereby we reimburse officers and directors for            out of pocket expenses incurred by each of them in the performance of their relevant            duties. We reimbursed our President, George Suzuki the aggregate amount of $4,882 for            out of pocket expenses incurred during our fiscal year ended December 31, 2006. We did            not reimburse any other officer or director for any such expenses during the fiscal            year ended December 31, 2006.

 

|   | We have no stock plan for employees, but may adopt one                            in the future. |
|--------|--------------------------------------------------------------------------------------------------|

 

**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND            MANAGEMENT.**

 

The table below lists the beneficial ownership of our voting securities            by each person known by us to be the beneficial owner of more than 5% of such            securities, as well as by all our directors and officers as of the date of this Report.            Unless otherwise indicated, the shareholders listed possess sole voting and investment            power with respect to the shares shown.

 

| **Name and Address of****Beneficial Owner**                       |   |   |   | **Amount and Nature of****Beneficial Ownership** |   |   |   | **Percent****of Class** |   |
|-------------------------------------------------------------------|--------|--------|--------|--------------------------------------------------|--------|--------|--------|-------------------------|--------|
|                                                              |   |   |   |                                             |   |   |   |                    |   |
| Fullerene USA, Inc.1721 Garvey Ave., #AAlhambra, CA 91803         |   |   |   | 29,100,000                                       | (1)    |   |   | 41.7                    | %      |
|                                                              |   |   |   |                                             |   |   |   |                    |   |
| Stephen G. Godwin11854 Darlington Ave., #304Los Angeles, CA 90049 |   |   |   | 6,000,000                                        | (1)    |   |   | 8.6                     | %      |
|                                                              |   |   |   |                                             |   |   |   |                    |   |
| All Directors and ExecutiveOfficers as a Group (3 persons)        |   |   |   | 29,100,000                                       | (1)    |   |   | 41.7                    | %      |

____________________

 

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| (1) | Mr. Suzuki, our sole officer and director, owns 40.2% of                            Fullerene’s issued and outstanding common stock. Further, in                            addition to the 6 million shares owned by Mr. Godwin referenced above,                            he owns approximately 19.4% interest in Fullerene USA, Inc. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**ITEM            12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

During the years ended December 31, 2005 and 2006, we paid Fullerene            USA, Inc. our majority stockholder, $6,000 per quarter for financial management            expenses. Messrs. Suzuki and Inouye, two of our officers and each of whom is a            director, each own 40.2% of Fullerene’s issued and outstanding common            stock.

 

In addition, we operate our business from offices at 131 N. Tustin Ave.,            Suite 100, Tustin, CA 92780. We share this space pursuant to a verbal, month-to-month            sublease with Belltec Industries, a company owned by George Suzuki, our President and a            director. Our monthly rent is $600. This space consists of 700 square feet of executive            office space. See “PART I, Item 2, Description of Property.”

 

Except as stated above or as stated elsewhere, no member of management,            executive officer or security holder had any direct or indirect interest in any other            transaction with us.

 

**PART IV**

 

**ITEM            13. EXHIBITS AND REPORTS ON FORM 8-K.**

 

| (a) | Exhibits. The following                            exhibits are attached to this Report: |
|-----|------------------------------------------------------------------------------------------|

 

| Exhibit No. |   | Description                                                                                                                    |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                           |
|        |   |                                                                                                                           |
| 31.1        |   | Certification of Chief Executive Officer Pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |   |                                                                                                                           |
| 31.2        |   | Certification of Chief Financial Officer Pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |   |                                                                                                                           |
| 32.1        |   | Certification of Chief Executive Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002. |
|        |   |                                                                                                                           |
| 32.2        |   | Certification of Chief Financial Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002. |

 

Following are a list of exhibits which we previously filed in other            reports which we filed with the SEC, including the Exhibit No., description of the            exhibit and the identity of the Report where the exhibit was filed.

 

41 

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| Exhibit No. |   | Description                                                                       |
|-------------|--------|-----------------------------------------------------------------------------------|
|        |   |                                                                              |
| 2.1*        |   | Corporate Charter                                                                 |
| 2.2*        |   | Articles of Incorporation                                                         |
| 2.3*        |   | Amendment to Articles of Incorporation                                            |
| 2.4*        |   | Bylaws                                                                            |
| 2.5**       |   | Amendment to Articles of Incorporation                                            |
| 10.1**      |   | Agreement between the Company and Fullerene, USA,                            Inc. |
| 10.2***     |   | Lease Agreement – Riverside Laboratory                                      |
| 10.3****    |   | Agreement between the Company and Bourns,                            Inc.         |
| 10.4*****   |   | Lease Agreement dated January 24, 2007                                            |

_____________________

*            Filed with the Securities and Exchange Commission in the Exhibits to Form 10-SB filed            on November 10, 1999, and are incorporated by reference herein.

