UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D. C. 20549
 
 FORM
10-KSB/A
 Amendment
#1
 
 (Mark
One)
  x ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

                  
                  For
      the fiscal year ended December 31,
      2007
                  
                  o TRANSITION REPORT
      UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF
      1934
 For the
transition period from ___________ to ___________
 
 Commission
File Number:   000-26673
 
 ETHOS
ENVIRONMENTAL, INC.
 (Name of
Small Business Issuer in Its Charter)
  Nevada
              
              88-0467241(State
      or Other Jurisdiction
              
              IRS
      Employerof
      Incorporation or Organization)
              
              Identification
      Number
  6800
Gateway Park
 San
Diego, CA 92154
 (619)
575-6800
 (Address
and Telephone Number of Principal Executive Offices)
  Securities
      registered under Section 12(b) of the Exchange Act:Title
      of each class registered:
              Name
      of each exchange on which registered:None
              Over-the-Counter
      Bulletin BoardSecurities
      registered under Section 12(g) of the Exchange Act:Common
      Stock, par value $0.0001
                (Title
      of class)
  Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.    Yes   ̈    No  x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act.    ̈
 
 Indicate
by check mark whether the registrant (1) has 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 registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes xNo o
  Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act.  Yes oNo x
  Index
 1
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the 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. Yes oNo x
  Revenues
for year ended December 31, 2007: $ 1,355,141.
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was approximately $ 20,541,157 as of December 31, 2007 based
upon the average bid and asked price of the registrant’s common stock on the
Over the Counter Bulletin Board.
 
 Number of
shares of the registrant’s common stock outstanding as of December 31, 2007 was:
37,998,562.
  Transitional
Small Business Disclosure Format: Yes oNo x
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 All
reports filed by the Registrant during 2007, and through the date of filing of
this Annual Report.
 Index
 2
 ETHOS
ENVIRONMENTAL, INC.
 ANNUAL
REPORT ON FORM 10-KSB/A
  FOR
THE YEAR ENDED DECEMBER 31, 2007
  INDEX
  PART
      I
                          Page
      No.Item 1.
                          Description
      of Business
                          6The
      CompanyProductsTrademarksSignificant
      EventsItem
      2.
                          PropertiesItem
      3.
                          Legal
      ProceedingsItem
      4.
                          Submission
      of Matters to a Vote of Security HoldersPART
      IIItem
      5.
                          Market
      for Common Equity and Related Stockholder MattersItem 6.
                          Management’s
      Discussion and Analysis or Plan of Operation
                          24Item 7.
                          Financial
      Statements
                          30Item 8.
                          Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                          50Item 8A(T).
                          Controls
      and Procedures
                          50Item 8B.
                          Other
      Information
                          53PART
      IIIItem
      9.
                          Directors,
      Executive Officers and Corporate GovernanceItem
      10.
                          Executive
      CompensationItem
      11.
                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder MattersItem
      12.
                          Certain
      Relationships and Related TransactionsItem 13.
                          Exhibits
                          54Item 14.
                          Principal
      Accountant Fees and Services
                          54
 Index
 3
 EXPLANATORY
NOTE:
 
 We are
filing this first amendment to our Annual Report on Form 10-KSB for the year
ended December 31, 2007 (the “2007 Form 10-K”) to restate our consolidated
financial statements for the years ended December 31, 2007 and 2006. In the
course of preparing our interim financial statements for our quarterly report on
Form 10-Q to be filed with the Securities and Exchange Commission (“SEC”) for the quarter ended
September 30, 2008, we discovered a misclassification of accounts receivable,
associated revenue and other accounting irregularities resulting in a material
misstatement of our 2007 interim financial statements for the previously
reported quarters and annual financial statements for the years ended December
31, 2007 and 2006 (collectively, the “Affected Financial Statements”). The
restatements in the Affected Financial Statements has had a negative effect on
our previously reported net change in cash and cash equivalents and a
significant impact on our previously reported consolidated balance sheets and
consolidated statements of operations contained in the Affected Financial
Statements.
  The
restatement of our consolidated financial statements as a result of the errors
described above has led our management to conclude that a material weakness
existed in our internal control over financial reporting as of December 31,
2007, and that Management’s Report on Internal Control over Financial Reporting
should also be restated. Accordingly, this amended filing includes a revised
ITEM 8A(T). CONTROLS & PROCEDURES that reflects management’s conclusion that
our internal control over financial reporting was not effective at
December 31, 2007 for reasons in addition to those previously
discussed.
  In
accordance with the rules of the SEC, the affected items of the 2007 Form 10-K,
“Item 1. Description of Business,” “Item 6. Management’s Discussion of Financial
Condition and Results of Operations,” “Item 7. Financial Statements,” “Item
8A(T). Controls and Procedures,” and “Item 14. Principal Accountant Fees &
Services” are being amended and completely restated. No other items have been
amended and, as such, are not included herein.
  No
attempt has been made in this Form 10-KSB/A to update other disclosures
presented in the 2007 Form 10-KSB as originally filed except as described above
or as required to reflect the effects of the restatement. This Form 10-KSB/A
does not reflect events occurring after the filing of the 2007 Form 10-K or
modify or update those disclosures, including the exhibits to the 2007 Form 10-K
affected by subsequent events; however, this Form 10-K/A includes as
Exhibits 31.1, 31.2 and 32 new certifications by our principal executive officer
and principal financial officer as required by Rule 12b-15 promulgated
under the Securities Exchange Act of 1934, as amended. Accordingly, this Form
10-K/A should be read in conjunction with our filings made with the SEC
subsequent to the filing of the 2007 Form 10-K, including any amendments to
those filings.
 Index
 4
 FORWARD-LOOKING
STATEMENTS
  This
Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These forward-looking statements are not
historical facts but rather are based on current expectations, estimates and
projections. We use words such as “anticipate,” “expect,” “intend,” “plan,”
“believe,” “foresee,” “estimate” and variations of these words and similar
expressions to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and other factors, some of which are beyond our control, are difficult to
predict and could cause actual results to differ materially from those expressed
or forecasted. These risks and uncertainties include the following:
  ·
              The
      availability and adequacy of our cash flow to meet our
      requirements;
  ·
              Economic,
      competitive, demographic, business and other conditions in our local and
      regional markets;
  ·
              Changes
      or developments in laws, regulations or taxes in our
    industry;
  ·
              Actions
      taken or omitted to be taken by third parties including our suppliers and
      competitors, as well as legislative, regulatory, judicial and other
      governmental authorities;
  ·
              Competition
      in our industry;
  ·
              The
      loss of or failure to obtain any license or permit necessary or desirable
      in the operation of our business;
  ·
              Changes
      in our business strategy, capital improvements or development
      plans;
  ·
              The
      availability of additional capital to support capital improvements and
      development; and
  ·
              Other
      risks identified in this report and in our other filings with the
      Securities and Exchange Commission or the
SEC.
  You
should read this report completely and with the understanding that actual future
results may be materially different from what we expect. The forward looking
statements included in this report are made as of the date of this report and
should be evaluated with consideration of any changes occurring after the date
of this Report. We will not update forward-looking statements even though our
situation may change in the future and we assume no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
  Use
of Term
  Except as
otherwise indicated by the context, references in this report to “Company,”
“ETEV,” “we,” “us” and “our” are references to the pre-merger business of Victor
Industries, Inc. and post-merger business of Ethos Environmental, Inc.  All
references to “USD” or “$” refer to the legal currency of the United States of
America.
 Index
 5
 PART
I
 
 Item 1.    Description of Business
  Overview
  The mission of Ethos
Environmental is to be recognized as the industry standard for high quality,
non-toxic cleaning and lubricating products that increase fuel mileage and
reduce these ecologically damaging emissions from vehicles, and at a price
everyone can afford.  The goal of the company is to make the world a
better place, “one gallon at a time”. According to the Environmental Protection
Agency (EPA), “The burning of fuels releases carbon dioxide (CO2) into the atmosphere and
contributes to climate change [Global Warming], but these emissions can be
reduced by improving your car’s fuel efficiency.”Air pollution caused by cars,
trucks and other vehicles burning petroleum-based fuels is one of the most
harmful and ubiquitous environmental problems. Furthermore, local accumulation
in heavy traffic is the greatest source of community ambient exposure, largely
because carbon monoxide is formed by incomplete combustion of carbon containing
fuels.
 
 Ethos Environmental
manufactures and distributes a unique line of fuel reformulators that contain a
blend of low and high molecular weight esters.  The product adds
cleaning and lubrication qualities to any type of fuel or motor
oil.  The overall benefits are increased fuel mileage, reduced
emissions and reduced maintenance costs as the product allows engines to perform
cooler, smoother and with more vigor.
 
 Esters
 
 In the simplest terms, esters
can be defined as the reaction products of acids and alcohols. Thousands of
different kinds of esters are commercially produced for a broad range of
applications. Within the realm of synthetic lubrication, a relatively small
substantial family of esters have been found to be very useful in severe
environment applications.
 
 Esters as lubricants have
already captured certain niches in the industrial market such as reciprocating
air compressors and high temperature industrial oven chain lubricants. When one
focuses on high temperature extremes and their telltale signs such as smoking,
wear, and deposits, the potential applications for the problem solving ester
lubricants are virtually endless.
 
 In many ways esters are very
similar to the more commonly known and used synthetic hydrocarbons or PAOs. Like
PAOs, esters are synthesized form relatively pure and simple starting materials
to produce predetermined molecular structures designed specifically for high
performance lubrication. Both types of synthetic base stocks are primarily
branched hydrocarbons which are thermally and oxidatively stable, have high
viscosity indices, and lack the undesirable and unstable impurities found in
conventional petroleum based oils. The primary structural difference between
esters and PAOs is the presence of multiple ester linkages (COOR) in esters
which impart polarity to the molecules. This polarity affects the way esters
behave as lubricants in the following ways:
 
 Volatility: The polarity of the ester
molecules causes them to be attracted to one another and this intermolecular
attraction requires more energy (heat) for the esters to transfer from a liquid
to a gaseous state. Therefore, at a given molecular weight or viscosity, the
esters will exhibit a lower vapor pressure which translates into a higher flash
point and a lower rate of evaporation for the lubricant. Generally speaking, the
more ester linkages in a specific ester the higher its flash point and the lower
its volatility.
 
 Lubricity: Polarity also causes the
ester molecules to be attracted to positively charged metal surfaces. As a
result, the molecules tend to line up on the metal surface creating a film which
requires additional energy (load) to penetrate. The result is a stronger film
which translates into higher lubricity and lower energy consumption on lubricant
applications.
 
 Detergency/Dispersency: The polar nature of esters
also makes them good solvents and dispersants. This allows the esters to
solubilize or disperse oil degradation by-products which might otherwise be
deposited as varnish or sludge, and translates into cleaner operation and
improved additive solubility in the final lubricant.
 
 Index
 6
 Biodegradability: While stable against
oxidative and thermal breakdown, the ester linkage provides a vulnerable site
for microbes to begin their work of biodegrading the ester molecule. This
translates into very high biodegradability rates for ester lubricants and allows
more environmentally friendly products to be formulated.
 
 Ethos Environmental
manufactures and distributes Ethos FR, a unique combination of high-quality,
non-toxic, specially designed esters that uses only the elements of carbon,
hydrogen and oxygen. It significantly reduces emissions, fuel consumption, and
engine maintenance costs. Ethos FR provides an immediate, cost-effective
strategy for fighting air pollution caused by fossil fuels and the internal
combustion engine. This combination of low molecular cleaning esters and the
high molecular lubricating esters, reformulates any fuel whether it’s gasoline,
diesel, methanol, ethanol, LNG, compressed natural gas or bio-diesel. When
blended with fuels, Ethos FR reduces the emissions of hydrocarbons (HC),
nitrogen oxides (NOx), carbon monoxide (CO), particulate matter (PM) and other
harmful products of combustion. Yet, the emission of O2 is significantly
increased. An EPA registered laboratory, confirms that Ethos FR is 99.99976%
clean upon ignition and ashless upon combustion. Ethos FR is free of
carcinogens.
 
 Ethos FR is a
multi-functional fuel reformulator. It is designed for use in all fuels to
increase power and mileage, dissolve gums and varnishes, lubricate upper
cylinder components and keep the entire fuel system clean and highly lubricated.
It is recommended for use at 1 part in 1280, which is equal to 1 fluid ounce of
Ethos FR per 10 gallons of fuel.
 
 Typical
      SpecificationsTests
              ResultsViscosity @ 37.8o
      C,CS
              10.39Viscosity @ 100o F,
      SSU
              60.2Specific Gravity @
      15.6/15.6oC
              0.93API Gravity,
      Degrees
              26.6Flash Point, COC, oC
      (oF)
              149oC
      (300oF)Color and
      Appearance
              Light, bright and
      clearSediment
              None
 
 Ethos Environmental offers a
cost-effective solution to relieve skyrocketing fuel prices and help lessen
environmental regulatory pressures. Ethos products address one problem that has
two side effects,wasted
fuelandair
pollution. Fuel
burns inefficiently in an internal combustion engine and that inefficiency leads
to wasted fuel transformed into toxic emissions. Ethos products make fuel burn
more efficiently so it significantly improves both of the aforementioned adverse
effects. Most important, the use of Ethos results in fuel cost savings to the
customer.
 
 Fuel and Maintenance Costs
Savings:
 
 • Customers report on average
increases in Miles-Per-Gallon between 7% and 19% Fleet-Wide
 • Enhances Engine Performance
by Reducing Heat Produced by Friction
 
 Fines and Downtime are
Reduced Due To Air Pollution:
 
 • Reduces Toxic Emissions By
30% or More
 • Free Of
Carcinogens
 • Non-Toxic &
Non-Hazardous
 • Not a
Petrochemical
 • 99.99976% Ashless upon
Combustion
 
 Repairs:
 
 • Improves
Combustion
 • Cleans Fuel
System
 • Lubricates Moving
Components
 • Extends Engine Life by
Reducing Friction
 
 Index
 7
 How Do Ethos Products
Work?
 
 Ethos products reformulate
any fuel, resulting in two important benefits. The first benefit is the added
lubricity to the engine. The second is adding cleansing properties to the fuel.
All of the internal components benefit from the cleansing and lubricating action
including the fuel lines, filters, carburetors, spark plugs and injectors. Ethos
also conditions the engine seals, keeping them tighter for a longer period of
time. A cleaner, more lubricated engine runs smoother, requires less maintenance
and reduces engine heat significantly, thereby returning horsepower closer to
the manufacturer’s specifications. Ethos removes carbon deposits that cause fuel
to combust incompletely, resulting in wasted fuel that creates toxic emissions.
The combination of cleaning and lubricating esters in our products stabilize the
fuel without changing its specifications.
 
 In Ethos FR®, for example, a
group of low molecular weight esters clean the dirty deposits formed by fuels
and the combustion process. These deposits lower performance of an engine making
it less fuel-efficient. Causing it to exhaust raw fuel, which is the primary
contributor to pollution. A group of high molecular weight esters lubricate the
engine surfaces as the fuel runs through it. Their molecular structure is small
enough to penetrate the metal and form a lubricating layer between surfaces.
This process allows the moving components of an engine to operate smoother and
with less power-robbing friction and heat.
 
