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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2006



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number 0-23897



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EarthFirst Technologies, Incorporated

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 59-3462501                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|2515 E Hanna Ave., Tampa, Florida        |  | 33610     
|(Address of principal executive offices) |  | (Zip Code)

Issuers telephone number: (813) 238-5010



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Securities registered pursuant
to Section 12(b) of the Exchange Act: None

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



(Title of Class)



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

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

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

State issuers revenues for its most recent fiscal year: $ 45,371,505

State the aggregate market value of voting and
non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date (April 9, 2007) within the past 60 days: $
10,109,228

State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date (April 9, 2007)
604,260,294 shares.

DOCUMENTS INCORPORATED BY REFERENCE: NONE.

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



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|         |  |                                                                                                                 |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                 |  | Page
|         |  | PART I                                                                                                          |  |     
|         |  |                                                                                                                
|Item 1.  |  | Business                                                                                                        |  | 3   
|Item 2.  |  | Description of Property                                                                                         |  | 7   
|Item 3.  |  | Legal Proceedings                                                                                               |  | 8   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 9   
|         |  |                                                                                                                
|         |  | PART II                                                                                                         |  |     
|         |  |                                                                                                                
|Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 9   
|Item 6.  |  | Managements Discussion and Analysis or Plan of Operation                                                       |  | 11  
|Item 7.  |  | Financial Statements                                                                                            |  | 21  
|Item 8.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 21  
|Item 8A. |  | Controls and Procedures                                                                                         |  | 22  
|Item 8B. |  | Other Information                                                                                               |  | 22  
|         |  |                                                                                                                
|         |  | PART III                                                                                                        |  |     
|         |  |                                                                                                                
|Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act |  | 22  
|Item 10. |  | Executive Compensation                                                                                          |  | 25  
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 27  
|Item 12. |  | Certain Relationships and Related Transactions                                                                  |  | 28  
|Item 13. |  | Exhibits                                                                                                        |  | 30  
|Item 14  |  | Principal Accountant Fees and Services                                                                          |  | F-31
|         |  | Signatures and Certifications                                                                                   |  |     



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PART I



|Item 1. | Business
|------- | --------

EarthFirst Technologies, Incorporated, a
Florida Corporation formed in 1997, is a specialized holding company owning subsidiaries engaged in a number of business activities. EarthFirst Technologies, Incorporated and its subsidiaries (collectively EarthFirst, the
Company, we, and our), is a research-based enterprise committed to the development and commercialization of technologies that will produce economically and environmentally superior products from carbon-rich solid
and liquid materials considered wastes. As part of its efforts, the Company is also attempting to develop and commercialize applications of its technologies for the efficient production of alternative fuels. Additional applications of the
Companys technologies are focused on the environmentally desirable processing, destruction, purification, and / or remediation of harmful liquid and solid wastes.

Through its subsidiary Electric Machinery Enterprises, Inc., the Company performs services as an electrical contractor and subcontractor in the construction of commercial, residential and municipal projects primarily
located in Florida and the Caribbean.

Solid Waste Technologies

Catalytic Activated Vacuum Distillation Process (CAVD) Reactors

EarthFirst developed the Catalytic Activated
Vacuum Distillation Process Reactor. The CAVD Reactor embodies the results of several years of research and development with respect to disposal of solid wastes. The CAVD Reactor offers a unique solution to the problem of disposing of harmful solid
wastes in an environmentally friendly manner and produces recyclable and reusable by-product.

We believe that the CAVD Reactor can be
designed to process a number of harmful solid waste products. We anticipate that governmental and nongovernmental entities who are faced with the problem of disposing of various types of solid waste products through conventional means will conclude
that the CAVD Reactors can provide a superior, safe and effective means of processing these waste products into recyclable material.

Initially, we are focusing on the processing of rubber tires, through our demonstration facility in mobile, Alabama. We have also processes carbon laden non waste products. The typical results of processing materials in our CAVD Reactor is
the production of alternative fuels consisting of a synthetic gas, oil product and some form of carbon based powder or crumb. Other uses are also being pursued. Such uses include the recycling of carpet materials, the destruction of animal waste and
remains, transuranic wastes (e.g. gloves, overalls, tools, etc. that have been exposed to low levels of radiation), and medical wastes.

No
revenues have been generated to date from solid waste technologies.

Electrical ContractingElectric Machinery Enterprises

The Company performs electrical contracting and subcontracting services for commercial and municipal projects primarily in Florida and the Caribbean
through its subsidiary Electric Machinery Enterprises, Inc. (EME). The Company has extensive expertise in performing electrical contracting



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services for water, sewer, and power generating facilities. EME has provided electrical contracting services over a broad spectrum of industries and
technologies, including projects such as the State Capitol Building in Tallahassee, Florida, utility company buildings, wastewater treatment plants, bridges, pumping stations, seaport terminals, international airports, hospitals department stores,
shopping centers, correctional facilities, large civic centers, hotels and resorts, schools, universities, sports stadiums apartment complexes, condominium buildings, tourism sites and theme parks.

Electric Machinery Enterprises, and its predecessors, has been in business for over 75 years. The Company acquired EME after EME had sought protection
from creditors under Chapter 11 of the United States Bankruptcy Code. In August of 2004, the Company acquired the stock of EME in exchange for 40 million shares of the Companys common stock. The Bankruptcy Court subsequently approved the
plan of reorganization for EME and that entity has successfully emerged from bankruptcy.

During the third quarter of 2005, EME expanded
into the residential electrical contracting arena, first assessing the new growth opportunity via a limited, small scale roll-out of residential services and support in the Tampa, Florida market. In response to managements evaluation of early
demand from the custom residential home building market, EME formally established Prime Power Residential, Inc., a wholly owned subsidiary in the electrical contracting business of the Company.

Substantially all of the Companys revenue is generated from electrical contracting.

Biofuels

In the second quarter of 2005, the Company formed SolarDiesel Corporation
(SDC),(formerly EarthFirst Americas Incorporated),a wholly owned subsidiary which is primarily focused on facilitating commercial scale production and distribution of biofuels produced from palm oil, soy and
rapeseed in the US, Latin America, the Caribbean and Europe. SDC has sold its biodiesel fuel to a variety of applications ranging from motor fuel to turbine fuel.

SDC is currently pursuing the establishment of its own Bio-Refinery.

Only a small percentage of total
revenues have been generated to date from biofuel sales.

Liquid Waste Technologies

The Company has developed technologies for the treatment of liquid waste products. The technologies involve the use of high temperature plasma through
which the liquid waste products are passed. The harmful properties contained in the liquid waste products are broken down at the molecular level as they pass through the plasma and a clean burning gas is produced.

No revenues have been generated to date from liquid waste technologies.



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See Management Discussion and Analysis or Plan of Operations for further discussion of the
aforementioned businesses.

Intellectual Properties

The Company has performed extensive research and development on various technologies focused on deriving solutions for liquid and solid waste problems and in creating alternative fuels. The Companys efforts have
been conducted through the work performed by its employees and consultants. The Company has developed patented technology for the CAVD Reactor and its liquid waste technologies.

Management believes that the Company owns all of the intellectual rights to commercialize and further develop its liquid and solid waste technologies.

The Company engaged outside legal counsel to review the history of the Companys development of its liquid waste technologies and the
contractual arrangements entered into by the Company with respect to such technologies. Legal counsel has advised that it believes that the Company currently possesses all of the intellectual property rights to commercialize its liquid waste
technologies and to further develop these technologies in additional applications.

Legal counsel has also reviewed in detail all aspects
of the claims and allegations made by a former consultant with respect to the underwater carbon arc technology embodied in the Companys technologies. Legal counsel also reviewed the Companys consulting agreements with the former
consultant and entities related to this individual.

Based upon its review of these agreements and the relevant law, it is the opinion of
outside legal counsel that the former consultant, or entities related to him, neither own nor control any US patents that are relevant to the Companys technologies, and have no legal standing to assert any claims as to patent infringement or
misappropriation of any trade secrets.

The former consultant and an entity affiliated with the former consultant are involved in legal
proceedings that were initiated by the Company to resolve issues of ownership.

Management believes that the Company has taken appropriate
steps to protect its intellectual property rights. However, the steps taken might not prove sufficient to prevent misappropriation of the Companys technology rights. Third-party development of similar technologies using different discoveries
remain a risk that could limit the Companys legal protection. The laws of certain foreign countries might not protect the Companys services or intellectual property rights to the same extent as do the laws of the United States.



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Third parties could claim infringement by the Company with respect to current or future uses. As the
number of entrants into the market increases, the possibility of an infringement claim against the Company might increase, and the possibility either exists that the Company could, now or in the future, inadvertently infringe on a third-partys
patent. In addition, because patent applications can take many years to allow, it is possible that the Company could, now or in the future, infringe upon a third-partys patent application now pending of which the Company is unaware. Any
infringement claim, whether meritorious or not, could consume a significant amount of managements time and attention, could result in costly litigation, cause service delays or require the Company to enter into royalty or licensing agreements
which might or might not be available on commercially acceptable terms, if at all. As a result, any claim of infringement against the Company could have a material adverse effect upon our business, financial condition or results of operations.

Research and Development

Research and
development costs incurred in 2006 and 2005 aggregated $853,034 and $582,430, respectively, and are centered on the aforementioned technologies. The CAVD plant was substantially completed in mid 2004 and allowed development to switch from the plant
process to the products produced by the plant. Extensive tests were done on the physical and chemical properties of the carbon, oil, and gas which is produced by the plant. In August 2005, the plant suffered damage from Hurricane Katrina, causing a
set back to operations. Since that time we have continued the development project as funds have been available. We now believe that we have perfected the process of commercially distilling a valuable carbon product, gas and oil from tires. We have
an enhance a reactor design and have applied for, and are applying for new patents and believe that our technology team has developed our own unique capability to produce a commodity grade carbon black substitute. We believe unique product can
replace certain grades of virgin carbon black at a competitive cost.

Competition

There are competitors to our solid waste business seeking to develop efficient means of recycling and disposing of various forms of solid and liquid
wastes, as well as the production of alternative fuels. The effect of numerous federal and state environmental regulations has been to encourage the originators of the waste, as well as governmental entities and entrepreneurial enterprises, to seek
to develop more effective and efficient solutions.

The EPA says two to three
billion scrap tires fill 2,800 landfills and stockpiles across the U.S. An additional 250 million scrap tires are generated yearly. Scrap sites are environmental hazards and security threats  they catch fire easily, producing noxious
smoke and toxic liquid waste, and they are often breeding grounds for mosquitoes and rodents. When tires are recycled, they are either shredded for highway construction or playground use, burned in kilns, or destroyed through pyrolysis  burned
in the absence of oxygen, at high temperature (around 2,200°) and high pressure. This typically destroys or degrades many valuable components (including carbon, which makes up 40% of a tire) and generates green house gases including
CO2.

Our proprietary tire processing system is unique, in that it produces a broad range of valuable
products, including steel, carbon, oil and a high energy gas with no CO2being released during the process.
Different from our



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competitors, we burn tires in a vacuum at a third of the typical pyrolysis temperature, preserving tire components and satisfying even the strictest
emissions regulations. Our process relies on a proprietary catalyst to convert tires at rapid rates. We believe our process and products position us in a recyclables market niche. We intend to compete through communication, education and
demonstration. Our CAVD plant in Mobile, Alabama is being utilized not only for demonstrations, but to also generate by-products that can be sold, sampled and tested to validate our technology. (However, no sales of by-products have occured to date)

We have limited resources and will likely need substantial infusions of capital in order to effectively commercialize our technologies.
There are no assurances that even if such financial resources can be obtained that our technology will be financially successful.

Employees

As of December 31, 2006, the Company had 253 full-time employees. Management considers its relations with its employees to be
satisfactory. None of the employees is represented by a union.

Additional information with respect to EarthFirsts businesses

EarthFirsts periodic reports filed with the Securities and Exchange Commission (the SEC), which include Form 10-KSB, Form 10-QSB, Form
8-K, and amendments thereto, may be accessed by the public free of charge from the SEC. Electronic copies of these reports can be accessed at the SECs web site at http://www.sec.gov. The public may read or obtain copies of these reports
from the SEC at the SECs Public Reference Room in Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms.



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

Our executive offices are
located at 2515 E. Hanna Ave., Tampa, Florida. This location is also occupied by EME. This lease obligation was assumed pursuant to EMEs reorganization plan for a period of two years. At present, the Company is occupying the premises on a
month to month basis. We lease and rent the real property, building, and all other improvements at this location from Hanna Properties Corp., a related party affiliated with the President of EME. This property consists of 29,680 sq. ft. of office
space, 80,320 sq. ft. of warehouse space and 26,992 sq. ft. of garage and workshop space. Monthly rental including sales tax, but excluding real estate taxes and insurances is $52,133.

Subsequent to December 31, 2006, on April 1, 2007, Prime Power Residential, Inc. (the
residential contracting division) relocated operations to 14255 49thStreet N, Building 2Clearwater, Florida. We
lease and rent the real property, building, and all other improvements at this location from Pure Fusion, Inc. This property consists of approximately 5,458 sq. ft. of office and warehouse space. The term of the lease is 4 years and 9 months
commencing on April 1, 2007 at a monthly rental including sales tax of $3,866.08 for the first eight months of the lease, and $7,732.16 commencing December 1, 2001 for the remainder.



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We own approximately 25 acres of land located at 1603 Grove Avenue, Haines City, Florida. This property
houses various office, warehousing and manufacturing buildings.

The Company leases facilities in mobile, Alabama on a month to month basis
at $4,000 per month to house its CAVD Reactor.

Investment Policies

The Company does not have any limitations on the amounts that may be invested in any one investment or type of investment. The Company has no holdings in real estate, except as described above, or real estate
mortgages and similar securities or publicly traded securities. The Company does not have any investments in persons or companies primarily devoted to such investments, and it is not the policy of the Company to make investments for the purpose of
capital gain or passive income. Presently, all available monies fund day-to-day operations.



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

We are involved in litigation
with Ruggero Maria Santilli (Santilli), The Institute for Basic Research, Inc. (IBR), and Hadronic Press, Inc. (Hadronic) concerning certain aspects of our liquid waste technologies. The matters contemplated above
will be referred to as the Hadronic Suit. Hadronic claims to own the intellectual property rights to one or more aspects of our liquid waste technologies.

Management continues to believe that we own all of the intellectual property rights necessary to commercialize and further develop our liquid and solid waste technologies without resorting to a license from any third
parties.

During 2004, we attempted to reach agreement with Santilli and his related parties to resolve the differences between the
parties. As of this date, the parties are continuing their efforts to resolve their differences.

The litigation described above does not
involve the technology we are developing in connection with our efforts for the processing of used automotive tires.

We are also involved
in disputes with vendors for various alleged obligations associated with operations that were discontinued in prior years. Several disputes involve deficiency balances associated with lease obligations for equipment acquired by us for our contract
manufacturing and BORS Lift operations that were discontinued during calendar 2000. The machinery and equipment associated with many of these obligations has been sold with the proceeds paid to the vendor or the equipment has been returned to the
vendor. Several of the equipment leasing entities claim that balances on the leases are still owed.