 

**            Filed with the Securities and Exchange Commission in the Exhibits to Form 8-K filed on            September 6, 2001, and are incorporated by reference herein.

 

***            Filed with the Securities and Exchange Commission in the Exhibits to Form 10-KSB filed            on April 8, 2005, and is incorporated by reference herein.

 

****Filed with the Securities and Exchange Commission in the Exhibits to            Form 10-KSB filed on April 18, 2006, and is incorporated by reference            herein.

 

*****Filed with the Securities and Exchange Commission in the Exhibits            to Form 10-KSB filed on April 2, 2007, and is incorporated by reference            herein.

 

| (b) | Reports on Form                            8-K. |
|-----|-------------------------------------------------|

 

We did not file any reports on Form 8-K during the three month period            ended December 31, 2006.

 

**Subsequent Events**

 

On or about January 24, 2007, we filed a report on Form 8-K advising            that effective December 18, 2006, pursuant to an Assignment and Assumption of Equipment            Purchase Agreement, we were assigned all rights of TDM L.L.C. relating to an Agreement            datedAugust 22, 2006, as amended December 20, 2006, between SGL Technic Inc., a wholly            owned subsidiary of SGL Technologies GmbH, a German company (“SGL”), and            TDM, LLC (“TDM”),wherein we acquired certain equipment on an “as            is” basis. This equipment consists of two press machine sets (200 and 800 ton)            plus auxiliary equipment, which is used for manufacturing of bi-polar plates. We have            been developing the MEA business segment of the fuel cell industry and have nanoMEA            technology to enhance performance and durability. A fuel cell stack (essentially an            electricity generator) consists of an MEA, GDL (gas diffusion layer) and bipolar            plates. As such, management believes that this acquisition of equipment fits in            with

 

42 

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our            proprietary technology. The purchase price of the equipment was $200,000 (US), all of            which has been paid except for the balance of $95,000, which shall become due on or            before June 30, 2007.

             

This equipment acquisition allows us to expand our current business plan            to begin to manufacture bipolar plates, which will provide us with the capability of            marketing our own fuel cell components for the industry.

             

On or about February 2, 2007 we filed a report on Form 8-K, advising            that on January 24, 2007, we issued an aggregate of 2,214,285 “restricted”            shares of our Common Stock (the “Shares”). We received proceeds of $300,000            from the sale thereof ($0.14 per share). The Shares were sold to a total of 10            investors, all of whom were “accredited investors” as that term is defined            under Rule 501(a) of Regulation D as promulgated under the Securities Act of 1933, as            amended.

 

**ITEM            14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

 

Our Board of Directors reviews and approves audit and permissible            non-audit services performed by its independent accountants, as well as the fees            charged for such services. In our review of non-audit service fees and its appointment            of Stark Winter Schenkein & Co., LLP as our independent accountants, our Board of            Directors considered whether the provision of such services is compatible with            maintaining independence. All of the services provided and fees charged by Stark Winter            Schenkein & Co., LLP, in fiscal years ended December 31, 2006, were approved by our            Board of Directors.

 

**Audit Fees**

 

The aggregate fees billed by Stark Winter Schenkein & Co., LLP for            professional services for the audit of our annual financial statements and the reviews            of the financial statements included in our quarterly reports on Form 10-QSB for 2006            and 2005 were $23,650 and $22,000, respectively, net of expenses.

 

**Audit-Related Fees**

 

There were no other fees billed by during the last two fiscal years for            assurance and related services that were reasonably related to the performance of the            audit or review of our financial statements and not reported under “Audit            Fees” above.

 

**Tax            Fees**

 

The aggregate fees billed during the last two fiscal years for            professional services rendered for tax compliance for fiscal years ended December 31,            2006 and 2005 were $3,250 and $2,900, respectively.

 

43 

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**All            Other Fees**

 

There were no other fees billed by Stark Winter Schenkein & Co., LLP            during the last two fiscal years for products and services provided.

 

44 

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of            1934, the Company caused this amended Report to be signed on its behalf by the            undersigned, thereunto duly authorized, on November 1, 2007.

 

|   | **PACIFIC FUEL CELL CORP.**

(Registrant)

                             

                             

By:  s/George                            Suzuki_________________

George Suzuki, President |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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 indicated on            November 1, 2007.

 

 

|  

                             

s/George                            Suzuki______________________

George Suzuki, Director |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|

 

 

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