 The primary task for the
Company is to distinguish itself as an industry leader in the reduction of fuel
costs and emission problems at a profit gain to the commercial user. Part of the
challenge before us is to differentiate Ethos products from two types of
products in this industry, additives - that are purported to increase fuel
mileage and oxygenates - which are mandated to lower emissions. Both additives
and oxygenates provide short-term benefits at the price of long-term engine or
environmental problems.
 
 Additives contain highly
refined petrochemicals or compressed hydrocarbons that promise better fuel
mileage and sometimes lower emissions, by “cleaning” the engine. Used mainly by
individual consumers, they are expensive and commonly sold at the auto parts and
retail stores. More than five thousand EPA-registered fuel additives compete in
the retail market and although the EPA requires that such products be
registered, that registration constitutes neither endorsement nor validation of
the product’s claims.
 
 Oxygenates, such as methyl
tertiary butyl ether (MTBE) and Ethanol, are intended to lower emissions by
adding oxygen to the fuel. Ethos FR®products actually complement
federally mandated oxygenates by lowering emissions, but as mentioned earlier,
Ethos FR®is not an oxygenate and
cannot be used for the purpose of complying with current language federal
legislation.
 
 In contrast, Ethos products
have cleaning properties that contribute to the lubrication of the engine
instead of destroying it. The ester-based formula dissolves the gums and
residues and adds important lubrication that an engine needs. The engine stays
clean and lubricated, allowing it to run smoothly and
efficiently.
 
 Both E85 and biodiesel, such
as B5, are alternative measures currently being considered for use by the
federal government.  However, these alternative measures rely entirely
on agricultural resources such as corn, barley, wheat and vegetable
oils.  Realistically, the agricultural sector of the economy cannot
hope to produce sufficient quantities of these products to cause an appreciable
effect on global warming.  This is a problem not facing Ethosas the product
is readily available and continuously produced at a lower
price.
 
 While the debate on emissions
reduction solutions continues, Ethos Environmental is making a difference in
cleaning the air today while reducing fuel costs to its
customers.  Extensive road tests by our customers that use EthosFR®have shown that commercial
fleets, on average, increase fuel mileage between 7% and 19% and reduce
emissions by more than 30%.  EthosFR®is non-toxic, non-hazardous
and works with any fuel used in cars, trucks, buses, RV’s, ships, trains and
generators.
 
 The overall result is that
EthosFR®makes engines combust fuel
more efficiently.  When an engine uses each measure of fuel to the
maximum degree possible, it has two very important benefits.  It
reduces fuel consumption and reduces non-combusted residues that an engine
expels in the form of exhaust emissions such as hydrocarbons, nitrogen oxides,
carbon monoxide, particulate matter and other harmful products of
combustion.  Unused fuel is saved in the fuel tank, waiting to be used
efficiently by the engine, instead of exhausted in the form of toxic
emissions.  EthosFR®reduces emissions without
adding any of its own components to the exhaust since it is 99.99976% ash-less
upon combustion,and free of carcinogenic
compounds.
 
 Index
 8
 Ethos Environmental is also
at the forefront in the development of new blending methods and is positioned to
become an industry leader with new products currently under
development.
 
 Our Corporate
History
 
 We were originally
incorporated under the laws of the State of Idaho on January 19, 1926 under the
name of Omo Mining and Leasing Corporation. The Company was renamed Omo Mines
Corporation on January 19, 1929. The name was changed again on November 14, 1936
to Kaslo Mines Corporation and finally Victor Industries, Inc. on December 24,
1977.
 
 As Victor Industries, Inc.,
the Company developed, manufactured, and marketed products related to the use of
the mineral known as zeolite. Zeolites have the unique distinction of being
nature's only negatively charged mineral. Zeolites are useful for metal and
toxic chemical absorbents, water softeners, gas absorbents, radiation absorbents
and soil and fertilizer amendments.
 
 Reverse Acquisition of
Ethos
 
 On November 2, 2006, as part
of a two-step reverse merger, the Company merged with and into Victor Nevada,
Inc. a newly incorporated entity for the purpose of redomiciling under the laws
of the State of Nevada. Concurrently therewith, we completed the merger
transaction with Ethos Environmental, Inc., a privately held Nevada corporation
(“Ethos”). The Company was the surviving entity, and changedits nameto Ethos Environmental, Inc.
to more accurately reflect its new direction and business
model.
  Additional
Corporate History
 
 On April 20, 2006, Victor
Industries, Inc., with the approval of its Board of Directors, executed an
Agreement and Plan of Merger with San Diego, CA based Ethos Environmental, Inc.,
a Nevada corporation.
 
 At a meeting oftheshareholders of the Company
held on October 30, 2006, a majority of shareholders voted in favor of the
merger. On November 2, 2006, the merger was consummated. As part of the merger,
the Company redomiciled to Nevada, and changed its name to Ethos Environmental,
Inc. In addition thereto, and as part of the merger, the Company set a record
date of November 16, 2006 for a reverse stock split of 1 for
1,200.
 
 The merger provides for a
business combination transaction by means of a merger of Ethos with and into the
Company, with the Company as the corporation surviving the merger. Under the
terms of the merger, the Company acquired all issued and outstanding shares of
Ethos in exchange for 17,718,187 shares of common stock of the Company. Shares
of Company common stock, representing an estimated 97% of the total issued and
outstanding shares of Company common stock, was issued to the Ethos
stockholders. Ethos shareholders were able to exchange their shares beginning on
or after November 16, 2006, the record date set for the reverse stock
split.
  The shares issued by the
registrant (17,718,187) were revalued at the new par value of
$.0001.  Another adjustment to common stock and additional paid in
capital was generated due to the cancellation of pre-merger shares
(17,717,477).  Due to the effect of the reverse merger, the Buyer’s
shares outstanding (479,500) were converted to common stock and the effect of
the net assets acquired was adjusted to additional paid in
capital.  During the year, another 4,910,000 shares of common stock
were issued for services based upon the price at date of
issuance.
  The merger was intended to
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code and no gain or loss will be recognized by the Company as a
result of the merger.
 
 The merger is accounted for
under the purchase method of accounting as a reverse acquisition in accordance
with U.S. generally accepted accounting principles for accounting and financial
reporting purposes. Under this method of accounting, Ethos is treated as the
“accounting acquirer” for financial reporting purposes. In accordance with
guidance applicable to these circumstances, the merger was considered to be a
capital transaction in substance. Accordingly, for accounting purposes, the
merger was treated as the equivalent of Ethos issuing stock for the net monetary
assets of the Company. The net monetary assets of the Company have been stated
at their fair value.
  Index
 9
 In connection with the
merger, Lana Pope and Dave Boulter voluntarily resigned from the board of
directors of the Company on November 3, 2006.
  Following such resignations,
as a result of the merger, three persons became the Company’s board of
directors: Enrique de Vilmorin, President, Chief Executive Officer, and
Director, Jose Manuel Escobedo, Director and Secretary, and Luis Willars,
Director and Treasurer.
  A summary of the merger
follows:
 
 •
              The Company was the
      surviving legal corporation,•
              The Company acquired
      all issued and outstanding shares of Ethos in exchange for 17,718,187
      shares of common stock of the Company. Shares of Company common stock,
      representing an estimated 97% of the total issued and outstanding shares
      of Company common stock, was issued to the Ethos
      stockholders,
 
 •
              The shareholders of the
      Company received pro rata for their shares of common stock of Ethos,
      17,718,187 shares of common stock of the Company in the merger, and all
      shares of capital stock of Ethos were cancelled,•
              The officers and
      directors of Ethos became the officers and directors of the
      Company,
 
 •
              The name of Victor
      Industries, Inc. was changed to “Ethos Environmental, Inc.”,
      and•
              Ethos requested a new
      symbol for trading on the Over the Counter Bulletin Board (“OTCBB”), which
      also reflects the reverse stock split of 1 for 1,200, the new symbol of
      the Company is “ETEV.”
 
 Ethos
FR®has been proven through many
thousands of miles of on-the-road testing. On average, customers report that
they have achieved a 7% to 19% increase in fuel mileage, and more than a 30%
reduction in emissions.
 
 Ethos seeks both a cleaner
environment and economic success. The Company’s approach is to sellEthos
FR®“one gallon at a time”,
earning the trust and loyalty of each customer by providing products that
perform as promised and make a positive difference in the
world.
 
 Products
 
 Ethos manufactures a unique
line of fuel reformulators that contain a blend of low and high molecular weight
esters.Ethosproducts add cleaning and
lubricating qualities to any type of fuel or motor oil, allowing engines to
perform cooler, smoother and with more vigor. The overall benefits are increased
fuel mileage, reduced emissions, and reduced maintenance
costs.
 
 Ethos fuel reformulating
products increase fuel mileage and reduce emissions by burning fuel more
completely. Exhaust is essentially unburned fuel, i.e. wasted fuel, so when that
fuel is used more completely, the engine delivers better mileage from every
tank. Efficient fuel use also improves engine performance due to the fact that a
more complete combustion process obtains increased power from every engine
revolution.
 
 Ethosproducts reduce fuel
emissions, benefiting the environment in two notable ways:
 
 1.           Customers report that the use
ofEthosproducts reduce engine
exhaust emissions by 30% or more, including measurable reductions in the
emission of hydrocarbons (HC), nitrogen oxides (Nox), and carbon monoxide
(CO).  All of these emissions are highly toxic and detrimental to the
environment.
 
 2.           Ethosproducts reduce emissions of
particulate matter, especially in diesel-powered engines. Diesel fuel is
commonly dirty and maintaining a diesel engine in the prime condition necessary
to reduce emissions is both expensive and time-consuming.  As a
result, diesel engines are a constant source of air contaminants. In most
industrialized countries, including the U.S., diesel engines are one of the
largest sources of air pollution. WhenEthosproducts are added to diesel
fuel, the engine runs cleaner, smoother and cooler - significantly reducing
sooty exhaust. Engines treated with Ethos run with less friction, heat and
noise. Fuel and lubricating systems, filters, tanks, and injectors last longer,
reducing maintenance costs.
 
 Index
 10
 Ethos has two products, Ethos
FR® and Ethos Bunker Fuel Conditioner (“Ethos BFC”). There are two esters used
in each product, a light ester and a heavy ester.  For the Ethos FR®, we
obtain the esters from major suppliers.  The mineral oil used in the Ethos
FR® is obtained, primarily, from major suppliers.
 
 Ethos FR® can be used in any
fuel. Ethos BFC is used for Bunker Fuel, which is used in external combustion
engines.
 
 Ethosproducts provide risk-free
benefits with an economic gain to the client. To date, most customers have
reported, either verbally or in writing, that they experienced a monetary gain
on fuel savings, with all stating that they experienced an average improvement
in mileage per gallon between 7% and 19%, depending on the fuel (gasoline or
diesel), the vehicle used, and the individual driver’s practices and driving
traits.
 
 Trademarks
 
 We own the following
trademark(s) used in this document (which is registered with the United States
Patent and Trademark Office under Registration Number 3,015,561): Ethos
FR®. Trademark rights are
perpetual provided that we continue to keep the mark in use. We consider these
marks, and the associated name recognition, to be valuable to our
business.
 
 Air Quality
Standards
 
 It is believed that with the
increased worldwide focus on the greenhouse effects of petroleum products, the
ability of Ethos to reduce emissions by 30% can only increase the Company’s
market presence.Political and media pressures
are causing more people to become concerned about our environment and the
effects of global warming. Most researchers had anticipated the complete
disappearance of the Arctic ice pack during the summer months would not happen
until after the year 2070, but now believe it could happen as early as
2030.
 
 Ethos Environmental began the
manufacturing and marketing of Ethos products after ten years of successful
product testing. During the early years, widespread public environmental
concerns were only beginning to surface. Air quality standards were non-existent
and fuel costs were low, making penetration of the market an uphill
battle.
 
 In recent years most of the
improvements in air quality have come through advancements in engine
technologies.  Through catalytic converters and computer controlled
air and fuel injection systems, engineers have designed cars that use fuel much
more efficiently and pollute far less than ever before.  But as new
engine technologies have reached their limits, the government has turned its
attention to the oil companies to produce cleaner-burning
fuels.
 
 The approach of Ethos
Environmental is to sell our products “one gallon at a time”, earning the
respect and trust of each user. Over the past decade, our products have gone
though extensive miles of road tests, with all such testing verifying the
ability of our products to significantly reduce emissions while improving gas
mileage.  Now, at a time of skyrocketing fuel costs, the value of
Ethos products is paying off for a long list of domestic customers and a growing
contingent of international clients.
 
 Market
Research
 
 Air pollution caused by cars,
trucks and other vehicles burning petroleum-based fuels is one of the most
harmful and ubiquitous environmental problems. Furthermore, local accumulation
in heavy traffic is the greatest source of community ambient exposure, largely
because carbon monoxide is formed by incomplete combustion of carbon containing
fuels.
 
 Index
 11
 Diesel exhaust is a major
contributor of particulate matter concentrations. Representing only 2 percent of
the vehicles on the road, diesel powered vehicles generate more than half of the
particulates and nearly a third of the nitrogen oxides in the air, according to
a study by the California Air Resources Board.  Air pollution
monitoring efforts by the American Lung Association indicate that diesel
accounts for 70% of the cancer risk. Furthermore, pioneers in the study of
global warming factors have come to believe that particulate matter, such as
that emitted by diesel engines, plays a far more critical role in the
development of the “greenhouse effect” than previously
suspected.
 
 To combat this problem the
U.S. Environmental Protection Agency developed a two-step plan to significantly
reduce pollution from new diesel engines. (New Emission Standards for Heavy-Duty
Diesel Engines Used In Trucks and Buses) (October 1997, EPA
420-F-97-016).  The first step set new emissions standards for diesel
engines beginning in 2000. The second step sets even more stringent emission
standards that became effective on January 1, 2007, combined with mandated
reductions in the sulfur levels of all diesel fuel.
 
 As crude oil is heated,
various components evaporate at increasingly higher temperatures. First to
evaporate is butane, the lighter-than-air gas used in cigarette lighters, for
instance. The last components of crude oil to evaporate, and the heaviest,
include the road tars used to make asphalt paving. In between are gasoline, jet
fuel, heating oil, lubricating oil, bunker fuel (used in ships), and of course
diesel fuel. The fuel used in diesel engine applications such as trucks and
locomotives is a mixture of different types of molecules of hydrogen and carbon
and include aromatics and paraffin. Diesel fuel cannot burn in liquid form. It
must vaporize into its gaseous state. This is accomplished by injecting the fuel
through spray nozzles at high pressure. The smaller the nozzles and the higher
the pressure, the finer the fuel spray and vaporization. When more fuel
vaporizes, combustion is more complete, so less soot will form inside the
cylinders and on the injector nozzles. Soot is the residue of carbon, partially
burned and unburned fuel.
 
 Sulfur is also found
naturally in crude oil. Sulfur is a slippery substance and it helps lubricate
fuel pumps and injectors. It also forms sulfuric acid when it burns and is a
catalyst for the formation of particulate matter (one of the exhaust emissions
being regulated). In an effort to reduce emissions, the sulfur content of diesel
fuel is being reduced through the refinery process, however, the result is a
loss of lubricity.
 