CNC Associates, Inc. obtained a
judgement in September of 2000 in the amount of approximately $400,000 relative to one of these deficiency balances.

On May 9, 2007, and
pursuant to Florida Statures section 56.29, the Pinellas County Circuit Court has ordered by May 19, 2007, that EarthFirst Technologies, Incorporated;

(a) turn over to CNC the EFTI treasury shares or if there are no issued treasury shares, then EFTI is directed to reissue the shares to CNC in partial satisfaction of the judgment; and

(b) turn over to the Pinellas County Sheriff, 100% of the shares of SolarDiesel Corporation , and such shares are to be sold by a publicly
advertised sheriff sale.

EarthFirst intends to file a motion for rehearing on and reconsideration of this order which will have the effect
of suspending the order until the motion is decided.

We are involved in litigation with the liquidator of Amwest Surety Company based on a
final judgment entered against Amwest in the amount of $432,471 in favor of Sunhouse Construction. Amwest is seeking recovery from Electric Machinery Enterprises, Inc. for this amount. There is no reasonable manner to determine with any degree of
certainty as to the outcome of the objection to Amwestss claim. As this claim pertains to transactions that occurred prior to EMEs bankruptcy, settlements if any would fall under the reorganization plan for unsecured creditors capping
the amount to 75% of the allowed claim, payable over 5 years. At this time, management is aggressively defending against this claim, and has not made any provision for a liability associated with it.



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Included in the balance of accrued expenses and other current liabilities is our estimate of the amount
at which the matters contemplated above will ultimately be resolved. Approximately $700,000 of the balance is attributable to the disputed matters contemplated above. While management believes the amounts recorded are adequate, there can be no
assurance that actual liabilities that may result from the resolution of these matters will not exceed recorded amounts.

The Company is
currently involved in an adversary proceeding pending in the Bankruptcy Court in the Middle District of Florida, Tampa division. The action was filed on December 23, 2003 and is entitled Electric Machinery Enterprises, Inc. vs. Hunt,
Clark/Construct Two, a Joint Venture, and Orange County (Adversary No. 03-00811). In August of 2001, EME was contracted to perform services on the construction project of Phase V of the Orlando Orange County Convention Center. During the
project, various disputes arose relative to the work required, and many unforeseen disruptions not caused by EME resulted in a severe delay in the prosecution of the work. EME completed the job, and in doing so incurred substantial costs far in
excess of those estimated. The dollar amount of the claim is approximately $9,000,000. The entire amount is disputed. EME expects to collect the full amount of this claim plus interest and attorneys fees. The defendants have asserted various
technical contract related defenses. Therefore, EME cannot estimate when the recovery, if any, is expected, as EME cannot predict whether or not Defendants will appeal any judgment entered in EMEs favor. This amount is not carried as an asset
on the balance sheet, and will only be recorded as revenue when and if the claim is favorably settled.

Other Litigation and Disputes

The Company has other litigation and disputes that arise in the ordinary course of its business.The Company has accrued amounts for which it
believes all of its disputes will ultimately be settled.



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

None.

Part II



|Item 5. | Market for Common Equity and Related Stockholder Matters
|------- | --------------------------------------------------------

EarthFirst shares trade on The National Association of Securities Dealers (NASD) OTC Bulletin Board (the Bulletin Board) under the trading symbol EFTI. The following table sets forth, for the periods
indicated, the range of high and low closing bid quotations as reported by the Bulletin Board for each quarter during the last two fiscal years.



|                                    |  |      |     |     |   |    
|----------------------------------- |  | ---- | --- | --- | - | ---
|                                    |  | High |     | Low
|Fiscal Year Ended December 31, 2005 |  |      |     |     |   |    
|First Quarter                       |  | $    | .27 |     | $ | .16
|Second Quarter                      |  |      | .30 |     |   | .17
|Third Quarter                       |  |      | .28 |     |   | .14
|Fourth Quarter                      |  |      | .31 |     |   | .17



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|                                    |  |     |  |    
|----------------------------------- |  | --- |  | ---
|Fiscal Year Ended December 31, 2006 |  |     |  |    
|First Quarter                       |  | .24 |  | .13
|Second Quarter                      |  | .19 |  | .09
|Third Quarter                       |  | .13 |  | .06
|Fourth Quarter                      |  | .15 |  | .04

On April 9, 2007, the last reported sales price for EarthFirst shares on the Bulletin Board
was $.06 per share. At April 9, 2007, the Company had approximately 447 stockholders of record. The Company estimates that there are approximately 2,500 beneficial owners of its common stock.

The Company has never paid cash dividends on its common stock and it is not expected that any such dividends will be paid in the foreseeable future. The
Company currently intends to retain any future earnings for use in the business. The payment of any future dividends on EarthFirst common stock will be determined by the Board of Directors in light of future conditions then existing, including the
financial condition of the Company, funding requirements for activities, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board.

Recent Sales of Unregistered Securities

The securities
described below were issued by the Company during the period covered by this report and were not registered under the Securities Act of 1933, as amended. Each of the transactions is claimed to be exempt from registration pursuant to Section 4
(2) of the Securities Act as transactions not involving a public offering. All of such securities are deemed to be restricted securities for the purposes of the Securities Act. All certificates representing such issued and outstanding
restricted securities have been properly legend, and stop transfer instructions have been issued to the transfer agent with respect to such securities. Except as noted, no commissions were paid in connection with any of the issuances.

DEBT CONVERSIONS OF SHAREHOLDER LOANS AND CASH INVESTMENTS

In February 2005, the Company issued 189,643,210 shares of the Companys common stock in satisfaction of amounts owed under related party promissory notes of $9,204,157.

LAURUS FINANCING

To obtain funding for general corporate
purposes we entered into agreements with Laurus Master Funds, Ltd, a Cayman Islands corporation (Laurus), pursuant to which we sold convertible debt, an option and a warrant to purchase our common stock to Laurus in a private offering
pursuant to exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The securities sold to Laurus include the following:



| |  |  | a secured convertible minimum borrowing note and a secured revolving note with an aggregate principal amount not to exceed $5,000,000;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | a secured convertible term note with a principal amount of $3,000,000;
| | - |  | ----------------------------------------------------------------------

| |  |  | a common stock purchase warrant to purchase 11,162,790 shares of our common stock, at a purchase price of $0.23 for the first 5,581,395 shares and $0.28 for any
additional shares, exercisable for a period of seven years; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | an option to purchase 24,570,668 shares of our common stock, at a purchase price equal to $0.01 per share, exercisable for a period of six years
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

At the closing of the foregoing financing from Laurus, on March 31, 2005, we received $3,000,000 in connection with
the convertible term note. In addition, we are permitted to borrow an aggregate principal amount not to exceed $5,000,000, based upon our eligible accounts receivable and inventory, pursuant to the convertible minimum borrowing note and the
revolving note. Accordingly at the closing, we received an additional $3,600,000 for an aggregate of $6,600,000 in financing from Laurus at that time. On May 15, 2005, we received an additional $1,400,000 utilizing the full amount extended by
the financing. As of December 31. 2006 the principal amount outstanding under the revolving note is $3,997,278 and the principal amount outstanding under the convertible minimum borrowing note is $1,000,000.

The above offerings and sales were exempt under Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors and transfer was restricted by our company in accordance with the requirements of the Securities Act of
1933. In addition to representations by Laurus, we have made independent determinations that Laurus is an accredited or sophisticated investor and that is was capable of analyzing the merits and risks of its investment, and that it understood the
speculative nature of their investment. Furthermore, Laurus was provided with access to our Securities and Exchange Commission filings.

ISSUANCE OF COMMON
SHARES AS STOCK BASED COMPENSATION

In August 2005, the Company issued 83,000,000 shares of common stock as stock based compensation to
entities affiliated with or controlled by John Stanton, Chairman, CEO and President, for services rendered by him from the inception of his involvement with the Company through the acquisition and reorganization of EME.



|Item 6. | Managements Discussion and Analysis or Plan of Operation
|------- | ---------------------------------------------------------

The following discussion and analysis provides information which management believes is relevant for an assessment and understanding of the results of operations and financial condition. The discussion should be read
in conjunction with the audited consolidated financial statements and notes thereto.

Electrical Contracting  Electric Machinery Enterprises

The Company performs electrical contracting and subcontracting services on commercial, residential and municipal projects primarily in
Florida and the Caribbean through its subsidiary Electric Machinery Enterprises, Inc. (EME).



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EMEs revenues are generated through three separate sources: Offshore, Domestic, and Domestic
Services.

Offshore work includes electrical contract work performed on commercial properties throughout the Caribbean. We currently have a
backlog of approximately $20 million.

Domestic work includes electrical contract work performed principally in the State of Florida. The
Company is attempting to improve profitability in this segment of its business by introducing enhanced technology in the bidding process for these contracts and in monitoring the progress with budgeted amounts as work is performed. The Company is
optimistic that these and other enhancements will enable it to be the successful bidder on an increased number of financially attractive contracts.

Domestic services include numerous small projects for electrical contract work on a time and materials basis for commercial projects located in Florida.

During calendar 2005, EME entered the market as an electrical contractor for residential real estate. Initially these services were provided on a small scale to allow the Company to evaluate the economic viability of
this market. In response to managements evaluation of early demand from the custom residential home building market, EME formally established Prime Power Residential, Inc., a wholly owned subsidiary in the electrical contracting
business of the Company, which now manages 15 actively engaged residential crews on the job throughout the State of Florida.

Catalytic Activated Vacuum
Distillation Process (CAVD) Reactors

EarthFirst developed the Catalytic Activated Vacuum Distillation Process Reactor. The
CAVD Reactor offers a unique solution to the problem of disposing of harmful solid wastes in and environmentally friendly manner and allows raw materials from the wastes to be recycled and reused.

We believe that the CAVD Reactor can be designed to process a number of harmful solid waste products. We anticipate that governmental and nongovernmental
entities who are faced with the problem of disposing of various types of solid waste products through conventional means will conclude that the CAVD Reactors can provide a superior, safe and effective means of eliminating these materials.

Initially, we are focusing on the processing of rubber tires. However, other uses are also being pursued. Such uses include the recycling
of carpet materials, the destruction of animal waste and remains, transuranic wastes (e.g. gloves, overalls, tools, etc. that have been exposed to low levels of radiation), and medical wastes.

In general, the Company processes used tires by having shredded tires added to a low pressure, heated, catalytically driven process in the CAVD Reactor.
The tires are converted to a high quality carbon and a light hydrocarbon mix that can be used as a fuel. Scrap steel and gases that can be used as a fuel are also recovered.



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Traditionally, tires have been disposed of in landfills, placed in stockpile areas, or recycled using
low-level technologies to produce products such as tire-derived fuel and mulch. Stockpiles of discarded tires are particularly vulnerable to catching fire. Fires at tire dumps are extremely difficult to extinguish and may take years to burn
themselves out. Such fires can release significant amounts of pollution into the atmosphere.

The owners of these dumping areas have long
sought a cost-effective means of disposing of the unwanted tires. We believe the CAVD Reactor provides a solution for the environmentally safe and efficient problem of the disposal of used tires.

The Companys first CAVD Reactor was constructed at a facility in Mobile, Alabama and processes shredded tires on a demonstration basis. No revenues
have been generated to date from this facility.

During processing in the CAVD Reactor, carbon, scrap steel, gas and oil are recovered and
are available for resale. The processing of a 20-pound tire yields approximately 5.5 to 8.5 pounds of carbon, 1.2 to 2 gallons of fuel oil, 12 to 16 cubic feet of gas, and .36 pounds of scrap steel. The amounts recovered depend upon the type of tire
and the length of time in the reactor.

The financial viability of the CAVD Reactor for use in processing used tires is dependant upon the
successful sale of the by-products recovered. We believe that the carbon and oil by-products represent the greatest value of this process. With current oil pricing reaching levels as high as $64 per barrel, the attractiveness of the CAVD technology
has grown beyond the prior emphasis on carbon. It is expected that the steel recovered from the process will be sold for scrap and the oil recovered can be used as an industrial oil or other fuel. Optimal operation of the CAVD Reactor may include
the use of a generator with the reactor which can utilize the gas produced from the processing to produce electricity that can be both used by the operator of the reactor and additional electricity sold to the electrical grid.

Testing of the various carbons recovered from our CAVD Reactor has led us to believe that, at the current time, the best carbon product to market is a
substitute for certain series of commodity grade carbon black.

As with most new
products, it is time consuming for the end users of the carbon to satisfy themselves as to the advantages of this product over the products that they are currently using. To hasten the acceptance of our carbon in the marketplace, the Company is
working with several potential end users who are conducting substantive testing of the carbon for use in their operations. An added advantage is that the CAVD carbon may qualify for Carbon or Green credits, because it reduces
CO2production during manufacturing and creates a recycled carbon.



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Provisional Patent Application US60/681,701 filed on May 17, 2005 and utility application
11/405,799 filed on April 17, 2006 describe the CAVD technology as a unique process for producing carbon and other products, and also contains several claims for novel components in the system. The technology is the cumulative result of seven
years of research and development.

New provisional patents are being filed based on the Companys reactor, reactor process and
by-products.

Based upon our experiences thus far, there is considerable interest in the CAVD Reactor from potential users. We believe that
delays in the creation of definitive agreements with the end users of the CAVD Reactors are waiting for the finalization of our renovated and upgraded design for our mobile reactor. We than expect our technology to gain immediate credibility in the
marketplace with both a variety of potential end users of the CAVD Reactors as well as the end users of carbon and other products recovered in the process. It is envisioned that future efforts would include work on adapting the CAVD Reactors to
process other solid waste streams such as municipal solid wastes, animal remains, and certain types of industrial waste products. However, there can be no assurance that the Company will ultimately be successful in achieving such
arrangements/agreements.

Liquid Waste Technologies

The Company is continuing to attempt to identify and implement commercially viable applications of its plasma arc converter technologies embodied in the BigSpark converter. The Companys BigSpark
plasma based technology splits apart the complex molecular bonds of water and hydrocarbon wastes to produce the clean burning, hydrogen-based fuel. BigSpark compares favorably with conventional combustion technologies used in the disposal of
liquid wastes in several significant areas. First, the waste is subjected to higher temperatures for longer periods of time (7,000 degree temperature of the plasma arc; and materials spend minutes, not seconds, in the reaction zone). Second,
BigSpark has a second stage combustion in a very high temperature oxygen flame. Third, BigSpark converters are compact and can be moved to the source of contaminated waste.

One application of the plasma arc technology that the Company has investigated involves the destruction of Poly-Chlorinated Biphenyls, commonly referred
to as PCBs. PCBs have many stable qualities that led to its use in various industrial applications before it was learned that long-term exposure to PCBs may increase the risk of cancer in humans.