 Diesel fuel has other
properties that affect its performance and impact on the environment as well.
The main problems associated with diesel fuel include:
 
 ·Difficulty getting it
      to start burning o Difficulty getting it to burn completely o Tendency to
      wax and gel·With introduction of
      low sulfur fuel, reduced lubrication·Soot clogging injector
      nozzles·Particulate
      emissions·Water in the
      fuel·Bacterial
      growth
 
 While diesel engines are the
only existing cost-effective technology making significant inroads in reducing
“global warming” emissions from motor vehicles, it is not sufficient to satisfy
regulators and legislators. Diesel engines will soon be required to adhere to
stringent regulatory/legislative guidelines that meet near “zero” tailpipe
emissions, especially on smog-forming nitrogen oxides (NOx), particulate matter
(PM) and “toxins”; the organic compounds of diesel exhaust.
 
 The U.S. Department of
Energy, Energy Information Administration (“EIA”) estimates that U.S. annual
consumption of fuel will continue to escalate through the year
2030.
 
 A breakdown of this estimate
is summarized as follows:
 
 Index
 12
 
 Based o further EIA published
data, the following table* depicts domestic distillate fuel oil consumption by
energy use for 2006.
  Sales of Distillate
      Fuel Oil by End Use 2006(Thousands of
      Gallons)Residential
                                  4,984,826Commercial
                                  2,808,786Industrial
                                  2,463,676Oil
      Company
                                  636,788Farm
                                  3,261,345Electric
      Power
                                  656,355Railroad
                                  3,552,430Vessel
      Bunkering
                                  1,903,138On-Highway
                                  39,118,301Military
                                  327,827Off-Highway
                                  2,478,554All
      Other
                                  062,192,026Notes:  Totals
      may not equal sum of components due to independent
      rounding.Sources:  Energy
      Information Administration Form EIA-821, "Annual
    FuelOil and Kerosene Sales
      Report for
2002-2006.
 
 When blended with fuels,
Ethos products reduce the emissions of hydrocarbons (HC), nitrogen oxides (Nox)
carbon monoxide (CO), particulate matter (PM) and other harmful compounds of
combustion.  Given these conditions, the commercial fuels consumer
market represents an important target for Ethos
Environmental.
 
 Index
 13
 Competition
 
 The market for products and
services that increase diesel fuel economy, reduce emissions and engine wear is
rapidly evolving and intensely competitive and management expects it to increase
due to the implementation of stricter environmental standards. Competition can
come from other fuel additives, fuel and engine treatment products and from
producers of engines that have been modified or adapted to achieve these
results. In addition, we believe that new technologies, including additives,
will further increase competition.
 
 Alternative fuels, gasoline
oxygenates and ethanol production methods are continually under development. A
number of automotive, industrial and power generation manufacturers are
developing more efficient engines, hybrid engines and alternative clean power
systems using fuel cells or clean burning gaseous fuels. Vehicle manufacturers
are working to develop vehicles that are more fuel efficient and have reduced
emissions using conventional gasoline. Vehicle manufacturers have developed and
continue to work to improve hybrid technology, which powers vehicles by engines
that utilize both electric and conventional gasoline fuel sources. In the
future, the emerging fuel cell industry offers a technological option to address
increasing worldwide energy costs, the long-term availability of petroleum
reserves and environmental concerns.
 
 The diesel fuel additive
business and related anti-pollutant businesses are subject to rapid
technological change, especially due to environmental protection regulations,
and subject to intense competition. We compete with both established companies
and a significant number of startup enterprises. We face competition from
producers and/or distributors of other diesel fuel additives (such as Lubrizol
Corporation, Chevron Oronite Company, Octel Corp., Clean Diesel Technologies,
Inc. and Ethyl Corporation), from producers of alternative mechanical
technologies (such as Algae-X International, Dieselcraft, Emission Controls
Corp. and JAMS Turbo, Inc.) and from alternative fuels (such as bio-diesel fuel
and liquefied natural gas) all targeting the same markets and claiming increased
fuel economy, and/or a decrease in toxic emissions and/or a reduction in engine
wear.
 
 Ethos FR® and Ethos BFC are
unique..The primary task for the
Company is to distinguish itself as an industry leader in the reduction of fuel
costs and emission problems at a profit gain to the commercial
user.  Part of the challenge before us is to differentiate Ethos
products from two types of products in this industry, additives - that are
purported to increase fuel mileage and oxygenates - which are mandated to lower
emissions. Both provide short-term benefits at the price of long-term engine or
environmental problems.
 
 Additives contain highly
refined petrochemicals or compressed hydrocarbons that promise better fuel
mileage and sometimes lower emissions, by “cleaning” the engine. Used mainly by
individual consumers, they are expensive and commonly sold at the auto parts and
retail stores. More than five thousand EPA-registered fuel additives compete in
the retail market and although the EPA requires that such products be
registered, that registration constitutes neither endorsement nor validation of
the product’s claims.
 
 Oxygenates, such as methyl
tertiary butyl ether (MTBE) and Ethanol, are intended to lower emissions by
adding oxygen to the fuel. Ethos FR®products actually complement
federally mandated oxygenates by lowering emissions, but as mentioned earlier,
Ethos FR®is not an oxygenate and
cannot be used for the purpose of complying with current language federal
legislation.
 
 In contrast, Ethos
FR®products have cleaning
properties that contribute to the lubrication of the engine instead of
destroying it. The ester-based formula dissolves the gums and residues and adds
important lubrication that an engine needs.  The engine stays clean
and lubricated, allowing it to run smoothly and efficiently.
 
 Marketing
Strategy
 
 Ethos products are ideally
positioned to capitalize on regulatory pressure to tighten emissions
standards.  Fuel is a significant operating cost for companies that
use cars, trucks or vessel fleets in their daily business, especially where
competitive markets make it difficult to pass along fuel increases. Every hike
in the price of fuel hurts the profitability of that company.  For
these businesses, obtaining better mileage offers a crucial competitive edge,
and the goal of Ethos Environmental is to help them maximize their fuel use and
maintain profitability.
 
 From its earliest days, Ethos
has focused on the product demonstration as the most effective means of
introducing Ethos FR®to potential users. Through
this demonstration process, we prove to each customer that they can realize the
benefits of reduced emissions, smoother-running vehicles and lower maintenance
costs at virtually no risk, because the reduction in fuel usage will more than
cover the expense of using Ethos FR®. In fact, the addition of
Ethos FR®will result in fuel savings
beyond the cost of treatment, resulting in monetary gain to the user by
extending the life of any particular vehicle.
 
 Index
 14
 Commercial fleets vary in
size from a few to thousands of vehicles. Usually a fleet’s oldest and dirtiest
vehicles, or vehicles out of warranty, are included in the demonstration. Such
vehicles amplify the effectiveness of the products and help to ease any initial
client objections regarding manufacturer warranties. Once the demonstration is
underway, Ethos FR®products sell themselves,
increasing fuel mileage between 7% and 19% and reducing emissions by more than
30% as reported by tests performed by our customers.  Once the
effectiveness of the product has been established, a conscientious
customer-service program ensures continued use.
 
 The Ethos Environmental
strategy has been to approach each market from the perspective of the customer’s
strongest motivation, whether to reduce fuel costs, reduce engine emissions or
to increase the longevity of a vehicle. From a marketing standpoint, it is most
cost-effective for Ethos Environmental to focus on commercial fuel users that
keep track of maintenance and operating expenses. These consumers are more
sensitive to pressures from rising fuel costs and more concerned about meeting
emissions standards.
 
 Significant fuel costs will
always be a marketing advantage for Ethos. Higher fuel prices decrease the cost
to treat each gallon of fuel; resulting in even greater savings to Ethos
clients.  The Company’s marketing strategy strengthens as the price of
fuel increases.  Even where cost savings are a client’s primary
motivator, the use of Ethos FR®identifies the user as an
environmentally conscientious business. It also creates goodwill within the
community through the reduction of unhealthy and unsightly exhaust
emissions.
 
 Ethos FR – Proof of
Performance
 
 An integral part of our sales
process is to conduct proof of performance demonstrations for potential
customers wherein we accumulate historical data that documents the effects of
the use of Ethos FR®(i.e. advantages in terms of
increased fuel economy, a decrease in engine wear and reductions in toxic
emissions) on that customer’s specific vehicles or vessels. In connection with
the proof of performance demonstrations, we provide fleet monitoring services
and forecasts of fuel consumption for purposes of the prospective customer’s own
analysis.
 
 The results below are test
results of customer experiences using Ethos FR®.  The results are
for a fleet of trucks for Allied Waste. On our website are results for other
customers, which may be viewed by visitingwww.ethosfr.com. In most customer tests,
they have reported a 7% to 19% cost saving, and an over 30% reduction in
emissions.
 
 Following is a Management
Report outlining the process and methodology of the testing of Ethos
FR®for Allied Waste
Services:
 
 Index
 15
 MANAGEMENT
REPORT
 
 Testing of Ethos Fuel
Reformulator
 Allied Waste Services,
Southwestern Region
 
 Overview
 
 Ethos FR has been used,
without interruption, at multiple Allied Waste locations in Southern California
since the year 2001.
 
 Based on the positive results
realized at those locations (estimated at a 10% reduction in fuel consumption
plus significant reductions in maintenance/repair costs and emissions) an
initial test was conducted at one location in the Southwestern Region of Allied
Waste during the months of July and August, 2006.  The results of this
initial 4 week test showed an estimated reduction in fuel consumption of 10.35%,
as measured by gallons per engine hour, compared to a baseline period of the
previous 12 months (July 2005 through June 2006).
 
 Based on these positive
results, a second phase of testing was initiated in May 2007 encompassing 4
locations in the Southwestern Region.  The period of testing was
generally the months of May, June and July 2007, however, one location continued
Ethos use through August.  The detailed data obtained from this
testing period is content of this report.
 
 Testing
Procedures and Data Compilation & Reporting Methodology
 
 Upon initiation of the
testing period, fuel consumption and engine hour data was obtained from each
location for a baseline period in order to establish a point of comparison for
the test.  The baseline period for each location was generally the
period of January through March, 2007.
 
 The standard CFA report
obtained from each location was the “Fuel Transaction Detail by Equipment #”
report.  This report provides the most comprehensive daily listing of
fuel dispensed and engine hours recorded for each vehicle during each time
period.  It is important to note thatdetailedreports were used throughout
the compilation of the data contained in this analysis because every report from
every location contains several “anomalies” which could distort the accuracy of
any data from any report.
 
 Most common among these
“anomalies” are:
 
 1.  Vehicles showing fuel
consumed but few or no engine hours recorded (which would result in a higher
fuel per hour calculation than is actually the case),
 2.  Vehicles showing no fuel
consumed yet have engine hours recorded (which would result in a lower fuel per
hour calculation than is actually the case), or
 3.  Vehicles that do not have
recorded data for both comparative periods.  This would
include:
 ·  new vehicles that have been
added to the fleet (and therefore have no baseline data)
 ·  vehicles that have been
retired from the fleet or are out of service for repairs or maintenance (these
vehicles will have baseline data but no data in one or more of the test
periods).
 
 Raw
Data vs. Comparable Data
 
 Due to the frequency and
significance of the anomalies outlined above, a detailed process was implemented
to ensure that any such reporting inaccuracies did not undermine the validity of
the comparative data obtained during this test.
 
 The procedures utilized by
Green Fleet Associates were as follows:
 
 1.)  Every CFA report that was
obtained from every location for every time period as reviewed line-by-line,
vehicle-by-vehicle to assure the validity of the data.  Any obvious
anomalies were highlighted on the raw CFA report.
 2.)  This raw data from the CFA
report was transferred to a spreadsheet in order to facilitate ongoing
side-by-side, vehicle-by-vehicle comparisons of baseline to test period
data.  Any anomalies or missing data for any vehicle was highlighted
on the spreadsheet for reach comparative period.
 3.)  A true “apples-to-apples”
comparison was obtained for each time period by removing all highlighted
items.
 
 Index
 16
 Verification
of Ethos Use
 
 Equally important in assuring
the validity of the data collected was making best efforts to verify that all of
the fuel being consumed by each location during the testing period was being
treated with Ethos.  The method utilized to check this compliance was
a detailed tracking of fuel deliveries compared the Ethos inventory at each
location during the testing period.  While almost all locations
maintained a consistent treatment schedule throughout the three month testing
period, there were some minor exceptions.
 
 The spreadsheets detailing
the baseline & test period data, for each month at each location are as
follows:
 
 
  Index
 17
 
 
  
 Ethos FR – Proof of
Performance Demonstrations
 
 Ethos
Environmental’sfuel reformulating products reduce emissions by burning fuel more completely,
which improves fuel mileage. Exhaust is essentially unburned fuel, wasted fuel,
so when the fuel is used more completely the engine delivers better mileage from
every tank. Efficient fuel use also means improved engine performance because a
more complete combustion process obtains increased power from each engine
revolution.
 
 In the last decade hundreds
of thousands of miles in road tests have been conducted. Test after test, Ethos
products have proven to reduce engine exhaust emissions by 30% and more,
including measurable reductions in the emissions of hydrocarbons (HC), nitrogen
oxides (NOx), carbon monoxide (CO), and sooty exhaust or particulate matter
(PM). All of these emissions are highly toxic and as a result, fuel mileage
increases have been significant, ranging from 7% to 19% fleet wide as reported
by our customers.
 
 Ethos
Environmentaluses an opacity meter, a detection device for diesel vehicles that measures the
percentage of opacity (light obstructed from passage through an exhaust smoke
plume), to demonstrate dramatic reductions in emissions. In more that 1,000
heavy-duty diesel vehicles treated (a motor vehicle having a manufacturer’s
maximum gross vehicle weight rating (GVWR) greater than 6,000 pounds), emissions
were lowered by as much as 90%. The Society of Automotive Engineers (SAE)
recommended practice SAE J1667 “Snap Acceleration Smoke Test Procedure” to be
used for heavy-duty diesel powered vehicles. Attached are samples of opacity
test sheets, taken from diesel-powered engines, demonstrating the positive
results after using Ethos FR®.
 
 Index
 18
 
 
 
 Target
Markets
 
 According to the American
Petroleum Institute, the United States fuels consumer market is comprised of the
following segments: retail consumer 27%, government agencies 16%, ground fleets
14%, industrial users 10%, aircraft 9%, maritime 6%, miscellaneous
18%.
 
 The Company’s typical
customers use cars, trucks or vessels in their day-to-day operations. Fuel is a
significant operating cost, and consequently these fleets are particularly
sensitive to fuel price fluctuations and strict emissions standards. The ideal
clients are those with fleet managers and are conscientious about keeping track
of operating expenses. They understand that every hike in fuel price hurts their
profitability, this being a critical factor wherever competitive markets make it
difficult to pass on the price increases to their clients; thereby making it
critical for businesses to obtain better mileage as a competitive
advantage.
 
 Maritime and government
agencies are desirable for their large fuel volume use and industry
credibility.  They offer the Company medium to long-term sales, since
the process requires a longer lead-time to close. The product demonstration
phase and administrative requirements are generally more complex, particularly
with large government institutions. At the same time, they offer large volume
sales and a continual source of staged orders that promote production
stability.
 
 Index
 19
 Marine vessels run on bunker
fuel that is less refined than diesel.  A mid-size ship will use more
than half a ton per hour of operation, or 125 gallons of fuel per hour. For
example, a mid-size vessel running on bunker on a typical trip to Japan from Los
Angeles will require a half ton per hour, or 180 tons.  This
represents a total of 45,000 gallons of fuel that requires 4,500 oz. (35
gallons) of Ethos BFC. This vessel would use approximately one drum (55gals.) of
Ethos BFC per month. Accordingly, maritime customers represent a large and solid
client base.
 
 Countries all around the
world are endeavoring to deal with the high costs of petroleum products and the
detrimental effects of those products on the environment, much like the United
States.
 
 As with our domestic client
base, international customers of Ethos appreciate the benefits of improved
mileage and reduced emissions.
 
 Customers
 
 Although we have many
customers utilizing products, the broadly diversified base means there is no
significant concentration in any industry. We derive revenue from our customers
as discussed in Note 1, "Organization and Significant Accounting Policies:
Revenue Recognition" of the consolidated financial
statements.
 
 Supply
Arrangements
 
 We presently obtain our raw
materials from five (5) suppliers. However, these arrangements are not governed
by any formal written contract. Accordingly, either party may terminate the
arrangement at any time. If a supplier is not able to provide us with sufficient
quantities of the product, or chooses not to provide the product at all (for any
reason), business and planned operations could be adversely affected. Although
management has identified alternate suppliers of the products, no assurance can
be given that the replacement products will be comparable in quality to the
product presently supplied to us by current suppliers, or that, if comparable,
products can be acquired under acceptable terms and
conditions.
 
 Vendors
 
 We are not dependent upon any
one vendor for our business.
 
 Governmental
Regulation
 
 In the United States, fuel
and fuel additives are registered and regulated pursuant to Section 211 of the
Clean Air Act. 40 CFR Part 79 and 80 specifically relates to the registration of
fuels and fuel additives. Typically, there are registration and regulation
requirements for fuel additives in each country in which they are sold. In
accordance with the Clean Air Act regulations at 40 CFR 79, manufacturers
(including importers) of gasoline, diesel fuel and additives for gasoline or
diesel fuel, are required to have their products registered by the EPA prior to
their introduction into commerce.
 
 However, EPA registered
additives are derived from petroleum while Ethos FR®is a reformulator. Even
though you “add it” to the fuel, Ethos FR®is not derived from
petroleum and is non-toxic and non-hazardous and therefore not subject to
governmental regulations.  There could be unforeseen future changes to
the registration requirements under the Clean Air Act and Ethos FR®may have to seek
registration under such new requirements.  In addition, we currently
sell our product outside of the United States and intend to further expand our
sales efforts internationally.  We may need to seek registration in
other countries for the Ethos FR®product.
 
 At this time the Company is
not aware of any present or pending rules or regulations that would require the
Company to seek registration of the Ethos FR®product either domestically
or internationally.
 
 Notwithstanding the above,
the Company is presently engaged in attempting to qualify its products, as
necessary, with the California Air Resources Board (“CARB”), and obtain other
testing and certifications as necessary to further establish the quality of our
products.
 
 Research and Development
Costs
 
 Research and development
costs are charged to operations when incurred and are included in operating
expenses.
 
 Following is the Ethos
FR®Material Safety Data Sheet
(MSDS)
 
 Index
 20
 
  Index
 21
 
 
 Index
 22
 Employees
 
 As ofDecember 31, 2007, we had ten (10) full time
employees, we had seven (7) consultants that dedicate a significant amount of
time to our Company, and we hire part time employees on an as needed basis to
assist in the production of our products.
 
 Available
Information
  We file
electronically with the Securities and Exchange Commission our annual reports on
Form 10-KSB, quarterly reports on Form 10-QSB, and current reports on Form 8-K,
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. 
You may obtain a free copy of our reports and amendments to those reports on the
day of filing with the SEC by going to http://www.sec.gov.
 Index
 23
 PART
II
  Item
6. Management's Discussion and Analysis or Plan of Operation.
 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 differ materially
from those expressed in any forward looking statements made by, or our behalf.
We disclaim any obligation to update forward-looking statements.
  Results of
Operations and Analysis of Financial Condition
  Results of Operations
    Revenues
  Ethos FR®.
  ®
  Gross Profit
    Index
 24
  Operating
Expenses
    Depreciation Expense
    General and
Administrative
    Selling Expense
    Other Income
(Expenses)
  Interest Expense
    Other Income
    Net Loss
    Index
 25
 Common Shares
          Liquidity and Capital Resources
        Cash Flows from Operating
Activities
    Index
 26
 Cash Flows from Investing
Activities
    Cash Flows from Financing
Activities
    Loan
Facilities
        Going
Concern
      Index
 27
  Off-Balance
Sheet Arrangements
    Critical Accounting Policies
  Use of Estimates
  
 Revenue
Recognition
  “Revenue Recognition in Financial
Statements”
  Stock-Based
Compensation
  Share-Based Payments
  Recent
Accounting Pronouncements
 Disclosures about
Derivative Instruments and Hedging Activities – an amendment to FASB Statement
No. 133
  Index
 28
 Business
Combinations
  Noncontrolling Interests in
Consolidated Financial Statements Liabilities –an Amendment of ARB No.
51
   Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
  "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB
Statements No. 87, 88, 106 and 132 (R)"
  Fair Value
Measurements".
  Index
 29
 Item7.   Financial Statements
 Ethos
Environmental, Inc.
 
 December
31, 2007
 
  IndexReport of
      Independent Auditor
                F-1Consolidated
      Balance Sheets
                F-2Consolidated
      Statements of Operations
                F-3Consolidated
      Statements of Cash Flows
                F-4Statement of
      Consolidated Stockholders’ Equity
                F-5Notes to the
      Consolidated Financial Statements
                F-6
 
 Index
 30
 MOORE
& ASSOCIATES, CHARTERED
 ACCOUNTANTS AND
ADVISORS
 PCAOB REGISTERED
 
 
 REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
the Board of Directors
 Ethos
Environmental Inc.
 
 
 We have
audited the accompanying restated consolidated balance sheets of Ethos
Environmental Inc. as of December 31, 2007 and December 31, 2006, and the
related restated consolidated statements of operations, stockholders’ equity and
cash flows for the years ended December 31, 2007 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 standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the restated consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ethos
Environmental Inc. as of December 31, 2007 and December 31, 2006, and the
related restated consolidated statements of operations, stockholders’ equity and
cash flows for the years ended December 31, 2007 December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America.
 
 The
accompanying restated financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 1 to
the financial statements, the Company has incurred a net loss of $24,582,613 and
$16,474,909, which raises substantial doubt about its ability to continue as a
going concern.  Management’s plans concerning these matters are also
described in Note 1.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
  /s/
Moore & Associates, Chartered
 
 Moore
& Associates Chartered
 Las
Vegas, Nevada
 November
19, 2008
 
 2675 S. Jones Blvd. Suite
109, Las Vegas, NV 89146 (702) 253-7499 Fax (702)
253-7501
 F-1
 Index
 31
   
 December
      31,
                                        2007
                                        $
                                        (Restated
      – Note 11)
                                      
                                      
                                      December
      31,
                                        2006
                                        $
                                        (Restated
      – Note 11)ASSETSCurrent
      AssetsCash
                                      
                                      
                                      74,176
                                      
                                      
                                      
                                      64,867Accounts
      Receivable, net of allowance of doubtful accounts
                                      
                                      
                                      84,248
                                      
                                      
                                      
                                      295,932Inventory
      (Note 3)
                                      
                                      
                                      602,399
                                      
                                      
                                      
                                      410,915Other
      Current Assets
                                      
                                      
                                      –
                                      
                                      
                                      
                                      19,900Total
      Current Assets
                                      
                                      
                                      760,823
                                      
                                      
                                      
                                      791,614Property
      and Equipment (Note 4)
                                      
                                      
                                      118,916
                                      
                                      
                                      
                                      6,354,740Other
      Assets
                                      
                                      
                                      399,419
                                      
                                      
                                      
                                      5,000Total
      Assets
                                      
                                      
                                      1,279,158
                                      
                                      
                                      
                                      7,151,354LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      Payable
                                      
                                      
                                      223,891
                                      
                                      
                                      
                                      311,119Accrued
      Liabilities
                                      
                                      
                                      109,300
                                      
                                      
                                      
                                      101,488Notes
      Payable (Note 5)
                                      
                                      
                                      350,000
                                      
                                      
                                      
                                      5,167,819Demand
      Loan (Note 5(a))
                                      
                                      
                                      246,521
                                      
                                      
                                      
                                      50,000Total
      Liabilities
                                      
                                      
                                      929,712
                                      
                                      
                                      
                                      5,630,426Stockholders’
      EquityCommon
      Stock (Note 6)
                                        Authorized:
      100,000,000 common shares, par value: $0.0001 per common
share
                                        Issued
      and outstanding: 37,998,562 and 24,334,562 common shares,
      respectively
                                      
                                      
                                      3,800
                                      
                                      
                                      
                                      2,434Additional
      Paid-In Capital (Note 6)
                                      
                                      
                                      44,779,632
                                      
                                      
                                      
                                      21,369,867Accumulated
      Deficit
                                      
                                      
                                      (44,433,986
                                      )
                                      
                                      
                                      (19,851,373
                                      )Total
      Stockholders’ Equity
                                      
                                      
                                      349,446
                                      
                                      
                                      
                                      1,520,928Total
      Liabilities and Stockholders’ Equity
                                      
                                      
                                      1,279,158
                                      
                                      
                                      
                                      7,151,354
 
 Going Concern (Note 1)
 Commitments
(Note 9)
 Restatement
(Note 12)
 Subsequent Events (Note
13)
  
 F-2
 Index
 32
 For
      the Year Ended December 31,
                                                2007
                                              
                                              
                                              For
      the Year Ended December 31,
                                                2006$
                                                (Restated
      – Note 11)
                                              
                                              
                                              $
                                                (Restated
      – Note 11)Revenue
                                              
                                              
                                              1,355,141
                                              
                                              
                                              
                                              1,521,166Cost
      of Sales
                                              
                                              
                                              745,136
                                              
                                              
                                              
                                              456,471Gross
      Profit
                                              
                                              
                                              610,005
                                              
                                              
                                              
                                              1,064,995Operating
      ExpensesAmortization
      Expense
                                              
                                              
                                              20,193
                                              
                                              
                                              
                                              18,865Bad
      Debt Expense (Note 2(d))
                                              
                                              
                                              427,530
                                              
                                              
                                              
                                              –General
      and Administrative
                                              
                                              
                                              17,655,463
                                              
                                              
                                              
                                              12,925,739Impairment
      of Property and Equipment
                                              
                                              
                                              –
                                              
                                              
                                              
                                              36,728Selling
      Expense
                                              
                                              
                                              6,861,554
                                              
                                              
                                              
                                              4,609,910Total
      Operating Expenses
                                              
                                              
                                              24,964,740
                                              
                                              
                                              
                                              17,591,242Total
      Operating Loss
                                              
                                              
                                              (24,354,735
                                              )
                                              
                                              
                                              (16,526,547
                                              )Other
      Income (Expenses)Interest
      Expense
                                              
                                              
                                              (618,084
                                              )
                                              
                                              
                                              (620,244
                                              )Other
      Expense
                                              
                                              
                                              –
                                              
                                              
                                              
                                              (58,931
                                              )Other
      Income
                                              
                                              
                                              390,206
                                              
                                              
                                              
                                              730,813Net
      Loss
                                              
                                              
                                              (24,582,613
                                              )
                                              
                                              
                                              (16,474,909
                                              )Net
      Loss Per Share – Basic and Diluted
                                                Net
      Loss Per Share – Basic and Diluted
                                              
                                              
                                              (0.87
                                              )
                                              
                                              
                                              (0.78
                                              )Weighted
      Average Shares Outstanding
                                              
                                              
                                              28,197,683
                                              
                                              
                                              
                                              21,188,318
 
 
 (The
accompanying notes are an integral part of these consolidated financial
statements)
 
 F-3
 Index
 33
 
 For
      the Year Ended December 31,
                                            2007
                                          
                                          
                                          For
      the Year Ended December 31,
                                            2006$
                                            (Restated
      – Note 11)
                                          
                                          
                                          $
                                            (Restated
      – Note 11)Operating
      ActivitiesNet
      Loss For The Year
                                          
                                          
                                          (24,582,613
                                          )
                                          
                                          
                                          (16,474,909
                                          )Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Amortization
      Expense
                                          
                                          
                                          201,093
                                          
                                          
                                          
                                          292,096Bad
      Debt Expense
                                          
                                          
                                          427,530
                                          
                                          
                                          
                                          –Common
      Stock Issued for Services
                                          
                                          
                                          13,214,960
                                          
                                          
                                          
                                          14,927,010Impairment
      from Sale Leaseback of Building
                                          
                                          
                                          1,500,000
                                          
                                          
                                          
                                          –Impairment
      from Sale of Property and Equipment
                                          
                                          
                                          –
                                          
                                          
                                          
                                          36,728Share
      Purchase Warrants Issued for Debt Extinguishment
                                          
                                          
                                          6,646,171
                                          
                                          
                                          
                                          –Changes
      in operating assets and liabilities:Accounts
      Receivable
                                          
                                          
                                          (215,846
                                          )
                                          
                                          
                                          (5,875
                                          )Inventory
                                          
                                          
                                          (191,484
                                          )
                                          
                                          
                                          (151,351
                                          )Other
      Assets
                                          
                                          
                                          (374,519
                                          )
                                          
                                          
                                          67,209Accounts
      Payable and Accrued Liabilities
                                          
                                          
                                          (79,416
                                          )
                                          
                                          
                                          (428,508
                                          )Net
      Cash Used In Operating Activities
                                          
                                          
                                          (3,454,124
                                          )
                                          
                                          
                                          (1,737,600
                                          )Investing
      ActivitiesPurchase
      of Property and Equipment
                                          
                                          
                                          (198,680
                                          )
                                          
                                          
                                          (6,359,874
                                          )Proceeds
      on Sale of Equipment, net
                                          
                                          
                                          6,233,411
                                          
                                          
                                          
                                          589Net
      Cash Provided By (Used in) Investing Activities
                                          
                                          
                                          6,034,731
                                          
                                          
                                          
                                          (6,359,285
                                          )Financing
      ActivitiesProceeds
      from Capital Contribution
                                          
                                          
                                          –
                                          
                                          
                                          
                                          957,616Proceeds
      from Issuance of Common Shares
                                          
                                          
                                          2,050,000
                                          
                                          
                                          
                                          1,550,819Proceeds
      from Issuance of Note Payable
                                          
                                          
                                          350,000
                                          
                                          
                                          
                                          5,167,819Proceeds
      from Related Parties
                                          
                                          
                                          196,521
                                          
                                          
                                          