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Preliminary tests have indicated that passing PCB laden liquids through a plasma arc similar to that
found in the BigSpark converters results in the destruction of the PCB molecules. While the results of such tests are encouraging, in order to be commercially successful, the technology will need to be adapted to destroy PCBs in surroundings
where such elements are commonly found and on a sufficient scale to economically address the problems faced in PCB disposal.

The Company
has also considered commercial adaptations for the plasma arc converters to develop solutions to issues involving the disposal and / or remediation of other liquid wastes including waste oils and antifreeze.

Prime Power of Tampa, Inc.

EME, a wholly owned
subsidiary of EarthFirst, and Triad Companies have consummated the formation of Prime Power of Tampa, Inc. (Prime), a strategic alliance created by the companies to jointly pursue major utility projects, large offshore projects, and/or
major design/build opportunities. Through this strategic alliance, Prime has the unique ability to address large electrical contracting projects from design through build to maintenance and support, offering a fully integrated contracting solution.
Management believes that the combination of the strengths of these two companies will create a competitive advantage when pursuing work on large projects.

SolarDiesel Corporation (formerly EarthFirst Americas, Incorporated)(Biofuels)

SolarDiesel Corporation (SDC),
(formerly EarthFirst Americas Incorporated) was originally formed to develop the market opportunities available and associated with Palm Oil as a feed stock for bio-fuels. The Company initially imported palm oil biodiesel from Central America for
research, development and resale. While the Company continues to sell biodiesel on a wholesale basis, the focus of its efforts are now geared toward the establishment of a bio-refinery capable of producing multiple products, primarily the production
of ASTM 6751 biodiesel, which can be used as a substitute for petroleum diesel in all markets.

The Company entered into a pilot program
for biodiesel use in municipal markets with the City of Coral Gables, Florida. The City has dedicated a portion of its fleet to operate using a B20 blend consisting of 20% palm oil biodiesel (purchased from SDC) and 80% petroleum diesel.
The Company provides the City with all technical support in coordination of the pilot program. Negotiations are also underway with other municipal governments and agencies for similar pilot programs toward the end of becoming a major governmental
biodiesel supplier.

The Company continues to explore the use of its CAVD technology to process vegetable feed stocks such as palm
fruit, soy beans and corn into a biofuel.



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FISCAL 2006 COMPARED TO FISCAL 2005

Revenue for the year ended December 31, 2006 increased by $3,628,185 when compared to the year ended December 31, 2005 from $41,743,320 to $45,371,505. This increase represents an 8% increase in sales volume over the
prior year.

Cost of Sales for the year ended December 31, 2006 increased by $8,710,062, or 27% when compared to cost of sales for the year
ended December 31, 2005. This increase is substantially higher than the growth in revenue causing a significant decline in gross profit. The costs associated with various jobs exceeded original estimated amounts due to estimating errors and cost
overruns associated with materials availability and idle labor.

The Companys gross profit decreased for the year ended December 31,
2006 by $5,081,877 or 53% when compared to a gross profit of $9,659,825 for the year ended December 31, 2005 as a result of significantly higher costs of sales relative to sales as discussed in the preceding paragraph.

Selling, general and administrative expenses for the year ended December 31, 2006 increased to $14,476,956 from $7,654,036 for the year ended December
31, 2005, an increase of approximately 89%. This large increase was due in part to a 2.8 million dollar bad debt expense in 2006, a 1 million dollar negotiated settlement relative to a contract performed in Grand Cayman, the expenses associated with
the start-up of the residential contracting and biodiesel businesses, and approximately $1,000,000 in warrants and options issued for services.

Impairment of an intangible asset is a charge against income for the year ended December 31, 2006, based on a declined valuation relative to the goodwill. Goodwill was determined as a component of the purchase transaction when EFTI acquired
EME in August of 2004. On an annual basis, the Company evaluates the carrying value of its intangible assets to see if the value has been impaired. In light of the losses sustained by EME during 2006 among other things, the Company incurred an
impairment charge in the amount of $9,323,152. The Company did not have an impairment charge in 2005.

The amount of related party stock
based compensation for the year ended December 31, 2005 in the amount of $18,260,000 was a one time transaction representative of compensation for the services of John Stanton, Chairman of the Board, Chief Executive Officer and President.

Direct research and development expenses for the year ended December 31, 2006 increased to $853,034 from $582,430 for the year ended
December 31, 2005, an increase of approximately 46%. This increase is reflective of an increase in spending on research and development related items pertaining to the solid waste facility in mobile, Alabama.

Gain on debt restructure decreased from $4,163,740 for the year ended December 31, 2005 to $145,684 for 2006. This decline is indicative of wrapping up
the affairs relative to EMEs bankruptcy filed in May 2003 and the related settlement of pre-petition liabilities.

Claims recovery
for the year ended December 31, 2006 in the amount of $1,100,000 is the first settlement of the claims being pursued by EME. There were no amounts reported for settlement of claims in 2005.

Miscellaneous income for the year ended December 31, 2006 and 2005, in the amounts of $215,314 and $397,071 represent non operational sources of income.

Derivative gain (loss) fluctuated from a loss of $592,521 for the year ended December 31, 2005 to a gain of $3,130,601 for the year ended
December 31, 2006. The derivative gain is associated with the Laurus credit facility and fluctuations occur normally in the fair value adjustment of the derivatives each reporting period, which result primarily from fluctuations in the
Companys stock price.

Interest expense increased from $2,760,202 for the year ended December 31, 2005 to $3,562,195 for the year
ended December 31, 2006, representing nine months in 2005 and twelve months in 2006.

Reorganization item, professional fees related
to bankruptcy and pursuit of claims expense for the years ended December 31, 2006 and 2005 in the amounts of $826,498 and $1,919,288 represent non-recurring costs associated with the preparation, presentation and implementation of the Plan of
reorganization incurred from the date of acquisition of Electric Machinery Enterprises.

Net loss increased by $187,188 to $17,872,288 for
the year ended December 31, 2006 from $17,685,100 for the year ended December 31, 2005.



FISCAL 2005 COMPARED TO FISCAL 2004

Revenue for the year ended December 31, 2005 increased by $26,428,428, as the revenues
for the year ended December 31, 2004 only reflected revenues from Electric Machinery Enterprises, Inc. from its acquisition date on August 20, 2004.

Cost of Sales for the year ended December 31, 2005 increased by $20,873,693 when compared to 2004, as the cost of sales for the year ended December 31, 2004 only reflected costs from Electric Machinery
Enterprises, Inc. from its acquisition date on August 20, 2004.

Selling, general and administrative expenses for the year ended
December 31, 2005 increased to $7,654,036 from $3,425,839 for the year ended December 31, 2004, an increase of approximately 123%. This increase was due primarily to a full year of operations for EME and WESCO, the creation of new
subsidiaries, as well as a general increase in the level of activities undertaken by the Company during 2005.

Related party stock based
compensation for the year ended December 31, 2005 in the amount of $18,260,000 was a one time transaction representative of compensation for the services of John Stanton, Chairman of the Board, Chief Executive Officer and President.

Direct research and development expenses for the year ended December 31, 2005 decreased to $582,430 from $2,474,949 for the year ended
December 31, 2004, a decrease of approximately 76%. This decrease was due primarily to the in progress research and development purchased with the acquisition of WESCO in the amount of $1,800,000 in 2004 as well as a decrease in the
the level of activities undertaken by the Company during 2005 due to the maturity of the CAVD technologies.

Gain on debt restructure
increased to $4,163,740 for the year ended December 31, 2005 from $1,298,068 for the year ended December 31, 2004. These gains are a result of the Plan of Reorganization of Electric Machinery Enterprises, Inc., which was approved by the
Bankruptcy Court during the fourth quarter of 2004. Most of the debt restructure took place in 2005.

Miscellaneous income for the year
ended December 31, 2005 and 2004, in the amounts of $397,071 and $333,214 respectively represent non operational sources of income.



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Interest expense  debt discount for the year ended December 31, 2005 represent the
amortization of the debt discount associated with the Laurus Master Fund Credit Facility. This discount is amortized over the term of the loan, which is three years. The loan was established March 31, 2005, at which time the debt discount was
determined, and the amortization of this discount commenced. The discount is being amortized using the interest method of amortization. There were no charges of this kind for the year ended December 31, 2004.

Interest expense for the year ended December 31, 2005 increased to $2,760,202 from $469,514 for the year ending December 31, 2004, an increase
of approximately 48%. This increase was due to the higher balances of debt related to the Companys borrowings from the Laurus fund as compared to the revolving line of credit loans from a related party.

Reorganization item, professional fees related to bankruptcy and pursuit of claims expense for the years ended December 31, 2005 and 2004, in the
amounts of $1,919,288 and $1,202,829 represent non-recurring expenses associated with the preparation, presentation and implementation of the Plan of Reorganization incurred from the date of acquisition of Electric Machinery Enterprises, Inc., and
the pursuit of claims.

Majority interest income for the year ended December 31, 2005, in the amount of $377 represents the net effect
of the income/expense interests of the Joint Venture Partners in the variable interest entities the Company has with Peleme, Ltd., and Prime Power of Tampa, Inc. The joint venture partner interests in the net profits of each of these companies are;
30% in Peleme, Ltd., and 49% in Prime Power of Tampa, Inc. For the year ended December 31, 2004, the majority interest expense in the amount of $430,230 represents the expense associated with the 30% interest in profits of the joint venture
partner in Peleme, Ltd. incurred from the date of acquisition of Electric Machinery Enterprises, Inc.

Net loss increased by $15,418,111 to
$17,685,100 for the year ended December 31, 2005 from $2,266,989 for the year ended December 31, 2004. This increased net loss resulted primarily from the previously discussed items, specifically the related party stock based compensation.

LIQUIDITY AND CAPITAL RESOURCES

Prior to its
acquisition of EME in late 2004, the Company experienced net losses and, as such, experienced negative operating cash flows. The Company has historically funded these negative operating cash flows with proceeds from sales of common and preferred
stock, as well as notes and convertible debentures and related party loans.

Commencing with the Companys acquisition of EME in late
2004, the Company has restructured many of EMEs liabilities with funding provided by the Laurus credit facility discussed in Note 2 as well as additional related party loans.

As discussed in Note 14, in January 2006, the Company secured a $5,000,000 line of credit with an entity related to the Companys Chairman and Chief
Executive Officer to facilitate the new biofuels business. Approximately $440,000 of this credit facility remains available at December 31, 2006.

We have experienced negative cash flows from operations of $4,043,159 during 2006 and $3,944,975 during 2005. These negative results have been accommodated in 2006 by large loans from an entity related to the
Companys Chairman, while the negative cash flows in 2005 were addressed through the Laurus credit facility.

In 2006, the Company had
a gross profit in the contracting segment of approximately $4,600,000 as compared to approximately $9,600,000 on less revenue for 2005. As most of the revenue of the Company comes from the contracting segment, this reduction in profitability is the
primary reason for the 2006 negative operating cash flows. Bad debt expense of approximately $2,800,000, a negotiated settlement in Grand Cayman of approximately $1,000,000, and several jobs not realizing the profitability originally estimated have
caused the Company difficulty in meeting cash requirements.

At December 31, 2006, the Company had a working capital deficiency of
approximately $5,000,000 as compared to a positive working capital of approximately $4,100,000 as of December 31, 2005. Trade payables have increased significantly as the result of the cash flow difficulties, including payables aggregating
approximately $4,900,000 at December 31, 2006 to two electrical parts suppliers that have historically served as major suppliers for the Company.

In evaluating the factors that caused the negative results of operations during the last two years, the Company in 2007 is improving the contracting segment to increase the quality of job estimating and implementation, as well as reducing
selling, general and administrative overhead.

While the Company believes that anticipated revenues earned during 2007 accompanied by its
restructuring efforts will be sufficient to bring profitability and a positive cash flow back to the Company, it is uncertain that these results can be achieved. Accordingly, the Company will, in all likelihood have to raise additional capital to
operate. There can be no assurance that such capital will be available when needed, or that it will be available on satisfactory terms.

As described in the report or our independent registered public accountants, the foregoing factors raise substantial doubt on the ability of the Company to continue as a going concern.



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INCOME TAXES

The Company has a net operating loss carry forward for federal income tax purposes of approximately $40,000,000 that is available to offset federal taxable income through fiscal 2024. A 100% valuation allowance has been provided on deferred
tax assets resulting from the net operating loss carry forwards discussed above.

EFFECTS OF INFLATION

Management does not believe that inflation has had a significant impact on the financial position or results of operations of the Company since its
inception.

CRITICAL ACCOUNTING POLICIES

The
preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the
basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our
reported results. We believe the following accounting policies are the most critical to us, in that they are important to the portrayal of our financial statements and they require our most difficult, subjective or complex judgments in the
preparation of our financial statements:

Revenue Recognition: The Company uses the percentage-of-completion method of accounting for contract
revenue from electrical contracts where percentage of completion is computed on the cost to total cost method. Under this method, contract revenue is recorded based upon the percentage of total contract costs incurred to date to total estimated
contract costs, after giving effect to the most recent estimates of costs to complete. Revisions in costs and revenue estimates are reflected in the period in which the revisions are determined. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined without regard to the percentage-of-completion. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that these estimates used will change
within the near term, and such changes could be material.

Stock-Based Compensation and other stock based valuation issues (derivative accounting):
We account for stock-based awards to employees and non-employees using the accounting provisions of SFAS 123R  Accounting for Share-Based Payments, which provides for the use of the fair value based method to determine compensation for all
arrangements where shares of stock or equity instruments are issued for compensation. Fair values of equity securities issued are determined by management based predominantly on the trading price of the Companys common stock. The values of
these awards are based upon their grant-date fair value. That cost is recognized over the period during which the employee is required to provide service in exchange for the award.

We use the Black-Scholes options-pricing model to determine the fair value of stock option and warrant grants. We also use the Black Scholes option pricing model as the primary basis for valuing our derivative
liabilities at each reporting date (both embedded and free-standing derivatives). The underlying assumptions used in this determination are primarily the same as are used in the determination of stock-based compensation discussed in the previous
paragraph except contractual lives of the derivative instruments are utilized rather than expected option terms as discussed in the previous paragraph.



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Impairment of Goodwill and Long-Lived Assets: In accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), and Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144), the Company reviews its non-amortizable (indefinite lived) long-lived assets (goodwill) for impairment annually, or sooner whenever events or changes in circumstances indicate the carrying amounts of such assets may not be
recoverable. Other depreciable or amortizable (finite lived) assets are reviewed when indications of impairment exist. Upon such an occurrence, recoverability of these assets is determined as follows. For long-lived assets that are held for use, the
Company compares the forecasted undiscounted net cash flows to the carrying amount. If the longlived asset is determined to be unable to recover the carrying amount, than it is written down to fair value. For long-lived assets held for sale, assets
are written down to fair value. Fair value is determined based on discounted cash flows, appraised values or managements estimates, depending upon the nature or the assets. Intangibles with indefinite lives are tested by comparing their
carrying amounts to fair value. Impairment of goodwill is tested using a two step method. The first step is to compare the fair value of the reporting unit to its book value, including goodwill. If the fair value of the unit is less than its book
value, the Company than determines the implied fair value of goodwill by deducting the fair value of the reporting units net assets, exclusive of goodwill, from the fair value of the reporting unit to determine the implied value of goodwill.
If the book value of goodwill is greater than its implied fair value, the Company writes down goodwill to its implied fair value. The Companys goodwill relates to the acquisition of Electric Machinery Enterprises, Inc.