                                          50,000Repayment
      of Note Payable
                                          
                                          
                                          (5,167,819
                                          )
                                          
                                          
                                          (13,000
                                          )Repurchase
      of Common Shares
                                          
                                          
                                          –
                                          
                                          
                                          
                                          (50,000
                                          )Net
      Cash Provided By (Used In) Financing Activities
                                          
                                          
                                          (2,571,298
                                          )
                                          
                                          
                                          7,663,254Increase
      (Decrease) in Cash
                                          
                                          
                                          9,309
                                          
                                          
                                          
                                          (433,631
                                          )Cash
      – Beginning of Period
                                          
                                          
                                          64,867
                                          
                                          
                                          
                                          498,498Cash
      – End of Period
                                          
                                          
                                          74,176
                                          
                                          
                                          
                                          64,867Supplemental
      DisclosuresInterest
      paid
                                          
                                          
                                          –
                                          
                                          
                                          
                                          –Income
      tax paid
                                          
                                          
                                          –
                                          
                                          
                                          
                                          –
  
 (The
accompanying notes are an integral part of these consolidated financial
statements)
 
 F-4
 Index
 34
 Ethos
Environmental, Inc.
 Consolidated
Statement of Stockholders’ Equity
 From
January 1, 2005 to December 31, 2007
 (expressed
in U.S. dollars)
 
 
 Common
      Stock
                            
                            Additional
                            
                            AccumulatedShares
                            
                            Par
      Value
                            
                            Paid-In
      Capital
                            
                            Deficit
                            
                            Total#
                            
                            $
                            
                            $
                            
                            $
                            
                            $Balance
      – December 31, 2004
                            17,609,992
                            
                            1,761
                            
                            3,805,764
                            
                            (2,324,827)
                            
                            1,482,698Issuance
      of common shares for cash
                            5,108,395
                            
                            511
                            
                            175,689
                            
                            –
                            
                            176,200Net
      loss for the year
                            –
                            
                            –
                            
                            –
                            
                            (1,051,637)
                            
                            (1,051,637)Balance
      – December 31, 2005
                            22,718,387
                            
                            2,272
                            
                            3,981,453
                            
                            (3,376,464)
                            
                            607,261Repurchase
      of common shares
                            (5,000,200)
                            
                            (500)
                            
                            (49,500)
                            
                            –
                            
                            (50,000)Recapitalization
      TransactionShares
      of Victor Industries Inc.
                            479,500
                            
                            48
                            
                            (48)
                            
                            –
                            
                            –Net
      assets assumed in recapitalization
                            –
                            
                            –
                            
                            3,131
                            
                            –
                            
                            3,131Capital
      Contribution
                            –
                            
                            –
                            
                            957,616
                            
                            –
                            
                            957,616Issuance
      of common shares to settle services
                            4,910,000
                            
                            491
                            
                            13,574,499
                            
                            –
                            
                            13,574,990Issuance
      of common shares for cash
                            776,225
                            
                            78
                            
                            1,550,741
                            
                            –
                            
                            1,550,819Issuance
      of common shares for services
                            350,650
                            
                            35
                            
                            751,985
                            
                            –
                            
                            752,020Issuance
      of common shares for services
                            100,000
                            
                            10
                            
                            599,990
                            
                            –
                            
                            600,000Net
      loss for the year
                            –
                            
                            –
                            
                            –
                            
                            (16,474,909)
                            
                            (16,474,909)Balance
      – December 31, 2006 (Restated – Note 11)
                            24,334,562
                            
                            2,434
                            
                            21,369,867
                            
                            (19,851,373)
                            
                            1,520,928Issuance
      of common shares for services
                            11,214,000
                            
                            1,121
                            
                            13,213,839
                            
                            –
                            
                            13,214,960Issuance
      of common shares for cash
                            2,500,000
                            
                            250
                            
                            2,049,750
                            
                            –
                            
                            2,050,000Fair
      value of share purchase warrants
                            –
                            
                            –
                            
                            6,646,171
                            
                            –
                            
                            6,646,171Impairment
      of Sale Leaseback of Equipment
                            –
                            
                            –
                            
                            1,500,000
                            
                            –
                            
                            1,500,000Cancellation
      of common shares
                            (50,000)
                            
                            (5)
                            
                            5
                            
                            –
                            
                            –Net
      loss for the year
                            –
                            
                            –
                            
                            –
                            
                            (24,582,613)
                            
                            (24,582,613)Balance
      – December 31, 2007 (Restated – Note 11)
                            37,998,562
                            
                            3,800
                            
                            44,779,632
                            
                            (44,433,986)
                            
                            349,446
 
 
 (The
accompanying notes are an integral part of these consolidated financial
statements)
 
 F-5
 Index
 35
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 
 1.
                    Nature
      of Operations
  Ethos
Environmental, Inc. (the “Company”) was incorporated under the laws of the State
of Nevada on January 19, 1926 as Omo Mining and Leasing
Corporation.  On January 19, 1929, the Company changed its name to Omo
Mines Corporation.  On November 14, 1936, the Company changed its name
to Kaslo Mines Corporation.  On December 24, 1977, the Company changed
its name to Victor Industries, Inc., focused on the development, manufacturing,
and marketing of products related to zeolite, a metalused
for the production of toxic chemical absorbents, water softeners, gas
absorbents, radiation absorbents and soil and fertilizer
amendments.
  On
November 2, 2006, the Company signed and executed the Plan of Merger (the
“Merger”) with Ethos Environmental, Inc., a company incorporated in the State of
Nevada which manufactures and distributes fuel reformulating products that
increase fuel mileage, reduce emissions, and maintain lower fuel
costs.  Under the terms of the Agreement, the Company acquired 100% of
the issued and outstanding common shares of Ethos Environmental, Inc. in
exchange for the issuance of 17,718,187 common shares of the
Company.  As a result of the Agreement, the former owners of Ethos
Environmental, Inc. hold approximately 97% of the issued and outstanding common
shares of the Company.  The acquisition is, in substance, a capital
transaction and is outside of the scope of SFAS No. 141, Business Combinations,and
the acquisition has been accounted for as a continuation of the Ethos
Environmental, Inc. business in accordance with EITF 98-3, Determining Whether a Non-Monetary
Transaction Involves a Receipt of Productive Assets or a
Business.  Under recapitalization accounting, Ethos
Environmental, Inc. is considered the acquirer for accounting and financial
reporting purposes, and acquired the assets and assumed the liabilities of
Victor Industries, Inc.
  In
addition, as part of the Merger agreement, the Company agreed to a reverse stock
split of its’ issued and outstanding common shares at a rate of 1 for 1,200
common shares.  This reverse stock split was approved and finalized on
November 16, 2006.  All common share amounts listed are shown
subsequent to the reverse stock split.
  These
consolidated financial statements have been prepared on a going concern basis,
which implies that the Company will continue to realize its assets and discharge
its liabilities in the normal course of business. During the year ended December
31, 2007 and 2006, the Company recognized sales revenue of $1,355,141 and
$1,521,166 but incurred a net loss of $24,582,613 and $16,474,909,
respectively.  As at December 31, 2007, the Company had an accumulated
deficit of $44,433,986.  The continuation of the Company as a going
concern is dependent upon the continued financial support from its shareholders,
the ability to raise equity or debt financing, and the attainment of profitable
operations from the Company's future business. These factors raise substantial
doubt regarding the Company’s ability to continue as a going concern. These
consolidated financial statements do not include any adjustments to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue
as a going concern.
  The
Company’s plan of action over the next twelve months is to continue its
operations to manufacture and distribute fuel reformulating products and raise
additional capital financing, if necessary, to sustain operations.
 
 
 2.
                    Summary
      of Significant Accounting Policies
  a)
                    Basis
      of Presentation
  These
consolidated financial statements and related notes are presented in accordance
with accounting principles generally accepted in the United States, and are
expressed in US dollars. The Company’s fiscal year-end is December
31.
  b)
                    Use
      of Estimates
  The
preparation of these consolidated financial statements in conformity with
generally accepted accounting principles in the United States 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. The Company regularly
evaluates estimates and assumptions related to valuation allowances on accounts
receivable and inventory, valuation and amortization policies on property and
equipment, and valuation allowances on deferred income tax losses. The Company
bases its estimates and assumptions on current facts, historical experience and
various other factors that it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities and the accrual of costs and expenses that are
not readily apparent from other sources. The actual results experienced by the
Company may differ materially and adversely from the Company’s estimates. To the
extent there are material differences between the estimates and the actual
results, future results of operations will be affected.
 
 F-6
 Index
 36
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
  2.
                    Summary
      of Significant Accounting Policies
(continued)
  c)
                    Cash
      and Cash Equivalents
  The
Company considers all highly liquid instruments with maturity of three months or
less at the time of issuance to be cash equivalents. As at December 31, 2007 and
2006, the Company had no cash equivalents.
  d)
                    Accounts
      Receivable
  Accounts
      receivable are stated at their principal balances and are non-interest
      bearing and unsecured.  Management conducts a periodic review of
      the collectability of accounts receivable and deems all unpaid amounts
      greater than 30 days to be past due.  If uncertainty exists with
      respect to the recoverability of certain amounts based on historical
      experience or economic climate, management will establish an allowance
      against the outstanding receivables.  For the year ended
      December 31, 2007, the Company recorded bad debt expense of $427,530
      related to one customer who has defaulted on their amount
      owing.  As at December 31, 2007 and 2006, the Company recorded
      an allowance for doubtful accounts of $111,362 and $126,485,
      respectively.
  e)
                    Inventory
  Inventory
      is comprised of raw materials and finished goods of its fuel reformulating
      products and is recorded at the lower of cost or net realizable value on a
      first in first out (FIFO) basis. The Company establishes inventory
      reserves for estimated obsolete or unmarketable inventory equal to the
      differences between the cost of inventory and the estimated realizable
      value based upon assumptions about future and market conditions. Shipping
      and handling costs are classified as a component of cost of sales in the
      statement of operations.
  f)
                    Property
      and Equipment
  Property
      and equipment are recorded at cost. Depreciation is calculated on the
      straight-line method over the estimated useful lives of the assets.
      Leasehold improvements are amortized over the shorter of the anticipated
      lease term or the estimated useful life. The Company's policy is to
      capitalize items with a cost greater than $4,000 and an estimated useful
      life greater than one year. The Company reviews all property and equipment
      for impairment at least annually. Typically, the company depreciates its
      assets over a 5 year period except for the building which is depreciated
      on a 25 year basis.
  g)
                    Revenue
      Recognition
  The
      Company will recognize revenue from the sale of its fuel reformulating
      products in accordance with Securities and Exchange Commission Staff
      Bulletin No. 104 (“SAB 104”), “Revenue Recognition in
      Financial Statements”. Revenue will be recognized only when the
      price is fixed or determinable, persuasive evidence of an arrangement
      exists, the service is provided, and collectibility is
      assured.
  h)
                    Basic
      and Diluted Net Income (Loss) Per
Share
  The
Company computes net income (loss) per share in accordance with SFAS No. 128,
"Earnings per Share".
SFAS No. 128 requires presentation of both basic and diluted earnings per share
(EPS) on the face of the income statement. Basic EPS is computed by dividing net
income (loss) available to common shareholders (numerator) by the weighted
average number of shares outstanding (denominator) during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during the
period using the treasury stock method and convertible preferred stock using the
if-converted method. In computing Diluted EPS, the average stock price for the
period is used in determining the number of shares assumed to be purchased from
the exercise of stock options or warrants. Diluted EPS excludes all dilutive
potential shares if their effect is anti dilutive.
  i)
                    Comprehensive
      Loss
  SFAS No.
130, “Reporting Comprehensive
Income,” establishes standards for the reporting and display of
comprehensive loss and its components in the consolidated financial statements.
As at December 31, 2007 and 2006, the Company did not record any comprehensive
income or loss.
  j)
                    Financial
      Instruments
  The fair
value of financial instruments, which include cash, accounts receivable, other
current assets, accounts payable, and accrued liabilities were estimated to
approximate their carrying value due to the immediate or relatively short
maturity of these instruments.
 
 F-7
 Index
 37
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
  2.
                    Summary
      of Significant Accounting Policies
(continued)
  k)
                    Foreign
      Currency Translation
 
 The
Company’s functional and reporting currency is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are translated
in accordance with SFAS No. 52 “Foreign Currency Translation”
using the exchange rate prevailing at the balance sheet date. Gains and losses
arising on translation or settlement of foreign currency denominated
transactions or balances are included in the determination of income. Foreign
currency transactions are primarily undertaken in Canadian dollars. The Company
has not, to the date of these financials statements, entered into derivative
instruments to offset the impact of foreign currency fluctuations.
 
 l)      Advertising
Costs
 
 Advertising
costs are expensed as incurred and are recorded in the consolidated financial
statements as selling expense.  For the years ended December 31, 2007
and 2006, the Company recorded advertising costs of $283,470 and $132,955,
respectively.
 
 m)                 Income
Taxes
  Potential
      benefits of income tax losses are not recognized in the accounts until
      realization is more likely than not. The Company has adopted SFAS No. 109
      “Accounting for Income
      Taxes” as of its inception. Pursuant to SFAS No. 109 the Company is
      required to compute tax asset benefits for net operating losses carried
      forward. The potential benefits of net operating losses have not been
      recognized in these consolidated financial statements because the Company
      cannot be assured it is more likely than not it will utilize the net
      operating losses carried forward in future
  years.
  n)
                    Stock-Based
      Compensation
  The
      Company records stock-based compensation in accordance with SFAS No. 123R
      “Share Based Payments”, using the fair value method. All transactions in
      which goods or services are the consideration received for the issuance of
      equity instruments are accounted for based on the fair value of the
      consideration received or the fair value of the equity instrument issued,
      whichever is more reliably measurable. Equity instruments issued to
      employees and the cost of the services received as consideration are
      measured and recognized based on the fair value of the equity instruments
      issued.
  o)
                    Recent
      Accounting Pronouncements
  In March
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161,
“Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133”. SFAS No. 161 is intended to improve financial standards for
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. Entities are required to
provide enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  It is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
with early adoption encouraged.  The Company is currently evaluating
the impact of SFAS No. 161 on its financial statements, and the adoption of this
statement is not expected to have a material effect on the Company’s financial
statements.
  In
December 2007, the FASB issued SFAS No. 141R, “Business
Combinations”.  This statement replaces SFAS 141 and defines
the acquirer in a business combination as the entity that obtains control of one
or more businesses in a business combination and establishes the acquisition
date as the date that the acquirer achieves control. SFAS 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date. SFAS 141R also requires the acquirer to
recognize contingent consideration at the acquisition date, measured at its fair
value at that date. This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008, and
earlier adoption is prohibited. The adoption of this statement is not expected
to have a material effect on the Company's financial statements.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements Liabilities –an Amendment of ARB No.
51”.  This statement amends ARB 51 to establish accounting and
reporting standards for the Noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2008, and earlier adoption is prohibited. The adoption of this statement is
not expected to have a material effect on the Company's financial
statements.
 F-8
 Index
 38
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 2.      Summary
of Significant Accounting Policies (continued)
  o)
                    Recent
      Accounting Pronouncements
(continued)
  In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including and amendment of FASB Statement No. 115". SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. SFAS No. 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. As such, the Company
is required to adopt these provisions at the beginning of the fiscal year ending
February 28, 2009. The Company is currently evaluating the impact of SFAS No.
159 on its consolidated financial statements.
   In
September 2006, the SEC 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 addresses how the effects of prior year
uncorrected misstatements should be considered when quantifying misstatements in
current year financial statements. SAB No. 108 requires companies to quantify
misstatements using a balance sheet and income statement approach and to
evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors. SAB No. 108
is effective for periods ending after November 15, 2006. The adoption of SAB No.
108 did not have a material effect on its consolidated financial
statements.
   In
September 2006, the FASB issued SFAS No. 158 "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements
No. 87, 88, 106 and 132 (R)" SFAS No. 158 requires employers to recognize
the over funded or under funded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. SFAS No.
158 also requires an employer to measure the funded status of a plan as of the
date of its year-end statement of financial position, with limited exceptions.
The provisions of SFAS No. 158 are effective for employers with publicly traded
equity securities as of the end of the fiscal year ending after December 15,
2006. As such, the Company is required to adopt these provisions effective this
fiscal year end. The adoption of this statement has no material effect on the
Company's reported financial position or results of operations.
   In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles ("GAAP"), and expands
disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. As such, the Company is required
to adopt these provisions at the beginning of the fiscal year ending February
28, 2009. The Company is currently evaluating the impact of SFAS No. 157 on its
consolidated financial statements.
   In June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statements No. 109" (FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes by prescribing a two-step method of first evaluating whether a tax
position has met a more likely than not recognition threshold and second,
measuring that tax position to determine the amount of benefit to be recognized
in the financial statements. FIN 48 provides guidance on the presentation of
such positions within a classified statement of financial position as well as on
de-recognition, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of this standard did not have a material effect
on the Company's results of operations or financial position.
  3.      Inventory
 
 December
      31,
                              2007
                              $
                            
                            
                            December
      31,
                              2006
                              $Raw
      Materials
                            
                            
                            267,278
                            
                            
                            
                            335,381Finished
      Goods
                            
                            
                            335,121
                            
                            
                            
                            75,534602,399
                            
                            
                            
                            410,915
  F-9
 Index
 39
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 4.      Property
and Equipment
 
 Net
      Book ValueCost
                                  $
                                
                                
                                Accumulated
                                  Amortization
                                  $
                                
                                
                                December
      31, 2007
                                  $
                                
                                
                                December
      31, 2006
                                  $Building
      and Land
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                5,666,824Computers
                                
                                
                                36,637
                                
                                
                                
                                35,482
                                
                                
                                
                                1,155
                                
                                
                                
                                12,762Equipment
                                
                                
                                235,257
                                
                                
                                
                                120,339
                                
                                
                                
                                114,918
                                
                                
                                
                                669,609Furniture
      and Fixtures
                                
                                
                                16,698
                                
                                
                                
                                13,855
                                
                                
                                
                                2,843
                                
                                
                                
                                5,545288,592
                                
                                
                                
                                169,676
                                
                                
                                
                                118,916
                                
                                
                                
                                6,354,740
  During
the year ended December 31, 2007, the Company recorded an impairment charge of
$nil (2006 - $36,728 relating to vehicles purchased by the Company that was no
longer used in the Company’s operations.
  5.      Notes
Payable
 
 a)
                    As
      at December 31, 2007, the Company owed $246,521 (2006 - $50,000) in a
      demand loan for financing of operations.  Under the terms of the
      loan, the amount is unsecured, non-interest bearing, and due on
      demand.
 
 b)
                    In
      December 2007, the Company entered into a Demand Loan Agreement with a
      third party for $350,000.  Under the terms of the loan, the
      amount was unsecured, non-interest bearing, and due on
    demand.
 
 b)
                    On
      December 26, 2006, the company entered into a Demand Loan Agreement with a
      third party for $500,000 with an annual interest rate of 12%. As at
      December 31, 2007, the Company had fully repaid the demand
      loan.
 
 c)
                    On
      January 26, 2006, the Company secured a loan for its building in the
      amount of $4,750,000 with a convertible Promissory Note. The Note was
      convertible into 1,900,000 common shares of the Company at a conversion
      rate of $2.50 per common share.  The Note carried an annual
      interest rate of 17% with interest-only payments and a term of one
      year.
 
 On
December 6, 2006, the Note was assigned to another third party, and interest was
renegotiated to 14% per annum.
 
 On May
24, 2007, the Company and the third party renegotiated the terms of the
settlement and cancelled the convertibility feature of the Note and replaced it
with the issuance of 1,900,000 share purchase warrants.  Each share
purchase warrants entitles the warrant holder to purchase one common share of
the Company at $2.50 per common share for a three-year period commencing from
the date of the renegotiated terms.  In addition, the annual interest
rate of the Note was reduced from 14% to 12% per annum.
 
 In
October 2007, corresponding with the completion of the sale leaseback of the
Company’s building, the Note was fully repaid.
  F-10
 Index
 40
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 6.
                    Common
      Shares
  Transactions
      for the year ended December 31,
2007:
  a)
                    On
      November 27, 2007, the Company issued 350,000 common shares of the Company
      at $2.05 per common share to settle consulting services valued at
      $717,500.
  b)
                    On
      November 21, 2007, the Company issued 20,000 common shares of the Company
      at $2.15 per common share to settle consulting services valued at
      $43,000.
  c)
                    On
      November 9, 2007, the Company issued 167,500 common shares of the Company
      at $1.20 per common share to settle consulting services and professional
      fees valued at $201,000.
  d)
                    On
      October 13, 2007, the Company issued 10,025,000 common share of the
      Company at $0.95 per common share to settle consulting services,
      professional fees, and management fees totalling $9,523,750, including
      5,000,000 common shares to the Company’s Chief Executive Officer with a
      fair value of $4,750,000.
  e)
                    On
      July 24, 2007, the Company issued 2,500,000 common shares of the Company
      in a private placement agreement as part of the sale of the Company’s land
      and building, for proceeds of $2,000,000.  The remaining
      $5,875,000 of the purchase and sale agreement has been allocated to the
      sale of the land and building.
 
 F-11
 Index
 41
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
  6.
                    Common
      Shares (continued)
  f)
                    On
      April 27, 2007, the Company issued 127,500 common shares of the Company at
      $3.10 per common share, or fair value of $395,250, for consulting services
      incurred.
  g)
                    On
      April 5, 2007, the Company cancelled 50,000 common shares of the Company
      and returned the shares to
treasury.
  h)
                    On
      April 4, 2007, the Company issued 156,000 common shares of the Company at
      $4.25 per common share, or fair value of $663,000, for professional fees
      and consulting services incurred.
  i)
                    On
      March 23, 2007, the Company issued 100,000 common shares of the Company at
      $4.00 per common share, or fair value of $400,000, for professional fees
      and consulting services incurred.
  j)
                    On
      March 9, 2007, the Company issued 10,000 common shares of the Company at
      $3.54 per common share, or fair value of $35,400, for professional fees
      incurred.
  k)
                    On
      February 6, 2007, the Company issued 58,000 common shares of the Company
      at $4.07 per common share, or fair value of $236,060, for professional
      fees and consulting services
incurred.
  l)
                    On
      January 24, 2007, the Company issued 200,000 common shares at $5.00 per
      common share, or fair value of $1,000,000, for consulting services
      incurred.
  Transactions
      for the year ended December 31,
2006:
  m)
                    On
      December 4, 2006, the Company issued 100,000 common shares of the Company
      to the Chief Financial Officer of the Company at $6.00 per common share
      for a fair value of $600,000 as part of the compensation
      package.
  n)
                    On
      November 21, 2006, the Company issued 1,310,000 common shares of the
      Company for consulting services at $5.00 per common
  share.
  o)
                    In
      November 2006, the Company issued 776,225 common shares of the Company in
      various private placements for gross proceeds of
    $1,550,819.
  p)
                    In
      November 2006, the Company issued 350,650 common shares of the Company at
      approximately $2.00 per common share to settle services valued at
      $752,020.
  q)
                    On
      November 16, 2006, the Company approved a 1-to-1,200 reverse common stock
      split that decreased the number of issued and outstanding common shares
      from 573,850,485 common shares to 479,500 common shares after accounting
      for rounding up of partial common shares affected by the reverse stock
      split.  The common stock split has been applied
      retroactively.
  r)
                    On
      November 2, 2006, the Company issued 17,718,187 post-reverse split common
      shares to acquire 100% of the common shares of Ethos Environmental, Inc.
      in a reverse takeover transaction, as disclosed in Note 3.  The
      common shares issued have been applied
  retroactively.
  s)
                    On
      November 1, 2006, the Company issued 3,500,000 post-reverse split common
      shares of the Company to the President of the Company with a fair value of
      $2.00 per common share as settlement of services.  The fair
      value of the common shares were derived by management using historical
      share issuance prices to third parties, and were a result of pre-merger
      activity.
  t)
                    On
      November 1, 2006, the Company issued 100,000 post-reverse split common
      shares at $0.25 per common share to settle legal fees valued at
      $25,000.
  u)
                    During
      the six months ended June 30, 2008, the Company received capital
      contributions totalling $957,616 which has been recorded as additional
      paid-in capital.
  7.
                    Share
      Purchase Warrants
  In
      May 2007, the Company issued 1,900,000 share purchase warrants as part of
      the amendment of the loan agreement, as noted in Note 5(b)
      above.  Each warrant allows the warrant holder to purchase one
      additional common share of the Company at $2.50 per common share within
      three years of the signed date.  As at December 31, 2007, no
      share purchase warrants have been
exercised.
  F-12
 Index
 42
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 7.
                    Share
      Purchase Warrants (continued)
  During
      the year ended December 31, 2007, the Company issued the following share
      purchase warrants:
 
 Number of Warrants
                        
                        
                        Exercise PriceBalance
      – December 31, 2006
                        
                        
                        –
                        
                        
                        
                        –Issued
                        
                        
                        1,900,000
                        
                        
                        $
                        2.50Balance
      – December 31, 2007
                        
                        
                        1,900,000
                        
                        
                        $
                        2.50
  As
      at December 31, 2007, the following share purchase warrants were
      outstanding:
 
 Number of Warrants
                          
                          
                          Exercise Price
                          
                          Expiry Date1,900,000
                          
                          
                          $
                          2.50
                          
                          May
      23, 20101,900,000
 
 
 8.      Related
Party Transactions
  a)
                    During
      the year ended December 31, 2007, the Company issued 5,000,000 common
      shares to the Chief Executive Officer of the Company (now former Chief
      Executive Officer of the Company) for management fees with a fair value of
      $4,750,000.
 
 
 9.      Commitments
and Contingencies
 
 a)
                    The
      Company leases an office building under a lease agreement that expires in
      July 2012.  For the years ended December 31, 2006 and 2005, rent
      expense totalled $52,657 and 66,844,
  respectively.
 
 In
      October 2007, the Company completed a sale and leaseback agreement with
      respect to its building.  Commencing November 1, 2007, the
      Company entered into a 15-year lease agreement, with monthly lease
      payments of $63,000 in 2007.  For the year ended December 31,
      2007, the Company incurred lease expense of $126,000 (2006 -
      $52,657).
 
 During
      the year ended December 31, 2007, the Company entered into various lease
      agreements with respect to its manufacturing equipment, including sale
      leaseback agreements of manufacturing equipment of approximately
      $737,968.  Under the lease terms, the monthly payment is based
      on a factor of 0.04125 times the average outstanding loan balance for the
      month.  For the year ended December 31, 2007, the Company
      incurred lease expense of $246,554 (2006 -
  $4,996).
 
 The Company’s future annual minimum
lease payments are as follows:
 
 
 Amount
                            $December
      31, 2008
                          1,174,860December
      31, 2009
                          900,891December
      31, 2010
                          809,568December
      31, 2011
                          809,568December
      31, 2012
                          782,784Thereafter
                          3,654,0008,131,671
  F-13
 Index
 43
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 
 10.           Concentrations
 
 Inventory
Purchases
 
 For the
year ended December 31, 2007, the Company uses eight vendors for its fuel
reformulating products which account for 97% of product purchases compared with
five vendors comprising 90% of product purchases for the year ended December 31,
2006.
 
 Sales
Revenue
 
 For the
year ended December 31, 2007, the Company had one customer comprising $705,205
or 52% of total revenues compared with one customer comprising $1,205,189 or 88%
of total revenues for the year ended December 31, 2006.
 
 11.           Income
Taxes
  The
Company has adopted the provisions of SFAS 109, “Accounting for Income
Taxes”. Pursuant to SFAS 109, the Company is required to compute tax
asset benefits for net operating losses carried forward. The potential benefit
of net operating losses have not been recognized in the consolidated financial
statements because the Company cannot be assured that it is more likely than not
that it will utilize the net operating losses carried forward in future years.
The Company has $15,038,000 of net operating losses to carryforward to offset
taxable income in future years which expire through fiscal 2027. For the years
ended December 31, 2007 and 2006, the valuation allowance established against
the deferred tax assets increased by $8,289,716 and $5,588,981,
respectively.
  The
components of the net deferred tax asset at December 31, 2007 and 2006, the
statutory tax rate, the effective tax rate and the amount of the valuation
allowance are indicated below:
  December
      31,
                                  2007
                                  $
                                
                                
                                December
      31,
                                  2006
                                  $Income
      (Loss) Before Taxes
                                
                                
                                (24,582,613
                                )
                                
                                
                                (16,474,909
                                )Statutory
      rate
                                
                                
                                34
                                %
                                
                                
                                34
                                %Computed
      expected tax recovery
                                
                                
                                (8,358,088
                                )
                                
                                
                                (5,601,469
                                )Non-deductible
      expenses
                                
                                
                                68,372
                                
                                
                                
                                12,488Change
      in valuation allowance
                                
                                
                                8,289,716
                                
                                
                                
                                5,588,981Reported
      income taxes
                                
                                
                                –
                                
                                
                                
                                –
 
 
 December
      31,
                              2007
                              $
                            
                            
                            December
      31,
                              2006
                              $Deferred
      tax asset-
      Cumulative net operating losses
                            
                            
                            15,038,059
                            
                            
                            
                            6,748,343-
      Less valuation allowance
                            
                            
                            (15,038,059
                            )
                            
                            
                            (6,738,343
                            )Net
      deferred tax asset
                            
                            
                            –
                            
                            
                            
                            –
  The
Company has incurred operating losses of $15,038,000 which, if unutilized, will
expire through to 2027. Future tax benefits, which may arise as a result of
these losses, have not been recognized in these consolidated financial
statements, and have been offset by a valuation allowance. The following table
lists the fiscal year in which the loss was incurred and the expiration date of
the operating:
  F-14
 Index
 44
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 ExpirationNet
                        
                        Date
      ofLoss
                        
                        OperatingPeriod
      Incurred
                        $
                        
                        LossesDecember
      31, 2004
                        801,800
                        
                        2011December
      31, 2005
                        357,500
                        
                        2020December
      31, 2006
                        5,589,000
                        
                        2026December
      31, 2007
                        8,289,700
                        
                        202715,038,000
  12.           Restatement
 
 The
Company has restated its consolidated financial statements as at and for the
years ended December 31, 2007 and 2006. The consolidated financial statements
have been restated to reflect the following transactions:
 ·
                    impairment
      of goodwill and intangible assets upon the Company’s acquisition of Ethos
      Environmental, Inc.;
 ·
                    recording
      of fair value of issuance of common shares to management and directors of
      the Company at the end-of-day trading price when the Company’s common
      stock was publicly traded or based on the most recent third-party issuance
      price when the Company’s common stock was not publicly
    traded;
 ·
                    recording
      of the issuance of common shares for cash proceeds and issuance of common
      shares for services for the years ended December 31, 2007 and
      2006;
 ·
                    recording
      of the issuance in fiscal 2006 of common shares to the Company’s Chief
      Financial Officer (CFO) that was previously booked during the year ended
      December 31, 2007;
 ·
                    recording
      of $901,080 of capital contributions for the year ended December 31,
      2006;
 ·
                    reversal
      of restricted cash that was previously recorded in the Company’s audited
      financial statements, as the Company does not have ownership of the
      funds;
 ·
                    property
      and equipment that was purchased for personal use were written off and
      charged to operations under general and administrative
      expense;
 ·
                    impairment
      of property & equipment that are no longer in the Company’s ownership
      and use of operations and adjustments to amortization expense based on the
      Company’s amortization policies;
and
 ·
                    reversal
      of unsupported sales invoices and inventory purchases for the years ended
      December 31, 2007 and 2006.
 