Derivative Financial Instruments:

The Company generally does not use
derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. However, certain other financial instruments, such as warrants and embedded conversion features that
are indexed to the Companys common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such
instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and
subsequently adjusted to fair value at the close of each reporting period. See Note 4 to the financial statements for discussion of valuation techniques regarding our derivative instruments.



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The caption Derivative Financial Instruments consists of (i) the fair values associated with derivative features
embedded in the Laurus Convertible Secured Term Notes and (ii) the fair values of the detachable warrants and options that were issued in connection with those financing arrangements.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting
Standards Board issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not effect
stockholders equity at December 31, 2006.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a
fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of SFAS 157 to materially impact its financial position
or results of operations.

In September, 2006 the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on the process of quantifying financial statement misstatements, advising companies to use both a balance sheet
(iron curtain) and an income statement (rollover) approach when quantifying and evaluating the materiality of a misstatement. The iron curtain approach quantifies a misstatement based on the effects of correcting the
misstatement existing in the balance sheet at the end of the reporting period. The rollover approach quantifies a misstatement based on the amount of the error originating in the current period income statement, including the reversing effect of
prior year misstatements. The use of this method can lead to the accumulation of misstatements in the balance sheet. Under the guidance of SAB 108, companies will be required to adjust their financial statements if either the iron curtain or
rollover approach results in the quantification of a material misstatement. Previously filed reports would not be amended, but would be corrected the next time the company files prior year financial statements. Companies are allowed to record a
one-time cumulative effect adjustment to correct errors in prior years that previously had been considered immaterial based on their previous approach. SAB 108 is effective for the Company upon issuance of its Fiscal 2007 annual financial
statements. However, early application of SAB 108 is permitted for interim periods prior to the issuance of the annual financial statements. The Company does not believe this standard will have any effect on its financial statements.

In February 2007, the Financial Accounting Standards Board issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities(FAS 159), which includes an amendment to FASB Statement No. 115. The statement permits entities to choose, at specified election dates, to measure eligible financial assets and financial liabilities at fair value (referred to as the fair
value option) and report associated unrealized gains and losses in earnings. Statement 159 is effective for fiscal years beginning after November 15, 2007. As of December 31, 2006, the Company has not determined the effect that the fair value
option, if elected, will have on the consolidated financial position or results of operations.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

Our disclosure and analysis in this 2006 Form 10-KSB contain some forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995 (the Act), that set forth anticipated results based on managements plans and assumption. From time to time, we also provide forward-looking statements in other materials we release to the public as
well as oral forward-looking statement. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. We have tried, wherever possible, to identify such statements by using
words such as anticipate, estimate, expect, project, intend, plan, believe, will, and similar expressions in connection with any discussion of future
operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals or acceptance, future performance or results of current and anticipated products, sales efforts,
expenses, the outcome of contingencies, such as legal proceedings, and financial results. These statements are not guarantees of future performance and the Company has no specific intention to update these statements.

Forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause actual results, performance, or
achievements of the Company to materially differ from any future results, performance, or achievements expressed or implied by such forward-looking statements and to vary significantly from reporting period to reporting period. Actual results



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may materially differ from those projected in the forward  looking statements as a result of certain risks and uncertainties set forth in this report
including, but not limited to the viability of the solid waste technologies in reclaiming the raw materials from used automotive tires in an environmentally acceptable manner, the ability to develop markets for the by products reclaimed in this
process, environmental remediation and alternative fuel markets for the Companys plasma arc technology as well as the proprietary rights to the Companys intellectual property and the Companys ability to obtain additional financing
to continue operations. Although management believes that the assumptions made and expectations reflected in the forward  looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual future results will not be different from the expectations expressed in this report. You should understand that it is not possible to predict or identify all factors affecting risk. Consequently, you should not consider the
risks and assumptions identified in this report to be a complete discussion of all potential risks or uncertainties affecting the Company.

OFF BALANCE
SHEET ARRANGEMENTS AND CONTRACTURAL OBLIGATIONS

The following chart summarizes our contractual payment obligations as of December 31,
2006. The long-term and short-term debts reflected as liabilities on our balance sheet as of December 31, 2006 include the effect of derivative financial instrument reporting.



|                 |  |                        |           |                 |   |                    |  |                 |         |       |   |   |  |   |          
|---------------- |  | ---------------------- | --------- | --------------- | - | ------------------ |  | --------------- | ------- | ----- | - | - |  | - | ---------
|                 |  | Payments Due By Period
|                 |  | Less thanOne Year      |           | One toTwo Years |   | Three toFive Years |  | AfterFive Years |         | Total
|Long-term debt   |  | $                      | 5,220,342 |                 | $ | 1,300,000          |  | $               |        |       | $ |  |  | $ | 6,520,342
|Operating leases |  |                        | 232,911   |                 |   | 197,273            |  |                 | 164,651 |       |   |  |  |   | 594,835  
|                 |  |                        |           |                 |   |                    |  |                 |         |       |   |   |  |   |          
|                 |  | $                      | 5,453,253 |                 | $ | 1,497,273          |  | $               | 164,651 |       | $ |  |  | $ | 7,115,177
|                 |  |                        |           |                 |   |                    |  |                 |         |       |   |   |  |   |          



|ITEM 7. | FINANCIAL STATEMENTS
|------- | --------------------

The consolidated 2006 financial
statements for the Company, including the notes thereto, together with the report thereon of Aidman, Piser & Company, P.A. is presented beginning at page F-1.



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

There have been no changes in or disagreements with accountants on accounting and financial disclosure issues with respect to any financial statements for the Company for 2006 or 2005. Aidman, Piser &
Company, P.A. has served as the independent public accountants for the Company for the 2006 and 2005 audited financial statements.



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|ITEM 8A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

As required by Rule 13a-15 under
the Securities Exchange Act of 1934, within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures. This
evaluation was carried out under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer / Chief Financial Officer, who concluded that the Companys disclosure controls
and procedures are effective. There have been no significant changes in the Companys internal control or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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



|ITEM 8B. | OTHER INFORMATION
|-------- | -----------------

None.

PART III



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

The executive officers, directors and other significant employees of the Company, and their ages and positions, are as follows:



|                       |  |     |  |                                     
|---------------------- |  | --- |  | ------------------------------------
|Name of Individual     |  | Age |  | Position                            
|John D. Stanton        |  | 58  |  | Chairman of the Board, President and
|                       |  |     |  | Chief Executive Officer             
|                       |  |    
|Jaime Jurado           |  | 72  |  | Vice Chairman                       
|                       |  |    
|Nicholas R. Tomassetti |  | 71  |  | Director                            
|                       |  |    
|Dr. David E. Crow      |  | 62  |  | Director                            
|                       |  |    
|Barry Markowitz        |  | 65  |  | Director                            
|                       |  |    
|Frank W. Barker, Jr.   |  | 51  |  | Chief Financial Officer             



22



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##### Table of Contents

The following is a brief description of the professional experience and background of the directors and officers.

John D. Stanton assumed the role of Chairman of the Board of Directors, President and Chief Executive Officer on May 15, 2000 in
connection with the acquisition of SAC-1. On July 30, 2001, Mr. Stanton brought in James V. Mahoney to assume the role of President and Chief Executive Officer but resumed these roles upon Mr. Mahoneys resignation in August 2002
until the appointment of Leon H. Toups as President on October 9, 2003. From 1987 through the present, Mr. Stanton has served as the President and Chief Executive Officer of Florida Engineered Construction Products, Corporation. Since the
early 1990s, Mr. Stanton has been, and continues to be, involved in turn-around management for financially distressed companies, providing both management guidance and financing. In 1981, Mr. Stanton assumed the role of Chief
Financial Officer for Florida Engineered Construction Products, Corporation, a privately held manufacturer of residential and commercial construction products, located in Tampa, Florida. Mr. Stanton worked as an auditor with the international
professional services firm that is now known as Ernst & Young, LLP from 1973 through 1981. Mr. Stanton, a Vietnam veteran of the United States Army, graduated from the University of South Florida with a Bachelors Degree in Marketing
and Accounting in 1972, and with an MBA in 1973. Mr. Stanton earned the designation of Certified Public Accountant in 1974 and was a Sells Award winner in the CPA examination. Mr. Stanton also serves on the Board of Directors of MTS
Medication Technologies, Inc. (MPP), Online Sales Strategies, Inc. (OSSG), Hybrid Fuel Systems, Inc. (HYFS), PowerCerv Corporation (PCRV), and Nanobac Pharmaceuticals, Inc. (NNBP).

Jaime Jurado joined the Board of Directors with the acquisition of EME. Mr. Jurado began working with EME in 1957 after serving as an electronics
specialist in the United States Army. Mr. Jurado became president of EME in 1977 and has served in that capacity ever since. Through Mr. Jurados leadership, EME grew from $1,000,000 in annual sales to more than $90,000,000 in 1998,
and has helped to establish a niche in the Caribbean, Central and South American Markets.

Nicholas R. Tomassetti joined the Board of
Directors effective August 1, 2001. Mr. Tomassetti has served as the President and Chief Operating Officer of Airbus Industries of North America, Inc. Mr. Tomassettis former business associations include serving as Vice
President and General Manager of Twin-Jet Business Development for McDonnell Douglas Corporation and Vice President of Pratt & Whitneys Commercial Engine Business Organization. Mr. Tomassetti served with Pratt & Whitney
for over 30 years during which time he held various positions including Vice President, Commercial Engine Organization and Vice President Sales and Service, Commercial Products Division. In 1987, Mr. Tomassetti was tapped to serve as President
for the International Aero Engines, a five nation consortium formed to develop and market the LAE V2500 aircraft engine. Mr. Tomassetti earned a degree in Engineering from the General Motors Institute and a Masters Degree in Engineering
from MIT. Mr. Tomassetti also serves on the Board of Directors of Pinnacle Airlines Corp. (PNCL)

Dr. David E. Crow first
joined the Company through an appointment to our Technical Advisory Board in 2002 after he left his position as Senior Vice President  Engineering for UTC-Pratt & Whitney. Dr. Crow was responsible for all technical aspects of
commercial and military gas



23



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turbine and rocket products. Dr. Crow spent some time working at G.M. Research improving automotive gas turbine combustors to meet stricter emission
standards. Much of his career has been devoted to improving advanced combustion technology with special emphasis on the fluid dynamic characteristics of gases under pressure and at higher temperatures. His work has lead to a number of patents and
special honorary recognitions. Dr. Crow earned a Bachelors Degree in Mechanical Engineering form the University of Missouri-Rolla, a Masters Degree from Rensselaer Polytechnic Institute, and his PhD Degree from the University of Missouri-Rolla.

Barry G. Markowitz was appointed to the Board of Directors on October 3, 2005. Mr. Markowitz founded DTE Energy Services in 1994
and served as its President from 1994 through 2004, and expanded it to include diversified energy investments (40 projects/facilities) in power generation, on-site energy, and coal-based fuels processing. The company developed, acquired, built,
owned and operated businesses generating over $1 billion in annual revenue and $200 million in net income after taxes. After leaving DTE Energy Services in 2004, Mr. Markowitz worked as an independent consultant. Mr. Markowitz was awarded
a Bachelor of Civil Engineering and Master of Business Administration by City College of New York. On May 4, 2007 Mr. Markowitz resigned his position on the board of directors.

Frank W. Barker, Jr. is a Certified Public Accountant licensed to practice in the State of Florida, and has been in practice since 1978. He was
co-founder of the accounting firm of Peel, Barker, Schatzel & Wells, PA in 1979, and went on to form the consulting firm of Frank W. Barker, Jr., CPA in 1993. Mr. Barker has been providing assistance to us as an independent consultant
since May of 2000. From 1993 until the present Mr. Barker has also been providing services as an independent consultant to various other entities in connection with their design and implementation of reorganization strategies. Mr. Barker
received a B.A. in Accounting and Finance from the University of South Florida, Tampa, Florida in 1978

AUDIT COMMITTEE

The Companys Board of Directors currently does not have an Audit Committee.

COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT

Section 16 (a) of the Securities Exchange
Act of 1934 requires the Companys officers, directors and persons who own more than ten percent of the Companys Common Stock, to file reports of ownership and reports of changes in ownership of common stock. Officers, directors and
greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16 (a) forms they file.

Specific due dates for such reports have been established by the Commission and the Company is required to disclose any failure to file reports by such dates. The Company believes that during the fiscal year ended
December 31, 2005, its officers, directors and greater than ten percent stockholders have failed to comply with applicable Section 16(a) filing requirements.



24



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##### Table of Contents

|ITEM 10. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The following summary compensation
table sets forth certain information concerning compensation paid to our Chief Executive Officer and our four most highly paid executive officers (the Named Executive Officers) whose total annual salary and bonus for services rendered in
all capacities for the year ended December 31, 2006 was $100,000 or more.



|                                                                              |  |      |  |        |         |       |   |             |  |              |   |                                      |   |                                                                        |  |                       |   |       |   |   |  |   |        |  |   |        
|----------------------------------------------------------------------------- |  | ---- |  | ------ | ------- | ----- | - | ----------- |  | ------------ | - | ------------------------------------ | - | ---------------------------------------------------------------------- |  | --------------------- | - | ----- | - | - |  | - | ------ |  | - | -------
|SUMMARY COMPENSATION TABLE - 2006                                            
|                                                                              |  |      |  |        |         |       |   |             | 
|Name and Principal Position                                                   |  | Year |  | Salary |         | Bonus |   | StockAwards |  | OptionAwards |   | Non-EquityIncentive PlanCompensation |   | Change in Pension Valueand Non-Qualified DeferredCompensation
Earnings |  | All OtherCompensation |   | Total
|John D. Stanton, Chairman of the Board, Chief Executive Officer and President |  | 2006 |  | $      | 1,000   |       | $ |            |  | $            |  |                                      | $ |                                                                       |  | $                     |  |       | $ |  |  | $ | 8,000  |  | $ | 9,000  
|                                                                              |  |      |  |        |         |       |   |             | 
|Leon H Toups, Director and former President (Deceased)                        |  | 2006 |  | $      | 108,000 |       | $ |            |  | $            |  |                                      | $ |                                                                       |  | $                     |  |       | $ |  |  | $ | 6,000  |  | $ | 114,000
|                                                                              |  |      |  |        |         |       |   |             | 
|Jaime Jurado, Vice Chairman                                                   |  | 2006 |  | $      | 187,044 |       | $ |            |  | $            |  |                                      | $ |                                                                       |  | $                     |  |       | $ |  |  | $ | 8,000  |  | $ | 195,044
|                                                                              |  |      |  |        |         |       |   |             | 
|Frank W. Barker, Jr, Chief Financial Officer                                  |  | 2006 |  | $      | 151,000 |       | $ |            |  | $            |  |                                      | $ |                                                                       |  | $                     |  |       | $ |  |  | $ |       |  | $ | 151,000
|                                                                              |  |      |  |        |         |       |   |             |  |              |   |                                      |   |                                                                        |  |                       |   |       |   |   |  |   |        |  |   |        
|                                                                              |  |      |  | $      | 447,044 |       | $ |            |  | $            |  |                                      | $ |                                                                       |  | $                     |  |       | $ |  |  | $ | 22,000 |  | $ | 469,044
|                                                                              |  |      |  |        |         |       |   |             |  |              |   |                                      |   |                                                                        |  |                       |   |       |   |   |  |   |        |  |   |        



|                                                        |  |                     |  |                       |         |                             |   |                               |  |              |            |  |   |  |   |   |  |   |  
|------------------------------------------------------- |  | ------------------- |  | --------------------- | ------- | --------------------------- | - | ----------------------------- |  | ------------ | ---------- |  | - |  | - | - |  | - | -
|SUMMARY COMPENSATION TABLE - 2005 and 2004             
|                                                        |  |                     |  |                       |        
|                                                        |  |                     |  |                       |         |                             |   | Long-term Compensation Awards |  | Payouts     
|                                                        |  | Annual Compensation |  | RestrictedStock Award |         | SecuritiesUnderlyingOptions |   | LTIPPayouts                   |  | AllOtherComp
|Name and Principal Position                             |  | Year                |  | Salary                |         | Bonus                       |   |                               |  |             
|John D. Stanton, chairman of the Board, Chief Executive |  | 2005                |  | $                     | 1,000   |                             | $ |                              |  | $            | 18,260,000 |  |  |  | $ |  |  | $ | 
|Officer and President (1)(2)                            |  | 2004                |  | $                     | 1,000   |                             | $ |                              |  | $            |           |  |  |  | $ |  |  | $ | 
|Jaime Jurado                                            |  | 2005                |  | $                     | 188,143 |                             | $ |                              |  | $            |           |  |  |  | $ |  |  | $ | 
|Vice Chairman                                           |  | 2004                |  | $                     | 64,764  |                             | $ |                              |  | $            |           |  |  |  | $ |  |  | $ | 
|Leon H. Toups, Director and former President (1)(3)     |  | 2005                |  | $                     | 156,000 |                             | $ |                              |  | $            |           |  |  |  | $ |  |  | $ | 
|(deceased August 2006)                                  |  | 2004                |  | $                     | 132,000 |                             | $ |                              |  | $            |           |  |  |  | $ |  |  | $ | 
|Frank W. Barker, Jr.                                    |  | 2005                |  | $                     | 100,000 |                             | $ |                              |  | $            |           |  |  |  | $ |  |  | $ | 
|Chief Financial Officer                                 |  |                     |  |                       |         |                             |   |                               |  |              |            |  |   |  |   |   |  |   |  

---

|(1) | Mr. Stanton assumed the role of Chief Executive Officer and President as of May 16, 2000. Prior to this date, Mr. Stanton was not employed by the
Company. Effective August 1, 2001, Mr. Stanton relinquished the role of Chief Executive Officer and President retaining his role as the Chairman of the Board of Directors. Mr. Stanton resumed his role as Chief Executive Officer and
President upon Mr. Mahoneys resignation in August 2002. Mr.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



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##### Table of Contents

| | Stanton relinquished the role of President on October 9, 2003 with the appointment of Leon H. Toups. On February 13, 2006 Mr. Stanton resumed
the roles of Chief Executive Officer and President.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | During 2001, Mr. Stanton was granted options to acquire 1,533,800 shares of the Companys stock at $.195 per share
|--- | ------------------------------------------------------------------------------------------------------------------

|(3) | Mr. Toups assumed the role of President effective October 9, 2003, and on March 1, 2004 commenced receiving annual compensation of $156,000. Prior to that date,
Mr. Toups received compensation from other entities associated with Mr. Stanton. On February 13, 2006 Mr. Toups stepped down as Chief Executive Officer and President.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Mr. Jurado assumed the position of Vice Chairman after the acquisition of Electric Machinery Enterprises, Inc. Prior to that, Mr. Jurado held the position of Electric
Machinery Enterprises, Inc. The compensation stated for 2004 is that amount incurred from the date of acquisition.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Mr. Barker assumed the position of Chief Financial Officer on May 11, 2005, and the compensation stated for 2005 is the amount incurred from that date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

No stock options were issued during calendar 2005 or 2004 to any of the individuals identified in the table above.

The following table summarizes the options awards granted to each of the named executive officers identified above in the summary compensation table as of
December 31, 2006. No stock options were exercised in 2006.



|                                             |  |                                                               |  |                                                                |  |                                                                                             |  |                         |       |                      |            |                                                         |   |                                                                 |   |                                                                                                    |  |                                                                                                                    |  |  
|-------------------------------------------- |  | ------------------------------------------------------------- |  | -------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | -------------------- | ---------- | ------------------------------------------------------- | - | --------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | -
|OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|                                             |  |                                                              
|                                             |  | OPTION AWARDS                                                 |  | STOCK AWARDS                                                  
|Name                                         |  | Number ofSecuritiesUnderlyingUnexercisedOptions, #Exercisable |  | Number ofSecuritiesUnderlyingUnexercisedOptions #Unexercisable |  | Equity Incentive Plan Awards:Number of SecuritiesUnderlying UnexercisedUnearned Options (#) |  | OptionExercisePrice ($) |       | OptionExpirationDate |            | Number ofShares or Unitsof Stock ThatHave NotVested (#) |   | Market Value of Sharesor Units of Stock ThatHave Not Vested ($) |   | Equity Incentive PlanAwards: Number ofUnearned Shares,Units or Other RightsThat Have
NotVested (#) |  | Equity Incentive PlanAwards: Market orPayout Value ofUnearned Shares, Unitsor Other Rights
ThatHave Not Vested (#)
|John D. Stanton                              |  | 1,533,800                                                     |  |                                                               |  |                                                                                            |  | $                       | 0.195 |                      | April 2011 |                                                         |  |                                                                 | $ |                                                                                                   |  |                                                                                                                   |  | 
|Leon H. Toups                                |  |                                                              |  |                                                               |  |                                                                                            |  | $                       |      |                      |            |                                                         |  |                                                                 | $ |                                                                                                   |  |                                                                                                                   |  | 
|Jaime Jurado                                 |  |                                                              |  |                                                               |  |                                                                                            |  | $                       |      |                      |            |                                                         |  |                                                                 | $ |                                                                                                   |  |                                                                                                                   |  | 
|Frank W. Barker, Jr.                         |  |                                                              |  |                                                               |  |                                                                                            |  | $                       |      |                      |            |                                                         |  |                                                                 | $ |                                                                                                   |  |                                                                                                                   |  | 

The following table summarizes Director Compensation for the members of the Board during 2006. The amounts of
compensation included in this table are also included in the Summary Compensation Table for those named executive officers included in that table.



|                      |  |                                |       |             |   |              |  |                                      |  |                                                                          |  |                           |  |       |        |  |   |       
|--------------------- |  | ------------------------------ | ----- | ----------- | - | ------------ |  | ------------------------------------ |  | ------------------------------------------------------------------------ |  | ------------------------- |  | ----- | ------ |  | - | ------
|DIRECTOR COMPENSATION
|                      |  |                                |       |             |   |              | 
|Name                  |  | Fees Earned or Paid inCash ($) |       | StockAwards |   | OptionAwards |  | Non-EquityIncentive PlanCompensation |  | Chane in Pension Value andNonqualified DeferredCompensation Earnings ($) |  | All OtherCompensation ($) |  | Total
|John Stanton          |  | $                              | 8,000 |             |   |              |  |                                      |  |                                                                          |  |                           |  |       |        |  | $ | 8,000 
|Jaime Jurado          |  | $                              | 8,000 |             |   |              |  |                                      |  |                                                                          |  |                           |  |       |        |  | $ | 8,000 
|Leon Toups            |  | $                              | 6,000 |             |   |              |  |                                      |  |                                                                          |  |                           |  |       |        |  | $ | 6,000 
|Nicholas Tomassetti   |  | $                              | 5,500 |             |   |              |  |                                      |  |                                                                          |  |                           |  |       |        |  | $ | 5,500 
|David E. Crowe        |  | $                              | 7,500 |             |   |              |  |                                      |  |                                                                          |  |                           |  |       |        |  | $ | 7,500 
|Barry Markowitz(1)    |  | $                              | 8,000 |             | $ | 36,250       |  |                                      |  |                                                                          |  |                           |  | $     | 32,500 |  | $ | 76,750

---

|(1) | - On March 23, 2006, Barry Markowitz was issued 250,000 shares of restricted common shares for consulting services pursuant to a consulting agreement. In addition he received
$32,500 as a part of that agreement. Mr. Markowitz resigned as a Director in May 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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EMPLOYMENT AGREEMENTS

We
have no employment agreements with any ou our executive officers, who serve at the discretion or our Board of directors and hold office until their successor is elected and qualified or until their earlier resignation or removal.



|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- | --------------------------------------------------------------

The following table sets forth certain information regarding ownership of the Companys common stock as of April 9, 2007, 2006 by each person known to us to own beneficially more than 5% of the outstanding common stock of the
Company, by each person who is a director, by each person listed in the Summary Compensation Table and by all directors and officers as a group.

The information reflected in the following table was furnished by the persons listed therein. The calculations of the percent of shares beneficially owned are based on 604,260,294 shares of common stock outstanding on April 9, 2007
plus, with respect to each such person, the number of additional shares that will be outstanding upon exercise of the warrants and options exercisable within sixty (60) days set forth herein.



|                                                                      |  |                      |  |                    
|--------------------------------------------------------------------- |  | -------------------- |  | -------------------
|Name and Address of Beneficial Owner                                  |  | Beneficial Ownership |  | Percentage of Class
|John D. Stanton P.O. Box 24567 Tampa, Florida 33623                   |  | 50,160,000(1)        |  | 8.30%              
|                                                                      |  |                     
|Jaime Jurado 2515 E Hanna Ave Tampa, Fl 33610                         |  | 39,377,897(3)        |  | 6.52%              
|                                                                      |  |                     
|Nicholas R. Tomassetti 853 Vanderbilt Beach Rd. Naples, Florida 34108 |  | 1,000,000            |  | .17%               
|                                                                      |  |                     
|David E Crow 2515 E Hanna Ave Tampa, Fl 33610                         |  | 600,000              |  | .10%               
|                                                                      |  |                     
|Barry Markowitz 2515 E Hanna Ave Tampa, Fl 33610                      |  | 500,000              |  | .08%               
|                                                                      |  |                     
|Frank W. Barker, Jr. 10396 57th Way North Pinellas Park, Fl 33782     |  | 1,500,000            |  | .25%               



27



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##### Table of Contents

|                                                                           |  |                |  |       
|-------------------------------------------------------------------------- |  | -------------- |  | ------
|Ralph W. Hughes Revocable Family Trust P.O. Box
24567 Tampa, Florida 33623 |  | 32,016,719(2)  |  | 5.30% 
|                                                                           |  |               
|Stone Enclosure, Inc. P.O. Box 24567 Tampa, Florida 33623                  |  | 50,731,070(2)  |  | 8.4%  
|                                                                           |  |               
|Wade, Inc. of Tampa Bay P.O. box 18341 Tampa, Florida 33679                |  | 50,731,070(2)  |  | 8.4%  
|                                                                           |  |               
|Denoument Strategies, Inc. P.O. Box 24567 Tampa, Florida 33623             |  | 80,173,120(2)  |  | 13.27%
|                                                                           |  |               
|Bunker Positioning, Inc. P.O. Box 24567 Tampa, Florida 33626               |  | 41,000,000(2)  |  | 6.79% 
|                                                                           |  |               
|Sic Semper Tyrannis, Incorporated P.O. Box 24567 Tampa, Florida 33623      |  | 120,000,000(2) |  | 19.86%
|                                                                           |  |                |  |       
|All Officers and Directors (Seven persons)                                 |  | 435,773,157    |  | 72.12%

---

|(1) | Includes options to purchase 1,533,800 shares of Common Stock at $.195 per share.
|--- | ---------------------------------------------------------------------------------

|(2) | Includes all shares owned by entities with which Mr. Stanton and the Ralph W. Hughes revocable family trust are affiliated. Of these affiliated entities, Stone Enclosure, Inc.,
Wade, Inc., Denoument Strategies, Inc. Bunker Positioning, Inc., and Sic Semper Tyrannis, Incorporated each own shares in EFTI in excess of five percent of the Companys outstanding common shares as of December 31, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 12,688,949 shares owned by spouse.
|--- | -------------------------------------------



|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|-------- | -----------------------------------------------

In
December 2000 and again in January 2003, we entered into multiple revolving line of credit promissory notes with Florida Engineered Construction Products Corporation, an entity in



28



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##### Table of Contents

which John Stanton is a majority shareholder, secured by all of our assets. The amount of the December 15, 2000 agreement was $2,500,000 at the time it
was made, and the amount of the January 28, 2003 agreement was $2,500,000 at the time it was made. Each revolving note was a demand loan, which meant that the lender could demand full repayment of the loan at any time. The promissory notes
related to each revolving line of credit merely provided for a loan up to a stated amount. There was no obligation on the part of the related party to make any loans pursuant to these agreements if the loan balance was less than the stated amount.
There was no obligation on the part of the related parties to make any additional loans.

Historically, the related party lender has
periodically agreed to convert portions of the loan balances into shares of our common stock. During 2004, the related party converted $5,334,010 of these notes into shares of our common stock.

As of December 31, 2004, we owed $6,672,519 pursuant to these agreements. Subsequent to December 31, 2004, additional loans were made under
these notes to help secure the outcome of the reorganization of EME. On February 23, 2005 the full balance of notes payable to related parties was converted into 189,643,210 shares of our common stock, and these agreements were cancelled.

The Company leases and rents the real property, building, and all other improvements located at 2515 E Hanna Avenue, Tampa, Florida 33610
from Hanna Properties Inc., a related party affiliated with Jaime Jurado, the President of EME. Mr. Jurado owns 45.425% of the common stock of Hanna Properties, Inc. This property consists of 29,680 sq. ft. of office space, 80,320 sq. ft. of
warehouse space and 26,992 sq. ft. of garage and workshop space. Monthly rental including sales tax, but excluding real estate taxes and insurances is $52,133. This lease obligation was assumed pursuant to EMEs reorganization plan for a period
of two years, at which time EarthFirst had the option to re-evaluate. The facilities are currently leased on a month to month basis. This location is the corporate headquarters of EarthFirst Technologies Incorporated and its subsidiaries.