 December 31,
2007
 
 The
effect of the restatement is to decrease total assets and stockholders’ equity
by $7,050,194.  Furthermore, the restatements decreased sales revenue
by $9,021,505, and increased net loss for the year ended December 31, 2007 by
$6,230,130 and accumulated deficit as at December 31, 2007 by
$16,363,959.
 F-15
 Index
 45
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 a)
                    Balance
      Sheet
 
 As
      at December 31, 2007As
      Reported
                              
                              
                              Adjustment
                              
                              
                              Restated$
                              
                              
                              
                              $
                              
                              
                              
                              $AssetsAccounts
      Receivable
                              
                              
                              5,951,275
                              
                              
                              
                              (5,867,027
                              )
                              
                              
                              84,248Inventory
                              
                              
                              1,376,030
                              
                              
                              
                              (773,631
                              )
                              
                              
                              602,399Total
      Current Assets
                              
                              
                              7,401,481
                              
                              
                              
                              (6,640,658
                              )
                              
                              
                              760,823Property
      and Equipment
                              
                              
                              228,452
                              
                              
                              
                              (109,536
                              )
                              
                              
                              118,916Other
      Assets
                              
                              
                              699,419
                              
                              
                              
                              (300,000
                              )
                              
                              
                              399,419Total
      Assets
                              
                              
                              8,329,352
                              
                              
                              
                              (7,050,194
                              )
                              
                              
                              1,279,158Stockholders’
      EquityCommon
      Stock
                              
                              
                              3,687
                              
                              
                              
                              113
                              
                              
                              
                              3,800Additional
      Paid-In Capital
                              
                              
                              35,615,040
                              
                              
                              
                              9,164,592
                              
                              
                              
                              44,779,632Accumulated
      Deficit
                              
                              
                              (28,219,087
                              )
                              
                              
                              (16,214,899
                              )
                              
                              
                              (44,433,986
                              )Total
      Stockholders’ Equity
                              
                              
                              7,399,640
                              
                              
                              
                              (7,050,194
                              )
                              
                              
                              349,446Total
      Liabilities and Stockholders’ Equity
                              
                              
                              8,329,352
                              
                              
                              
                              (7,050,194
                              )
                              
                              
                              1,279,158
 
 
 b)      Statement
of Operations
 
 For
      the Year Ended December 31, 2007As
      Reported
                              
                              
                              Adjustment
                              
                              
                              Restated$
                              
                              
                              
                              $
                              
                              
                              
                              $Sales
      Revenue
                              
                              
                              10,376,646
                              
                              
                              
                              (9,021,505
                              )
                              
                              
                              1,355,141Cost
      of Sales
                              
                              
                              3,404,735
                              
                              
                              
                              (2,659,599
                              )
                              
                              
                              745,136Gross
      Profit
                              
                              
                              6,971,911
                              
                              
                              
                              (6,361,906
                              )
                              
                              
                              610,005Operating
      ExpensesBad
      Debt Expense
                              
                              
                              –
                              
                              
                              
                              427,530
                              
                              
                              
                              427.530General
      and Administrative
                              
                              
                              18,214,796
                              
                              
                              
                              (559,333
                              )
                              
                              
                              17,655,463Total
      Operating Expenses
                              
                              
                              25,096,543
                              
                              
                              
                              (131,803
                              )
                              
                              
                              24,964,740Net
      Loss
                              
                              
                              (18,352,510
                              )
                              
                              
                              (6,230,130
                              )
                              
                              
                              (24,582,640
                              )Net
      Loss Per Share – Basic and Diluted
                              
                              
                              (0.66
                              )
                              
                              
                              (0,21
                              )
                              
                              
                              (0.87
                              )
 
 F-16
 Index
 46
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 
 12.           Restatement
(continued)
 
 c)      Statement
of Cashflows
 
 For
      the Year Ended December 31, 2007As
      Reported
                          
                          
                          Adjustment
                          
                          
                          Restated$
                          
                          
                          
                          $
                          
                          
                          
                          $Operating
      ActivitiesNet
      Loss for the Year
                          
                          
                          (18,352,510
                          )
                          
                          
                          (6,230,103
                          )
                          
                          
                          (24,582,613
                          )Amortization
      Expense
                          
                          
                          213,702
                          
                          
                          
                          (12,609
                          )
                          
                          
                          201,093Bad
      Debt Expense
                          
                          
                          –
                          
                          
                          
                          427,530
                          
                          
                          
                          427,530Common
      Stock Issued for Services
                          
                          
                          15,359,710
                          
                          
                          
                          (2,144,750
                          )
                          
                          
                          13,214,960Impairment
      from Sale Leaseback of Building
                          
                          
                          –
                          
                          
                          
                          1,500,000
                          
                          
                          
                          1,500,000Changes
      in Operating Assets and LiabilitiesAccounts
      Receivable
                          
                          
                          (5,623,951
                          )
                          
                          
                          5,408,105
                          
                          
                          
                          (215,846
                          )Inventory
                          
                          
                          (965,115
                          )
                          
                          
                          773,631
                          
                          
                          
                          (191,484
                          )Other
      Assets
                          
                          
                          (674,519
                          )
                          
                          
                          300,000
                          
                          
                          
                          (374,519
                          )Accounts
      Payable and Accrued Liabilities
                          
                          
                          (272,195
                          )
                          
                          
                          192,779
                          
                          
                          
                          (79,416
                          )Cashflows
      Provided By (Used In) Operating Activities
                          
                          
                          (3,668,707
                          )
                          
                          
                          214,583
                          
                          
                          
                          (3,454,124
                          )Investing
      ActivitiesPurchase
      of Property and Equipment
                          
                          
                          –
                          
                          
                          
                          (198,680
                          )
                          
                          
                          (198,680
                          )Proceeds
      from Sale of Property and Equipment
                          
                          
                          1,199,314
                          
                          
                          
                          5,034,097
                          
                          
                          
                          6,233,411Cashflows
      Provided By Investing Activities
                          
                          
                          1,199,314
                          
                          
                          
                          4,835,417
                          
                          
                          
                          6,034,731Financing
      ActivitiesProceeds
      from Issuance of Note Payable
                          
                          
                          1,055,334
                          
                          
                          
                          (705,334
                          )
                          
                          
                          350,000Repayment
      of Note Payable
                          
                          
                          (1,123,153
                          )
                          
                          
                          (4,044,666
                          )
                          
                          
                          (5,167,819
                          )Cashflows
      Provided by (Used In) Financing Activities
                          
                          
                          2,178,702
                          
                          
                          
                          (4,750,000
                          )
                          
                          
                          (2,571,298
                          )Increase
      (Decrease) in Cash
                          
                          
                          (290,691
                          )
                          
                          
                          300,000
                          
                          
                          
                          9,309Cash
      – Beginning of Period
                          
                          
                          364,867
                          
                          
                          
                          (300,000
                          )
                          
                          
                          64,867
 
 
 d)      Statement
of Stockholders’ Deficit
 
 Balance
      – December 31, 2007As
      Reported
                      
                      
                      Adjustment
                      
                      
                      Restated$
                      
                      
                      
                      $
                      
                      
                      
                      $Common
      Stock
                      
                      
                      3,687
                      
                      
                      
                      113
                      
                      
                      
                      3,800Additional
      Paid-In Capital
                      
                      
                      35,615,040
                      
                      
                      
                      9,164,592
                      
                      
                      
                      44,779,632Accumulated
      Deficit
                      
                      
                      (28,219,087
                      )
                      
                      
                      (16,214,899
                      )
                      
                      
                      (44,433,986
                      )Number
      of Shares of Common Stock
                      
                      
                      36,871,687
                      
                      
                      
                      1,126,875
                      
                      
                      
                      37,998,562
  F-17
 Index
 47
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 
 12.           Restatement
(continued)
 
 December 31,
2006
 
 The
effect of the restatement is to decrease total assets by $4,702,099, decrease
total liabilities by $192,779, and decrease stockholders’ equity by
$4,509,320.  Furthermore, the restatements decrease sales revenue by
$3,395,907, and increase net loss for the year ended December 31, 2006 and
accumulated deficit as at December 31, 2006 by $10,067,166.
 
 a)
                    Balance
      Sheet
 
 As
      at December 31, 2006As
      Reported
                          
                          
                          Adjustment
                          
                          
                          Restated$
                          
                          
                          
                          $
                          
                          
                          
                          $AssetsRestricted
      Cash
                          
                          
                          300,000
                          
                          
                          
                          (300,000
                          )
                          
                          
                          –Accounts
      Receivable
                          
                          
                          327,324
                          
                          
                          
                          (31,392
                          )
                          
                          
                          295,932Total
      Current Assets
                          
                          
                          1,123,006
                          
                          
                          
                          (331,392
                          )
                          
                          
                          791,614Property
      and Equipment
                          
                          
                          10,725,447
                          
                          
                          
                          (4,370,707
                          )
                          
                          
                          6,354,740Total
      Assets
                          
                          
                          11,853,453
                          
                          
                          
                          (4,702,099
                          )
                          
                          
                          7,151,354LiabilitiesAccounts
      Payable
                          
                          
                          503,898
                          
                          
                          
                          (192,779
                          )
                          
                          
                          311,119Total
      Liabilities
                          
                          
                          5,823,205
                          
                          
                          
                          (192,779
                          )
                          
                          
                          5,630,426Stockholders’
      EquityCommon
      Stock
                          
                          
                          2,311
                          
                          
                          
                          123
                          
                          
                          
                          2,434Additional
      Paid-In Capital
                          
                          
                          15,961,204
                          
                          
                          
                          5,408,663
                          
                          
                          
                          21,369,867Accumulated
      Deficit
                          
                          
                          (9,933,267
                          )
                          
                          
                          (9,918,106
                          )
                          
                          
                          (19,851,373
                          )Total
      Stockholders’ Equity
                          
                          
                          6,030,248
                          
                          
                          
                          (4,509,320
                          )
                          
                          
                          1,520,928Total
      Liabilities and Stockholders’ Equity
                          
                          
                          11,853,453
                          
                          
                          
                          (4,702,099
                          )
                          
                          
                          7,151,354
  b)      Statement
of Operations
 
 For
      the Year Ended December 31, 2006As
      Reported
                          
                          
                          Adjustment
                          
                          
                          Restated$
                          
                          
                          
                          $
                          
                          
                          
                          $Sales
      Revenue
                          
                          
                          4,768,013
                          
                          
                          
                          (3,246,847
                          )
                          
                          
                          1,521,166Cost
      of Sales
                          
                          
                          1,340,135
                          
                          
                          
                          (883,664
                          )
                          
                          
                          456,471Gross
      Profit
                          
                          
                          3,427,878
                          
                          
                          
                          (2,363,243
                          )
                          
                          
                          1,064,635Operating
      ExpensesAmortization
      Expense
                          
                          
                          –
                          
                          
                          
                          18,865
                          
                          
                          
                          18,865General
      and Administrative
                          
                          
                          5,346,409
                          
                          
                          
                          7,579,330
                          
                          
                          
                          12,925,739Impairment
      of Property and Equipment
                          
                          
                          –
                          
                          
                          
                          36,728
                          
                          
                          
                          36,728Selling
      Expense
                          
                          
                          4,689,910
                          
                          
                          
                          (80,000
                          )
                          
                          
                          4,609,910Total
      Operating Expenses
                          
                          
                          10,036,319
                          
                          
                          
                          7,554,923
                          
                          
                          
                          17,591,242Net
      Loss
                          
                          
                          (6,556,803
                          )
                          
                          
                          (9,918,106
                          )
                          
                          
                          (16,474,909
                          )Net
      Loss Per Share – Basic and Diluted
                          
                          
                          (0.05
                          )
                          
                          
                          (0.73
                          )
                          
                          
                          (0.78
                          )
  F-18
 Index
 48
 Ethos
Environmental, Inc.
 Notes to
the Consolidated Financial Statements
 (expressed
in U.S. dollars)
 
 12.           Restatement
(continued)
 
 c)      Statement
of Cashflows
 
 For
      the Year Ended December 31, 2006As
      Reported
                      
                      
                      Adjustment
                      
                      
                      Restated$
                      
                      
                      
                      $
                      
                      
                      
                      $Operating
      ActivitiesNet
      Loss for the Year
                      
                      
                      (6,556,803
                      )
                      
                      
                      (9,918,106
                      )
                      
                      
                      (16,474,909
                      )Amortization
      Expense
                      
                      
                      358,786
                      
                      
                      
                      (66,690
                      )
                      
                      
                      292,096Common
      Stock Issued for Services
                      
                      
                      7,580,990
                      
                      
                      
                      7,346,020
                      
                      
                      
                      14,927,010Impairment
      of Property and Equipment
                      
                      
                      –
                      
                      
                      
                      36,728
                      
                      
                      
                      36,728Changes
      in Operating Assets and LiabilitiesAccounts
      Receivable
                      
                      
                      (37,267
                      )
                      
                      
                      31,392
                      
                      
                      
                      (5,875
                      )Accounts
      Payable and Accrued Liabilities
                      
                      
                      (235,729
                      )
                      
                      
                      (192,779
                      )
                      
                      
                      (428,508
                      )Cashflows
      Provided By (Used In) Operating Activities
                      
                      
                      1,025,835
                      
                      
                      
                      (2,763,435
                      )
                      
                      
                      (1,737,600
                      )Financing
      ActivitiesProceeds
      from Capital Contribution
                      
                      
                      45,000
                      
                      
                      
                      912,616
                      
                      
                      
                      957,616Proceeds
      from Issuance of Common Shares
                      
                      
                      –
                      
                      
                      