On August 29, 2005, the Company issued 83,000,000 shares of common stock as stock based compensation to entities affiliated with or
controlled by John Stanton, Chairman of the Board, for services rendered from the inception of his involvement with the Company through the acquisition and reorganization of EME. Included in this issuance were those shares entitled to be issued by
EFTI as a plan proponent to the EME bankruptcy, and authorized by the Fourth Amended Plan of Reorganization of EME pursuant to Section 1145 of the Bankruptcy Code. Compensation expense associated with this transaction, calculated based upon the
market price of the Companys stock on the date of grant was $18,260,000.

In January 2006, the Company, through its subsidiary
SolarDiesel Corporation (formerly EarthFirst Americas, Incorporated), entered into a revolving line of credit promissory note in the amount of $3,000,000 with US Sustainable Energy Corp., an entity related to John Stanton, the
Companys Chairman of the Board, Chief Executive Officer, and President. In June 2006, the amount of the revolving line of credit promissory note was increased to $5,000,000, and the terms were modified to require no payments until January
2009. The Promissory note accrues interest at the rate of 6%. Simultaneously with the execution of the promissory note, the Company entered into a security agreement pledging as collateral all of the Companys right title and interest in and to
all Palm Oil and Palm Methyl ester Products, and any and all assets associated with the biofuels business of SolarDiesel Corporation. As of December 31, 2006, the balance including accrued interest was $4,561,660.



29



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##### Table of Contents

|ITEM 13. | EXHIBITS.
|-------- | ---------

FINANCIAL STATEMENTS

EarthFirst Technologies, Incorporated



|                                                                                                        |  |    
|------------------------------------------------------------------------------------------------------- |  | ---
|Index to financial statements:                                                                          |  |    
|                                                                                                        | 
|Report of Independent Registered Public Accounting Firm  Aidman, Piser & Company, P.A.                 |  | F-1
|                                                                                                        | 
|Consolidated Balance Sheet as of December 31, 2006                                                      |  | F-2
|                                                                                                        | 
|Consolidated Statements of Operations for the years ended December 31, 2006 and 2005                    |  | F-3
|                                                                                                        | 
|Consolidated Statement of Stockholders Equity (Deficit) for the years ended December 31, 2006 and 2005 |  | F-4
|                                                                                                        | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005                    |  | F-5
|                                                                                                        | 
|Notes to Consolidated Financial Statements                                                              |  | F-7

Other Exhibits:



|      |  |                                                                                                                                                                
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Articles of Amendment to Articles of Incorporation filed with the Florida Secretary of State on May 24, 2005. (*****)                                          
|      | 
|3.2   |  | By-Laws of the Company. (*)                                                                                                                                    
|      | 
|3.3   |  | Articles of Amendment to Articles of Incorporation filed with the Florida Secretary of State on November 24, 1998. (**)                                        
|      | 
|3.4   |  | Articles of Amendment to Articles of Incorporation filed with the Florida Secretary of State on March 30, 1999. (**)                                           
|      | 
|3.5   |  | Articles of Amendment to Articles of Incorporation filed with the Florida Secretary of State on June 26, 2000. (***)                                           
|      | 
|3.6   |  | Articles of Amendment to Articles of Incorporation filed with the Florida Secretary of State on February 28, 2001. (***)                                       
|      | 
|3.7   |  | Articles of Amendment to Articles of Incorporation filed with the Florida Secretary of State on April 30, 2004. (****)                                         
|      | 
|31.1  |  | Certification of the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|      | 
|31.2  |  | Certification of the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|      | 
|32.1  |  | Certification of the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|      | 
|32.2  |  | Certification of the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|      |  |                                                                                                                                                                
|*     |  | Previously filed as Exhibits to, and incorporated by reference from, the Companys 1997 Form 10-KSB on March 11, 1998.                                         
|**    |  | Previously filed as Exhibits to, and incorporated by reference from, the Companys 1999 Form 10-KSB on May 12, 2000.                                           
|***   |  | Previously filed as Exhibits to, and incorporated by reference from, the Companys 2000 Form 10-KSB on April 16, 2001.                                         
|****  |  | Previously filed as Exhibits to, and incorporated by reference from, the Companys 2004 Form 10-KSB                                                            
|***** |  | Previously filed as Exhibits to, and incorporated by reference from, the Companys 2005 Form 10-KSB                                                            



30



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##### Table of Contents

Reports on Form 8-K (incorporated by reference)

On April 6, 2005 the company filed Form 8-K with the Securities and Exchange Commission in which it reported under Item 1.01 the agreements
entered into with Laurus Master Funds, Ltd. whereby the Company sold convertible debt, and option and a warrant to purchase common stock of the Company in a private offering pursuant to exemption from registration under Section 4(2) of the
Securities Act of 1933

On May 16, 2005 the Company filed Form 8-K with the Securities and Exchange Commission in which it reported
under Item 2.02, the Companys Results of Operations and Financial Condition for the first quarter of 2005, under Item 5.02, the resignation of John Stanton as Chief Executive Officer and Chief Financial Officer, and the appointment
of Leon Toups as Chief Executive Officer and Frank W. Barker, Jr. as Chief Financial Officer, and under Item 7.01, certain regulation FD Disclosures of items relative to letters of intent and contracts in public press releases.

On October 7, 2005, the Company filed Form 8-K with the Securities and Exchange Commission in which it reported under Item 5.02, the appointment
of Barry G. Markowitz as a member of the Board of Directors of the Company.

On October 13, 2005, the Company filed Form 8-K with the
Securities and Exchange Commission in which it reported under Item 8.01, Other Events encompassing the resignation of Jaime Jurado as President and as a Director of Electric Machinery Enterprises, Inc., (a wholly owned subsidiary) and the
appointment of Frank J. Sierra as President and as a member of its Board of Directors.

On December 2, 2005 the Company filed
Form 8-K with the Securities and Exchange Commission in which it reported under Item 2.02, the Companys Results of Operations and Financial Condition for the third quarter of 2005.

On February 16, 2006 the Company filed Form 8-K with the Securities and Exchange Commission in which it reported under Item 5.02, the
resignation of Leon Toups as Chief Executive Officer and President, and the appointment of John Stanton as Chief Executive Officer and President.

On March 28, 2006 the Company filed Form 8-K with the Securities and Exchange Commission in which it reported under Item 7.01, a regulation FD Disclosure of the approval by the Board of Directors in principle of a merger of the
Company with Cast-Crete Corporation.

On October 13, 2006 the Company filed Form 8-K with the Securities and Exchange Commission in
which it reported under Item 4.02, a Non-Reliance on Previously Issued Financial Statements relative to the presentation of the comparative data contained in our consolidated statement of operations and cash flows for the year ended
December 31, 2004.

On May 4, 2007, the Company filed Form 8-K with the Securities and Exchange Commission in Which it
reported under Item 5.02, Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory

Arrangements of Certain Officers, the resignation of Barry Markowitz from the Board of Directors.



31



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors

EarthFirst Technologies, Incorporated

Tampa, Florida

We have audited the accompanying consolidated balance sheet of EarthFirst Technologies, Incorporated and Subsidiaries (the Company) as of December 31,
2006, and the related consolidated statements of operations, stockholders equity (deficit) and cash flows for each of the two years in the period then ended. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in
accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of EarthFirst Technologies, Incorporated and Subsidiaries, at December 31, 2006, and
the consolidated results of their operations and their cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company has incurred significant losses and negative operating cash flows during the years ended December 31, 2006 and 2005, has a working capital deficiency of approximately $5,000,000 at December 31, 2006, and
expects that additional capital will be required in order to continue operations in 2007. These factors, among others as discussed in Note 17, raise substantial doubt about the Companys ability to continue as a going concern. Managements
plans in regard to these matters are also described in Note 17. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ Aidman, Piser & Company, P.A.




|              
|--------------
|May 16, 2007  
|Tampa, Florida



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##### Table of Contents

EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2006



|                                                                                                         |  |   |             |  
|-------------------------------------------------------------------------------------------------------- |  | - | ----------- | -
|ASSETS                                                                                                   |  |   |            
|Current assets:                                                                                          |  |   |             |  
|Cash                                                                                                     |  | $ | 115,000     |  
|Accounts receivable  net of allowance for doubtful accounts of $3,100,000                               |  |   | 8,649,533   |  
|Costs and estimated earnings in excess of billings on uncompleted contracts                              |  |   | 1,692,063   |  
|Inventory                                                                                                |  |   | 2,745,543   |  
|Prepaid expenses and other current assets                                                                |  |   | 101,599     |  
|                                                                                                         |  |   |             |  
|Total current assets                                                                                     |  |   | 13,303,738  |  
|                                                                                                         | 
|Property and equipment, net                                                                              |  |   | 4,746,416   |  
|Goodwill                                                                                                 |  |   | 6,000,000   |  
|Loan costs and discounts                                                                                 |  |   | 353,230     |  
|Other assets                                                                                             |  |   | 263,775     |  
|                                                                                                         |  |   |             |  
|                                                                                                         |  | $ | 24,667,159  |  
|                                                                                                         |  |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                     |  |   |             |  
|Current liabilities:                                                                                     |  |   |             |  
|Notes payable                                                                                            |  | $ | 23,064      |  
|Secured convertible notes payable                                                                        |  |   | 4,393,812   |  
|Accounts payable and accrued expenses, including $312,305 to related party                               |  |   | 11,256,232  |  
|Billings in excess of costs and estimated earnings on uncompleted contracts                              |  |   | 2,662,655   |  
|                                                                                                         |  |   |             |  
|Total current liabilities                                                                                |  |   | 18,335,763  |  
|                                                                                                         | 
|Secured convertible notes payable, non-current                                                           |  |   | 315,340     |  
|Derivative liabilities                                                                                   |  |   | 1,005,596   |  
|Notes payable, related party                                                                             |  |   | 4,561,660   |  
|                                                                                                         |  |   |             |  
|Total liabilities                                                                                        |  |   | 24,218,359  |  
|                                                                                                         | 
|Minority interests                                                                                       |  |   | 118,820     |  
|                                                                                                         | 
|Commitments and contingencies (Note 11)                                                                  |  |   |            |  
|                                                                                                         | 
|Stockholders equity:                                                                                    |  |   |             |  
|Common stock, par value $.0001, 750,000,000 shares authorized, 604,260,294 shares issued and outstanding |  |   | 60,426      |  
|Additional paid-in capital                                                                               |  |   | 87,816,914  |  
|Accumulated deficit                                                                                      |  |   | (87,547,360 | )
|                                                                                                         |  |   |             |  
|Total stockholders equity                                                                               |  |   | 329,980     |  
|                                                                                                         |  |   |             |  
|                                                                                                         |  | $ | 24,667,159  |  
|                                                                                                         |  |   |             |  

See notes to consolidated financial statements.



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##### Table of Contents

EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2006 AND 2005



|                                                                                        |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                        |  | 2006 |             |   | 2005 |  
|Revenue                                                                                 |  | $    | 45,371,505  |   |      | $ | 41,743,320  |  
|Cost of sales                                                                           |  |      | 40,793,557  |   |      |   | 32,083,495  |  
|                                                                                        |  |      |             |   |      |   |             |  
|Gross profit                                                                            |  |      | 4,577,948   |   |      |   | 9,659,825   |  
|                                                                                        |  |     
|Selling, general and administrative expenses                                            |  |      | 14,476,956  |   |      |   | 7,654,036   |  
|Impairment of goodwill                                                                  |  |      | 9,323,152   |   |      |   |            |  
|Related party stock-based compensation                                                  |  |      |            |   |      |   | 18,260,000  |  
|Research and development expenses                                                       |  |      | 853,034     |   |      |   | 582,430     |  
|                                                                                        |  |      |             |   |      |   |             |  
|Loss from operations                                                                    |  |      | (20,075,194 | ) |      |   | (16,836,641 | )
|                                                                                        |  |      |             |   |      |   |             |  
|Other income (expense):                                                                 |  |      |             |   |      |   |             |  
|Gain on extinguishment of debt, bankruptcy                                              |  |      | 145,684     |   |      |   | 4,163,740   |  
|Claims recovery                                                                         |  |      | 1,100,000   |   |      |   |            |  
|Miscellaneous income, net                                                               |  |      | 215,314     |   |      |   | 397,071     |  
|Derivative gain (loss)                                                                  |  |      | 3,130,601   |   |      |   | (592,521    | )
|Interest expense, including related party interest of $178,037 in 2006 and none in 2005 |  |      | (3,562,195  | ) |      |   | (2,760,202  | )
|                                                                                        |  |      |             |   |      |   |             |  
|Loss before reorganization item, income taxes and majority and minority interests       |  |      | (19,045,790 | ) |      |   | (15,628,553 | )
|                                                                                        |  |     
|Reorganization item, professional fees related to bankruptcy and pursuit of claims      |  |      | (826,498    | ) |      |   | (1,919,288  | )
|                                                                                        |  |      |             |   |      |   |             |  
|Loss before income taxes and majority and minority interests                            |  |      | (19,872,288 | ) |      |   | (17,547,841 | )
|Income tax benefit                                                                      |  |      |            |   |      |   |            |  
|                                                                                        |  |      |             |   |      |   |             |  
|Loss before majority and minority interests                                             |  |      | (19,872,288 | ) |      |   | (17,547,841 | )
|Majority and minority interests                                                         |  |      |            |   |      |   | 377         |  
|                                                                                        |  |      |             |   |      |   |             |  
|Loss from continuing operations                                                         |  |      | (19,872,288 | ) |      |   | (17,547,464 | )
|                                                                                        |  |     
|Loss on disposal of discontinued operations                                             |  |      |            |   |      |   | (137,636    | )
|                                                                                        |  |      |             |   |      |   |             |  
|Net loss                                                                                |  | $    | (19,872,288 | ) |      | $ | (17,685,100 | )
|                                                                                        |  |      |             |   |      |   |             |  
|Net loss per common share, basic and diluted                                            |  | $    | (.03        | ) |      | $ | (.035       | )
|                                                                                        |  |      |             |   |      |   |             |  
|Weighted average shares outstanding, basic and diluted                                  |  |      | 600,874,349 |   |      |   | 501,999,049 |  
|                                                                                        |  |      |             |   |      |   |             |  

See notes to consolidated financial statements.



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##### Table of Contents

EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)

YEARS ENDED DECEMBER 31, 2006 AND 2005



|                                                        |        |              |        |                          |        |  |                    |            |   |               |    |             |       |  |    |            |   |  |   |             |  
|------------------------------------------------------- | ------ | ------------ | ------ | ------------------------ | ------ |  | ------------------ | ---------- | - | ------------- | -- | ----------- | ----- |  | -- | ---------- | - |  | - | ----------- | -
|                                                        |        | Common Stock |        | AdditionalPaid-inCapital |        |  | AccumulatedDeficit |            |   | TreasuryStock |    |             | Total | 
|                                                        | Shares |              | Amount |                          |        |  |                   
|Balances, January 1, 2005                               |        | 301,770,150  |        | $                        | 30,177 |  | $                  | 56,795,183 |   |               | ($ | 49,989,972  | )     |  | ($ | 1,268,060  | ) |  | $ | 5,567,328   |  
|                                                        |        |              |        |                          |        | 
|Converson of notes payable, related party to stock      |        | 189,643,210  |        |                          | 18,964 |  |                    | 9,185,193  |   |               |    |            |       |  |    |           |   |  |   | 9,204,157   |  
|                                                        |        |              |        |                          |        | 
|Stock issued for professional services                  |        | 4,633,333    |        |                          | 463    |  |                    | 694,537    |   |               |    |            |       |  |    |           |   |  |   | 695,000     |  
|                                                        |        |              |        |                          |        | 
|Stock issued as partial exercise of Laurus Fund Options |        | 19,000,000   |        |                          | 1,900  |  |                    | 188,100    |   |               |    |            |       |  |    |           |   |  |   | 190,000     |  
|                                                        |        |              |        |                          |        | 
|Reclassification of Derivative Liabilities to equity    |        |             |        |                          |       |  |                    | 2,470,000  |   |               |    |            |       |  |    |           |   |  |   | 2,470,000   |  
|                                                        |        |              |        |                          |        | 
|Stock issued as compensation for related party          |        | 83,000,000   |        |                          | 8,300  |  |                    | 18,251,700 |   |               |    |            |       |  |    |           |   |  |   | 18,260,000  |  
|                                                        |        |              |        |                          |        | 
|Net loss                                                |        |             |        |                          |       |  |                    |           |   |               |    | (17,685,100 | )     |  |    |           |   |  |   | (17,685,100 | )
|                                                        |        |              |        |                          |        |  |                    |            |   |               |    |             |       |  |    |            |   |  |   |             |  
|Balances, December 31, 2005                             |        | 598,046,693  |        |                          | 59,804 |  |                    | 87,584,713 |   |               |    | (67,675,072 | )     |  |    | (1,268,060 | ) |  |   | 18,701,385  |  
|                                                        |        |              |        |                          |        | 
|Stock issued for professional services                  |        | 500,000      |        |                          | 50     |  |                    | 57,450     |   |               |    |            |       |  |    |           |   |  |   | 57,500      |  
|                                                        |        |              |        |                          |        | 
|Stock issued for cashless exercise of employee options  |        | 700,000      |        |                          | 70     |  |                    | (70        | ) |               |    |            |       |  |    |           |   |  |   |            |  
|                                                        |        |              |        |                          |        | 
|Warrants issued for professional services               |        |             |        |                          |       |  |                    | 767,680    |   |               |    |            |       |  |    |           |   |  |   | 767,680     |  
|                                                        |        |              |        |                          |        | 
|Stock options issued                                    |        |             |        |                          |       |  |                    | 162,644    |   |               |    |            |       |  |    |           |   |  |   | 162,644     |  
|                                                        |        |              |        |                          |        | 
|Stock issued for cashless exercise of Laurus options    |        | 5,013,601    |        |                          | 502    |  |                    | (502       | ) |               |    |            |       |  |    |           |   |  |   |            |  
|                                                        |        |              |        |                          |        | 
|Reclassification of derivative liabilities to equity    |        |             |        |                          |       |  |                    | 513,059    |   |               |    |            |       |  |    |           |   |  |   | 513,059     |  
|                                                        |        |              |        |                          |        | 
|Retirement of treasury shares                           |        |             |        |                          |       |  |                    | (1,268,060 | ) |               |    |            |       |  |    | 1,268,060  |   |  |   |            |  
|                                                        |        |              |        |                          |        | 
|Net loss                                                |        |             |        |                          |       |  |                    |           |   |               |    | (19,872,288 | )     |  |    |           |   |  |   | (19,872,288 | )
|                                                        |        |              |        |                          |        |  |                    |            |   |               |    |             |       |  |    |            |   |  |   |             |  
|Balances December 31, 2006                              |        | 604,260,294  |        | $                        | 60,426 |  | $                  | 87,816,914 |   |               | ($ | 87,547,360  | )     |  | $  |           |   |  | $ | 329,980     |  
|                                                        |        |              |        |                          |        |  |                    |            |   |               |    |             |       |  |    |            |   |  |   |             |  

See notes to consolidated financial statements.



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##### Table of Contents

EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2006 AND 2005



|                                                                               |  |      |             |   |      |   |             |  
|------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                               |  | 2006 |             |   | 2005 |  
|Cash flows from operating activities:                                          |  |      |             |   |      |   |             |  
|Net loss                                                                       |  | $    | (19,872,288 | ) |      | $ | (17,685,100 | )
|Adjustments to reconcile net loss to net cash flows from operating activities: |  |      |             |   |      |   |             |  
|Expenses funded through stock issuance                                         |  |      | 57,500      |   |      |   | 695,000     |  
|Intangible asset impairment                                                    |  |      | 9,323,152   |   |      |   |            |  
|Related party compensation funded through stock issuance                       |  |      |            |   |      |   | 18,260,000  |  
|Majority/minority interest in net income (loss) of consolidated entities       |  |      |            |   |      |   | (377        | )
|Derivative (gain) loss                                                         |  |      | (3,130,601  | ) |      |   | 592,521     |  
|Amortization of debt discount                                                  |  |      | 2,574,687   |   |      |   | 3,634,465   |  
|Depreciation and amortization                                                  |  |      | 698,122     |   |      |   | 362,098     |  
|Gain on cancellation of debt                                                   |  |      | (145,684    | ) |      |   | (4,163,740  | )
|Loss on disposal of discontinued operations                                    |  |      |            |   |      |   | 137,636     |  
|(Gain)/loss on disposal of assets                                              |  |      | 20,534      |   |      |   | (40,039     | )
|Bad debt expense                                                               |  |      | 2,839,885   |   |      |   | 79,500      |  
|Share-based compensation                                                       |  |      | 930,324     |   |      |   |            |  
|Increase (decrease) in cash due to changes in:                                 |  |      |             |   |      |   |             |  
|Accounts receivable                                                            |  |      | (2,256,854  | ) |      |   | (800,372    | )
|Costs and estimated earnings in excess of billings on uncompleted contracts    |  |      | (245,737    | ) |      |   | (460,057    | )
|Inventory                                                                      |  |      | (1,132,267  | ) |      |   | (212,641    | )
|Prepaid expenses and other current assets                                      |  |      | 196,938     |   |      |   | (52,701     | )
|Accounts payable and accrued expenses                                          |  |      | 4,924,050   |   |      |   | (328,958    | )
|Billings in excess of costs and estimated earnings on uncompleted contracts    |  |      | 1,942,835   |   |      |   | (327,745    | )
|Other liabilities                                                              |  |      | (744,488    | ) |      |   |            |  
|                                                                               |  |      |             |   |      |   |             |  
|Net cash flows from operating activities                                       |  |      | (4,019,892  | ) |      |   | (310,510    | )
|                                                                               |  |      |             |   |      |   |             |  
|Cash flows from investing activities:                                          |  |      |             |   |      |   |             |  
|Acquisition of property and equipment                                          |  |      | (215,081    | ) |      |   | (992,180    | )
|                                                                               |  |      |             |   |      |   |             |  
|Net cash flows from investing activities                                       |  |      | (215,081    | ) |      |   | (992,180    | )
|                                                                               |  |      |             |   |      |   |             |  
|Cash flows from financing activities:                                          |  |      |             |   |      |   |             |  
|Distributions to minority interest in consolidated subsidiary                  |  |      | (184,828    | ) |      |   |            |  
|Proceeds from note payable, related party                                      |  |      | 4,561,660   |   |      |   | 1,791,516   |  
|Proceeds from option exercise                                                  |  |      |            |   |      |   | 190,000     |  
|Repayment of long term debt                                                    |  |      | (1,229,339  | ) |      |   | (8,958,729  | )
|Proceeds from Laurus credit facility                                           |  |      |            |   |      |   | 8,000,000   |  
|                                                                               |  |      |             |   |      |   |             |  
|Net cash flows from financing activities                                       |  |      | 3,147,493   |   |      |   | 1,022,787   |  
|                                                                               |  |      |             |   |      |   |             |  
|Net change in cash                                                             |  |      | (1,087,480  | ) |      |   | (279,903    | )
|                                                                               |  |     
|Cash, beginning of year                                                        |  |      | 1,202,480   |   |      |   | 1,482,383   |  
|                                                                               |  |      |             |   |      |   |             |  
|Cash, end of year                                                              |  | $    | 115,000     |   |      | $ | 1,202,480   |  
|                                                                               |  |      |             |   |      |   |             |  

See notes to consolidated financial statements.



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##### Table of Contents

EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

YEARS ENDED DECEMBER 31, 2006 AND 2005



Supplemental schedule of cash flow information



|                                           |  |      |         |      |   |        
|------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                           |  | 2006 |         | 2005
|Cash paid during the year for interest     |  | $    | 735,026 |      | $ | 550,129
|                                           |  |      |         |      |   |        
|Cash paid during the year for income taxes |  | $    |        |      | $ |       
|                                           |  |      |         |      |   |        

Supplemental schedule of non-cash financing and investing activities

During 2006, the Company



| |  |  | Reclassified derivative liabilities to equity in the amount of $513,059
| | - |  | -----------------------------------------------------------------------

During 2005, the Company



| |  |  | Converted $9,204,157 of related party debt to 189,643,210 shares of common stock
| | - |  | --------------------------------------------------------------------------------



| |  |  | Loan costs of $390,290 were funded through proceeds of Laurus credit facility
| | - |  | -----------------------------------------------------------------------------



| |  |  | Retired secured creditor in the amount of $1,676,967 through proceeds of Laurus credit facility
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Reduced accounts payable in the amount of $51,848 through proceeds of Laurus credit facility
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Reclassified derivative liabilities to equity in the amount of $2,470,000
| | - |  | -------------------------------------------------------------------------

See Notes to Consolidated Financial Statements



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



| | 1. | Nature of business, basis of presentation and summary of significant accounting policies:
| | -- | -----------------------------------------------------------------------------------------

Nature of business:

EarthFirst
Technologies, Incorporated, a Florida Corporation formed in 1997, is a specialized holding company owning subsidiaries engaged in developing and commercializing technologies for the production of alternative fuel sources and the destruction and/or
remediation of liquid and solid waste, and in supplying electrical contracting services.

The Companys solid waste division, operated
through World Environmental Solutions Company, Inc. (WESCO), a wholly owned subsidiary, continues to remain focused on the commercialization of its Solid Waste Remediation Plant in Mobile, Alabama. This unit is known as the
Catalytic Activated Vacuum Distillation Process (CAVD) Reactor. This plant processes rubber tires, on a demonstration basis only, extracting carbon and other raw materials for resale. This process efficiently disposes of the
tires in an environmentally compliant manner that allows raw materials from those waste products to be recycled and reused.

The Company
anticipates providing additional CAVD plants to customers in various industries. The Company expects to bring proven technology in replicating its production plants and distribution network for the disposal of the by-products produced in the
process. No revenues have been generated to date from solid waste technologies.

The Company has developed technologies for the treatment of
liquid waste products. The technology involves the use of high temperature plasma through which the liquid waste products are passed. The harmful properties contained in the liquid waste products are broken down at the molecular level as they pass
through the plasma and a clean burning gas is produced. No revenues have been generated to date from liquid waste technologies.

The
Companys biofuels division, operated through SolarDiesel Corporation, a wholly owned subsidiary, is primarily focused on facilitating commercial scale production and distribution of biofuels produced from palm oil, soy and rapeseed in the US,
Latin America, the Caribbean, Europe and Asia. Only a small percentage of the Companys total revenue have been generated to date from biofuel sales.

Through its Electric Machinery Enterprises, Inc. subsidiary (EME), the Company performs services as an electrical contractor and subcontractor in the construction of commercial, residential and municipal projects
primarily located in Florida and the Caribbean. Substantially all of the Companys revenues were generated by EME in 2006 and 2005.



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YEARS ENDED DECEMBER 31, 2006 AND 2005



Principles of Consolidation:

The financial statements include the consolidated accounts of EarthFirst Technologies Incorporated and all of its subsidiaries (including the variable
interest entity discussed below) (collectively, the Company). All significant intercompany transactions and accounts have been eliminated.

Restricted Cash:

The balance in cash includes $100,000 representing funds held by a bank as
collateral for an irrevocable letter of credit issued in connection with a vendor. This letter of credit expires on September 16, 2007 and will be extended automatically for one year provided the Company does not take action to the contrary.

Variable Interest Entity:

During 2004, the Company entered into a joint venture to operate Peleme, Ltd. (an EME affiliated Cayman company) to perform work in the Cayman Islands. The Shareholder Agreement provided for EMEs 40% ownership interest; however, it
entitled EME to 70% of the net profit of this project and EME was responsible for 100% of the financial support pursuant to the agreement. In accordance with SFAS Interpretation No. 46R, the Company has accounted for this investment as a
variable interest entity and the accompanying financial statements include the assets and liabilities of Peleme and the majority interest in this entity. Accordingly, the joint venture financial statements have been combined with those of the
Company. Further, although organized in the Caymans, Pelemes functional currency is in U.S. Dollars. All invoices are billed in U.S. Dollars and substantially all invoices paid in U.S. Dollars.

At December 31, 2005, the Company negotiated the purchase of the majority interest obligation in Peleme, Ltd. for $550,000. The final payment was
made in April 2006.

Accounts Receivable, allowance for doubtful accounts, customer concentrations and foreign revenues:

Accounts receivable are customer obligations due under normal trade terms. Retainage on construction contracts, which aggregate $2,430,799 at
December 31, 2006, and are included in accounts receivable, are contractual obligations of the customer that are withheld from progress billings until project completion and are generally collected within one year. The Company performs
continuing credit evaluations of its customers financial condition and does not require collateral.

Senior management reviews
receivables on a weekly basis to determine if any amounts may become uncollectible. Any contract receivable



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YEARS ENDED DECEMBER 31, 2006 AND 2005



balances that are determined to be uncollectible, along with a general reserve, are included in the allowance for doubtful accounts. After all reasonable
attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, the Company believes the allowance for doubtful accounts of approximately $3,100,000 is adequate as of
December 31, 2006. However, actual write-offs might exceed the recorded allowance.

Accounts receivables from three customers accounted
for approximately 40% of the Companys trade accounts receivable balance at December 31, 2006.

Revenues were generated from three
customers in 2006 that approximated 14%, 12% and 10%, respectively, of total revenue for the year. No customer accounted for in excess of 10% of revenues for 2005.

Revenues generated from electrical contract work outside of the United States (Caribbean region) approximated $21,000,000 and $24,000,000 during the years ended December 31, 2006 and 2005, respectively.

Inventory:

Inventory, which consists
of electrical and construction supplies, and B-100 biodiesel fuel, is stated at the lower of cost (determined by the first-in, first-out method) or market.