                      1,550,819
                      
                      
                      
                      1,550,819Cashflows
      Provided by Financing Activities
                      
                      
                      5,199,819
                      
                      
                      
                      2,463,435
                      
                      
                      
                      7,663,254Increase
      (Decrease) in Cash
                      
                      
                      (133,631
                      )
                      
                      
                      (300,000
                      )
                      
                      
                      (433,631
                      )Cash
      – End of Period
                      
                      
                      364,867
                      
                      
                      
                      (300,000
                      )
                      
                      
                      64,867
 
 
 d)      Statement
of Stockholders’ Deficit
 
 Balance
      – December 31, 2006As
      Reported
                      
                      
                      Adjustment
                      
                      
                      Restated$
                      
                      
                      
                      $
                      
                      
                      
                      $Common
      Stock
                      
                      
                      2,311
                      
                      
                      
                      123
                      
                      
                      
                      2,434Additional
      Paid-In Capital
                      
                      
                      15,961,204
                      
                      
                      
                      5,408,663
                      
                      
                      
                      21,369,867Accumulated
      Deficit
                      
                      
                      (9,933,267
                      )
                      
                      
                      (9,918,106
                      )
                      
                      
                      (19,851,373
                      )Number
      of Shares of Common Stock
                      
                      
                      23,107,687
                      
                      
                      
                      1,226,875
                      
                      
                      
                      24,334,562
 
 
 13.           Subsequent
Events
 
 a)
                    On
      March 31, 2008, the Company issued a Promissory Note (the “Note”) in
      exchange for cash proceeds of $300,000.  In accordance with the
      terms of the Note, the amount is unsecured, due interest at 12% per annum
      payable monthly in arrears, and due on March 28,
  2009.
 
 b)
                    On
      March 26, 2008, the Company issued a Promissory Note (the “Note”) in
      exchange for cash proceeds of $1,000,000.  In accordance with
      the terms of the Note, the amount is secured with 2,000,0000 common shares
      owned by the Company’s Chief Executive Officer, due interest of 12% per
      annum, and is due on July 30, 2008.
 
 c)
                    On
      January 30, 2008, the Company repaid outstanding promissory notes totaling
      $500,000.  Refer to Note
12(d).
 
 d)
                    On
      January 18, 2008, the Company issued a Promissory Note in exchange for
      cash proceeds of $150,000.  In accordance with the terms of the
      Note, the amount is unsecured, non-interest bearing, and is due on January
      18, 2009.  The Note was subsequently repaid on January 30,
      2008.
 
 e)
                    Subsequent
      to December 31, 2007, the Company issued 106,550 common shares to settle
      consulting services and professional fees, and issued 742,798 common
      shares pursuant to a provision in the Registration Rights Agreement with
      GreenBridge Capital Partners IV,
LLC.
  F-19
 Index
 49
 Item
8.  Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
 
 Other
than as may have been previously disclosed in our filings with the SEC, we have
had no changes in and disagreements with our independent public accountants on
accounting and financial disclosure.
  Item
8A(T).  Controls and Procedures
  Evaluation
of Disclosure Controls and Procedures
 
 As
required by Rule 13a-15 under the Exchange Act, our management, including Corey
P. Schlossmann, our Chief Executive Officer, and Thomas W. Maher, our Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures for the period ended December 31, 2007
and December 31, 2006.  This evaluation was performed as of November
18, 2008.
 
 Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures.
 
 Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based on that evaluation, Mssrs. Schlossmann and Maher concluded that because of
the material weaknesses in internal control over financial reporting described
below, our disclosure controls and procedures were not effective as of December
31, 2007.
  Management’s
Annual Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act.  Our management is also required to
assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
(“Section 404”).   Management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2007 and
December 31, 2006.  In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework.  During our
assessment of the effectiveness of internal control over financial reporting as
of December 31, 2007 and December 31, 2006, management identified material
weaknesses related to (i) the U.S. GAAP expertise of our internal accounting
staff and (ii) our internal audit functions, and material weaknesses related to
(i) the absence of an Audit Committee as of December 31, 2007 and December 31,
2006 and (ii) a lack of segregation of duties within accounting
functions.
 
 The
Company completed a merger in November 2006, following which new management was
appointed.  Since that time, our internal accounting department has
been inadequate to effectively respond to requirements under Section 404, which
resulted in material weaknesses of our internal control over financial reporting
for the years ended December 31, 2007 and 2006.
 
 On
September 5, 2008, the Company accepted the resignations of Enrique de Vilmorin,
Luis Willars, and Jose Manuel Escobedo from all positions with the
Company.  These resignations were precipitated by certain shareholders
of the Company advising Mr. de Vilmorin that they would be formally requesting a
shareholder vote to replace management, including the Company’s
directors.  Prior to receiving such a demand, Mr. de Vilmorin, Mr.
Willars and Mr. Escobedo resigned from their positions with the
Company.
 
 Index
 50
 Immediately
following their resignations, the Company launched an internal investigation,
led by the Audit Committee which was formed on September 25, 2008, to ascertain
the extent of the financial statement items requiring restatement and other
issues requiring disclosure to the Securities & Exchange Commission and to
the investment community. On or about October 16, 2008, we concluded that
sufficient support had been obtained that certain revenue transactions dating
back to the year ended December 31, 2006 were unsupportable, and that certain
personal expenditures were incurred on the Company’s accounts.  Upon
evidence of these transactions which were materially misstated for all periods
dating back to December 31, 2006, the Company filed a Form 8-K on October 21,
2008 citing non-reliance on its issued financial statements since that
time.
 
 Among the
materially misstated transactions noted were the following:
 
 ·
              Sales
      invoices and transactions to companies that did not exist dating back to
      the fiscal year ended December 31,
2006;
 ·
              Purchases
      of inventory that were not supportable dating back to the fiscal year
      ended December 31, 2006; and
 ·
              Personal
      expenditures incurred by Mr. de Vilmorin dating back to the fiscal year
      ended December 31, 2006, including cash payments and purchases of personal
      assets that were recorded as Company
assets.
 
 The
Company, through co-operation of its management and Board of Directors, has
substantively reviewed all significant transactions and will be restating, to
the extent not already done, all reported financial statements from December 31,
2006 to June 30, 2008 to reflect the Company’s true financial position for each
of the reporting periods then ended.
 
 The
following material weaknesses over internal controls over financial reporting
existed as at December 31, 2007 and 2006:
 
 Lack of Control
Environment that sufficiently promotes effective internal control over financial
reporting throughout the management structure.
 
 Our
control environment did not sufficiently promote effective internal control over
financial reporting throughout our management structure, and this material
weakness was a contributing factor in the development of other material
weaknesses described below. Principal contributing factors included the lack of
permanent employees in key financial reporting positions, resistance to change
of long-held practices developed in an entrepreneurial and trust culture, the
lack of a formal program for training members of our finance and accounting
group and a lack of a full evaluation of our financial system applications due
to incomplete documentation and testing of key controls. Our control environment
also contributed to our inability to fully evaluate our general computer
controls and financial system application controls, as described more fully
below.
 
 Insufficient
Segregation of Duties.
 
 We did
not segregate duties in several important functions, including: permitting one
person the ability to receive inventory, perform cycle counts and process
adjustments, and another individual to initiate and authorize the scrapping of
obsolete and excess inventory; permitting changes to inventory quantity
information within the financial application system without appropriate review;
providing users access within our financial application system to areas outside
of their responsibilities; and permitting the creation, modification and
updating of customer or vendor data without a secondary level of review or
approval.
 
 Insufficient
personnel in our finance/accounting functions and Lack of Controls over the
Invoice Posting Process.
 
 We had a
lack of resources and inadequate training within our finance and accounting
departments.  Training for our accounting staff with respect to
generally accepted accounting principles (“GAAP”) had been ad hoc rather than
systematic. As a result of these factors, certain transactions were not recorded
initially in accordance with GAAP, such as a limited number of third-party
vendor contracts, leases and licenses; the capitalization of sales and use taxes
on fixed assets and the internal labor component of a financial application
system implementation; and appropriate period-end cut-off for “FOB Origin”
inventory received shortly after the end of the period.
 
 Insufficient
policies and procedures over various financial statement
areas.
 
 We had
insufficient processes and personnel to provide adequate oversight of
financially significant transactions and determinations by our finance and
accounting personnel in our offices outside of headquarters. These deficiencies
represented a design deficiency in internal controls which resulted in more than
a remote likelihood that a material error would not have been prevented or
detected, and constituted a material weakness.
 Index
 51
 Lack of control
process for recording and approving journal entries.
 
 We did
not have appropriate controls around the process for recording and approving
journal entries. We also noted instances where material journal entries were
recorded before subsequently provided supporting documentation was prepared or
reviewed by the accounting department. Instances also occurred in which journal
entries were not adequately documented and reviewed. These deficiencies
represented an operating effectiveness deficiency in internal controls which
resulted in more than a remote likelihood that a material error would not have
been prevented or detected, and constituted a material
weakness.
 
 Lack of controls
over the sales transaction process.
 
 We did
not have a consistent process in place to document the significant terms of all
important product sales contracts and our accounting for these contracts. We
enter into a small number of high dollar amount contracts for our product sales.
These contracts often contain complex terms that impact our recognition and
determination of revenue (including customer rights of return, multiple elements
and contingencies that can have a material impact on the recognition or deferral
of revenue) and balance sheet classification of deferred revenue. These
deficiencies represented a design deficiency in internal controls which resulted
in more than a remote likelihood that a material error would not have been
prevented or detected, and constituted a material weakness.
 
 Lack of
Independent Directors for our audit committee & lack of an audit committee
financial expert.
 
 We did
not have an audit committee with a designated financial expert.  An
audit committee is engaged primarily in an oversight function and ultimately is
responsible for the company's financial reporting processes and the quality of
its financial reporting.  As a basis for carrying out its
responsibilities, an audit committee must have a working knowledge of a
company's goals and strategies as well as the issues it faces in achieving its
objectives. We had numerous material weaknesses which would have likely made the
role of an audit committee ineffective. These deficiencies represented a design
deficiency in internal controls, and constituted a material weakness at December
31, 2006, and again at December 31, 2007.
 
 Lack of Training
in Public Company Reporting Obligations.
 
 Our Chief
Executive Officer and Chief Financial Officer for the years ended December 31,
2007 and 2006 appear to have had limited knowledge of the reporting
obligations associated with being a reporting company.  This
represented a design deficiency in internal controls which resulted in more than
a remote likelihood that a material error would not have been prevented or
detected, and constituted a material weakness.
 
 Insufficient
documentation for accounting or business transactions and Lack of Policies and
procedures over records retention.
 
 In
November 2006, new officers and directors were appointed and the process of
obtaining and producing certain corporate documentation proved to be a difficult
and lengthy task.  These deficiencies represented a design deficiency
in internal controls which resulted in more than a remote likelihood that a
material error would not have been prevented or detected, and constituted a
material weakness.
 
 Insufficient
Corporate Governance Policies.
 
 Following
the transaction in which Ethos Environmental, Inc. became a public company, our
officers and directors failed to implement appropriate corporate governance
policies. This represented a design deficiency in internal controls which
resulted in more than a remote likelihood that a material error would not have
been prevented or detected, and constituted a material
weakness.
 Auditor
Attestation
 
 This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
 Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report.
  Index
 52
 Changes in Internal Controls.
 
 As at
November 19, 2008, the filing date of our amended Form 10-K for the year ended
December 31, 2007, we have not implemented any new internal controls or
significantly changed our existing internal controls. However, as a response to
the material misstatements of our financial statements from December 31, 2006 to
June 30, 2008 as a result of material weaknesses in our internal controls over
financial reporting, we created an Audit Committee on September 25, 2008 to
oversee our internal controls and financial reporting process and have hired a
financial statement consulting firm to review our policies and implement
required internal controls over financial reporting for all significant
financial statement processes.
 
 Conclusion:
 
 For the
year ended December 31, 2007, and as at November 18, 2008 (the filing of our
amended Form 10-K for the year ended December 31, 2007), our management has
concluded that because of the material misstatements of our financial statements
from December 31, 2006 to June 30, 2008, and the material weaknesses in internal
controls over financial reporting identified in various significant financial
statement processes, our internal controls over financial reporting were not
effective as of December 31, 2007 and December 31,
2006.
 
 Item
8B.   Other Information
 None.
  Index
 53
 PART III
  Item
13.   Exhibits
  EXHIBIT
      NUMBER
                DESCRIPTION
                LOCATION3.1
      - 3.2
                Articles
      of Incorporation and Bylaws
                Incorporated
      by reference as Exhibits to the Form 8-K filed on December 12, 2004 as
      amended on February 3, 2005.31.1
                Rule
      13a-14(a)/15d-14(a) Certification (CEO)
                Filed
      herewith31.2
                Rule
      13a-14(a)/15d-14(a) Certification (CFO)
                Filed
      herewith32.1
                Section
      1350 Certification (CEO)
                Filed
      herewith32.2
                Section
      1350 Certification (CFO)
                Filed
      herewith
 Item
14. Principal Accounting Fees and Services
  During
the year ended December 31, 2007, we engaged Peterson Sullivan PLLC, J.H. Cohn
LLP and Moore & Associates, Charteredas our independent
auditors.  For the year ended December 31, 2007, we incurred fees to these
firms as discussed below.
  ·
              Audit Fees:Peterson Sullivan PLLC
      fees for audit and quarterly review services totaled $29,273 and
      $117,457 for 2007 and 2006, respectively, including fees associated with
      consents and the review of this
report.
  ·
              Tax Fees:We paid PETERSON
      SULLIVAN PLLC, $1,728 for tax related services associated with our 2006
      corporate tax return extensions.
  ·
              All Other Fees:J. H. Cohn LLP fees totaled $43,411 for 2007, although they were
      not associated with any audit or review, and NIL for 2006.  In
      addition, the Company contracted for the services of Blum and Clark, CPAs,
      for assistance in preparing the Registrant’s financial
      statements.  The fees associated with Blum and Clark in 2007
      were $68,076 and NIL in 2006.  Moore & Associates,
      Chartered, fees totaled $57,500 for 2007 and $12,500 for
    2006.
  Index
 54
 SIGNATURES
  In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 19th day of
November, 2008.
  Ethos
      Environmental, Inc.
                    a
      Nevada CorporationBy:/s/
      Corey P. SchlossmannCorey
      P. Schlossmann
                    Chief
      Executive Officer
  Pursuant to the requirements of the
Securities Exchange Act of 1934, the following persons on behalf of the
Registrant and in the capacities and on the dates indicated have signed this
report below.
  
 Signature
                
                Position
                
                Date/s/
      Corey P. Schlossmann
                
                Chief
      Executive Officer and Director
                
                November
      19, 2008Corey
      P. Schlossmann/s/
      Howard Landa
                
                Director
                
                November
      19, 2008Howard
      Landa/s/
      Bruce Tackman
                
                Director
                
                November
      19, 2008Bruce
      Tackman/s/ Thomas W. Maher
                
                Principal
      Accounting Officer
                
                November
      19, 2008Thomas
      W. Maher
                
                Chief
      Financial Officer
  Index
 55