Property and equipment:

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets, which range from 5-7 years for machinery, computer equipment, office equipment and furniture. Leasehold improvements are amortized over the shorter of the term of the lease or
the useful life of the asset. Depreciation relating to the CAVD Reactor commenced in the fourth quarter of 2006 over an estimated useful life of four years.

Impairment of goodwill and long-lived assets:

In accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), and Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144), the Company reviews its non-amortizable long-lived assets (goodwill) for impairment annually, in the fourth quarter, or sooner whenever events or changes in circumstances indicate the carrying amounts of such assets may not be
recoverable. Other depreciable or amortizable assets are reviewed when indications of impairment exist. Upon such an occurrence, recoverability of these assets is determined as follows. For long-lived assets that are held for use, the Company
compares the forecasted undiscounted net cash flows to the carrying amount. If the long-lived asset is determined to be unable to recover the carrying amount, then it is written down to fair value. For long-lived assets held for sale, assets are
written down to fair value. Fair value is determined based on discounted cash flows, appraised values or managements estimates, depending upon the nature or the assets.



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YEARS ENDED DECEMBER 31, 2006 AND 2005



Impairment of goodwill is tested using a two step method. The first step is to compare the fair value of the reporting unit to its book value, including
goodwill. If the fair value of the unit is less than its book value, the Company than determines the implied fair value of goodwill by deducting the fair value of the reporting units net assets, exclusive of goodwill from the fair value of the
reporting unit. If the book value of goodwill is greater than its implied fair value, the Company writes down goodwill to its implied fair value. The Companys goodwill relates to the acquisition of Electric Machinery Enterprises, Inc. in 2004.

Derivative financial instruments:

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. However, certain other financial
instruments, such as warrants and embedded conversion features that are indexed to the Companys common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or
net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement.
Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.

The caption Derivative Financial Instruments consists of (i) the fair values associated with derivative features embedded in the Laurus Convertible Secured Term Notes and (ii) the fair values of the detachable warrants and options
that were issued in connection with those financing arrangements.

Income taxes:

Deferred income tax assets and liabilities are computed annually for differences between the financial statement and federal income tax basis of assets
and liabilities that will result in taxable income or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected to be realized.



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YEARS ENDED DECEMBER 31, 2006 AND 2005



Revenue recognition:

Revenues recognized from biofuel transactions consisted of sales of biodiesel fuel. These revenues are recognized when the biodiesel fuel is delivered to
the customer.

The Company uses the percentage-of-completion method of accounting for contract revenue from electrical contracts where
percentage of completion is computed on the cost to total cost method. Under this method, contract revenue is recorded based upon the percentage of total contract costs incurred to date to total estimated contract costs, after giving effect to the
most recent estimates of costs to complete. Revisions in costs and revenue estimates are reflected in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such
losses are determined without regard to the percentage-of-completion. Because of the inherent uncertainties in estimating costs, it is possible that the estimates used will change in the near term and such change could be material. Changes in
contract cost estimates in 2006 with respect to contracts in process at December 31, 2005 had the effect of reducing revenues and increasing net loss for the year ended December 31, 2006 by approximately $750,000.

Cost of Sales:

The type of costs
included in cost of sales consists primarily of items both directly and indirectly related to the performance of electrical construction contracts. These expenses include labor, materials, freight on the purchase of materials, equipment rentals,
equipment repairs, subcontractors, vehicle costs, purchasing, receiving and warehouse costs. All of these costs are completely accounted for in costs of sales, without any prorations to selling, general and administrative expenses. Costs associated
with biodiesel fuel include the cost of biodiesel sold.

Selling, General and Administrative expenses

Selling, general and administrative expenses include those operational expenses associated with sales and marketing, public relations, compliance with
laws and regulations, occupancy, office operations, and all other general administrative expenses necessary to support operations.

Contract Claims

As of December 31, 2006 the Company has certain contracts and claims in various stages of negotiation,
arbitration and litigation in the approximate amount of $9,000,000. The Company is attempting to resolve these matters, and expects to be successful in recovering these amounts. However, as in all matters in litigation, the outcome is not certain
and amounts recovered, if any, could be materially different than expected. The Company does not record contract claims until such



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YEARS ENDED DECEMBER 31, 2006 AND 2005



claims are realized pursuant to guidance in Statement of Position 81-1 Accounting for Performance Construction-Type and Certain Production-Type Contracts.
The guidance states that recognition of amounts of additional contract revenue relating to claims is appropriate only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably
estimated. All of the conditions were not present so these claims are considered to be contingent gains and will be recorded if and when realized.

During the year ended December 31, 2006, the Company recognized $1,100,000 in revenue for amounts that were collected in relation to these claims. This claim recovery is included in other income in the
accompanying statement of operations for the year ended December 31, 2006.

Use of estimates:

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

Net loss per share:

The Company computes net loss per share under Statement of Financial Accounting Standards No. 128, Earnings Per Share. The statement
requires presentation of two amounts; basic and diluted loss per share. Basic loss per share is computed by dividing the loss available to common stockholders by the weighted average common shares outstanding. Diluted earnings per share would
include all common stock equivalents unless anti-dilutive. The Company has not included the outstanding options and warrants, or convertible debentures as common stock equivalents because the effect would be anti-dilutive.

The following table sets forth the shares issuable upon exercise of outstanding options and warrants and conversion of debentures that is not included in
the basic and diluted net loss per share available to common stockholders:



|                                                      |  |            |  |           
|----------------------------------------------------- |  | ---------- |  | ----------
|December 31,                                          |  | 2006       |  | 2005      
|Shares issuable upon exercise of outstanding options  |  | 15,533,800 |  | 12,570,668
|Shares issuable upon exercise of outstanding warrants |  | 29,562,790 |  | 11,162,790
|Shares issuable upon conversion of debentures         |  | 33,144,287 |  | 33,789,474
|                                                      |  |            |  |           
|Total                                                 |  | 78,240,877 |  | 57,522,932
|                                                      |  |            |  |           



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YEARS ENDED DECEMBER 31, 2006 AND 2005



Recent accounting pronouncements

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not effect stockholders equity at December 31, 2006.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 (SFAS 157),
Fair Value Measurements. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of SFAS 157 to materially impact its financial position or results of operations.

In September, 2006 the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on the process of quantifying financial statement misstatements, advising companies to use both a balance sheet (iron curtain) and an
income statement (rollover) approach when quantifying and evaluating the materiality of a misstatement. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet
at the end of the reporting period. The rollover approach quantifies a misstatement based on the amount of the error originating in the current period income statement, including the reversing effect of prior year misstatements. The use of this
method can lead to the accumulation of misstatements in the balance sheet. Under the guidance of SAB 108, companies will be required to adjust their financial statements if either the iron curtain or rollover approach results in the quantification
of a material misstatement. Previously filed reports would not be amended, but would be corrected the next time the company files prior year financial statements. Companies are allowed to record a one-time cumulative effect adjustment to correct
errors in prior years that previously had been considered immaterial based on their previous approach. SAB 108 is effective for the Company upon issuance of its Fiscal 2007 annual financial statements. However, early application of SAB 108 is
permitted for interim periods prior to the issuance of the annual financial statements. The Company does not believe this standard will have any effect on its financial statements.

In February 2007, the Financial Accounting Standards Board issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities(FAS 159), which includes an amendment to FASB Statement No. 115. The statement permits entities to choose, at specified election dates, to measure eligible financial assets and financial liabilities at fair value (referred to as the
fair value option) and report associated unrealized gains and losses in earnings. Statement 159 is effective for fiscal years beginning after November 15, 2007. As of December 31, 2006, the Company has not determined the effect that the
fair value option, if elected, will have on the consolidated financial position or results of operations.



| | 2. | Laurus Credit Facility
| | -- | ----------------------

On March 30, 2005, the
Company entered into agreements with Laurus Master Funds, Ltd, a Cayman Islands corporation (Laurus), pursuant



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YEARS ENDED DECEMBER 31, 2006 AND 2005



to which the Company sold convertible debt and an option and a warrant to purchase common stock of the Company to Laurus in a private offering pursuant to
exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The securities sold to Laurus include the following:



| |  |  | a secured convertible minimum borrowing note and a secured revolving note with an aggregate principal amount not to exceed $5,000,000;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a secured convertible term note with a principal amount of $3,000,000;
| | - |  | ----------------------------------------------------------------------



| |  |  | a common stock purchase warrant to purchase 11,162,790 shares of common stock of the Company, at a purchase price of $0.23 for the first 5,581,395 shares and $0.28
for any additional shares, exercisable for a period of seven years; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an option to purchase 24,570,668 shares of common stock of the Company, at a purchase price equal to $0.01 per share, exercisable for a period of six years
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

At the closing of the foregoing financing from Laurus, on March 31, 2005, the Company received $3,000,000 in
connection with the convertible term note. In addition, the Company is permitted to borrow an amount based upon its eligible accounts receivable and inventory, pursuant to the convertible minimum borrowing note and the revolving note. Accordingly,
the Company received an additional $3,600,000 at closing, and $1,400,000 on May 15, 2005 for an aggregate of $8,000,000 in financing from Laurus.

The Company must pay certain fees in the event the facility is terminated prior to expiration. The Companys obligations under the notes are secured by substantially all of the assets of the Company, including
but not limited to inventory, accounts receivable and a pledge of the stock of Electric Machinery Enterprises, Inc., EarthFirst Resources, Inc., World Environmental Solutions Company, Inc., EarthFirst Investments, Inc., EM Enterprise Resources, Inc.
and EME Modular Structures, Inc., the active subsidiaries of the Company. The notes mature on March 30, 2008. Annual interest on the convertible minimum borrowing note and the revolving note is equal to the prime rate published in
The Wall Street Journal from time to time, plus 2.0%, provided, that, such annual rate of interest may not be less than 7.0%, subject to certain downward adjustments resulting from certain increases in the market price of the Companys common
stock. Annual interest on the convertible term note



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YEARS ENDED DECEMBER 31, 2006 AND 2005



is equal to the prime rate published in The Wall Street Journal from time to time, plus 2.5%, subject to certain downward adjustments resulting
from certain increases in the market price of the Companys common stock.

The principal amount of the secured convertible term note is
repayable at the rate of $100,000 per month together with accrued but unpaid interest, commencing on October 1, 2005. Such amounts may be paid, at the holders option (i) in cash with a 2% premium; or (ii) in shares of common
stock, assuming the shares of common stock are registered under the Securities Act of 1933. If paid in shares of common stock the number of shares to be issued shall equal the total amount due, divided by $0.19. If the average closing price of the
common stock for five consecutive trading days prior to an amortization date is equal to or greater than $.209, the Company may require the holder to convert into common stock an amount of principal, accrued interest and fees due under the term note
equal to a maximum of 25% of the aggregate dollar trading volume of the common stock for the 22 consecutive trading days prior to a notice of conversion. The Company in cash may redeem the term note by paying the holder 125% of the principal amount,
plus accrued interest during the first year of the note, 115% of the principal amount, plus accrued interest during the second year of the note and 110% of the principal amount, plus accrued interest thereafter. The holder of the term note may
require the Company to convert all or a portion of the term note, together with interest and fees thereon at any time. The number of shares to be issued shall equal the total amount to be converted, divided by $0.19.

The principal amount of the secured convertible minimum borrowing note, together with accrued interest thereon is payable on April 1, 2008. The
secured convertible minimum borrowing note may be redeemed by the Company in cash by paying the holder 103% of the principal amount, plus accrued interest during the first year of the note, 102% of the principal amount, plus accrued interest during
the second year of the note and 101% of the principal amount, plus accrued interest thereafter. The holder of the term note may require the Company to convert all or a portion of the term note, together with interest and fees thereon at any time.
The number of shares to be issued shall equal the total amount to be converted, divided by $0.19.

Upon an issuance of new shares of common
stock below the fixed conversion price, the fixed conversion price of the notes will be reduced accordingly. The conversion price of the secured convertible notes may be adjusted in certain circumstances such as if we pay a stock dividend, subdivide
or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution.



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YEARS ENDED DECEMBER 31, 2006 AND 2005



120% of the full principal amount of the convertible notes are due upon default under the terms of
convertible notes. Laurus has contractually agreed to restrict its ability to convert pursuant to the terms of the convertible notes to an amount that would be convertible into that number of Conversion shares which would exceed the difference
between 4.99% of the outstanding shares of Common Stock, and the number of shares of Common stock beneficially owned by the holder and issuable to the holder upon the exercise of the warrant and the option held by such holder. The intent is that at
no time shall Laurus own more than 4.99% of the outstanding Common Stock of the Company.

The Company was obligated to file a registration
statement registering the resale of shares of the Companys common stock issuable upon conversion of the convertible notes, exercise of the warrant and exercise of the option. If the registration statement was not filed by May 30, 2005, or
declared effective by January 31, 2006, or if the registration was suspended other than as permitted, in the registration rights agreement between the Company and Laurus, the Company is obligated to pay Laurus certain fees. The Company has
filed this registration statement and has responded to three rounds of comments, and is preparing a response to the fourth round of comments from the SEC.

The Company paid a fee at closing to Laurus Capital Management LLC, the manager of the Laurus Master Funds, Ltd., equal to 3.6% of the total maximum funds to be borrowed under the Companys agreements with
Laurus. The amount of the fee was $288,000.

The following table reflects balances of the secured convertible notes at December 31,
2006:



|                                                                                                                                                                                      |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- | -
|Face value $1,500,000 Secured Convertible Term Note, variable rate of prime plus 2% (10.75% at December 31, 2006), due in stated monthly
payments of $100,000 through March 30, 2008. |  | $ | 648,654    |  
|Face value $1,000,000 Secured Convertible Minimum Note, variable rate of prime plus 2%, subject to 7% floor (10.25% at December 31, 2006)
due at maturity on March 30, 2008.          |  |   | 185,609    |  
|Face value $3,997,278 Secured Convertible Revolving Note, variable rate of prime plus 2%, subject to 7% floor (10.25% at December 31,
2006), due at maturity on March 30, 2008.       |  |   | 3,874,889  |  
|                                                                                                                                                                                      |  |   |            |  
|                                                                                                                                                                                      |  |   | 4,709,152  |  
|Less current maturities                                                                                                                                                               |  |   | (4,393,812 | )
|                                                                                                                                                                                      |  |   |            |  
|                                                                                                                                                                                      |  | $ | 315,340    |  
|                                                                                                                                                                                      |  |   |            |  



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YEARS ENDED DECEMBER 31, 2006 AND 2005



|                                                                                          |  |   |          
|----------------------------------------------------------------------------------------- |  | - | ---------
|Scheduled maturities of face values for the years ending December 31 are as follows: 2007 |  | $ | 5,197,278
|2008                                                                                      |  |   | 1,300,000
|                                                                                          |  |   |          
|Convertible debentures                                                                    |  | $ | 6,497,278
|                                                                                          |  |   |          

The Laurus Financings included registration rights and certain other terms and conditions related
to share settlement of the embedded conversion features and the warrants that the Company has determined are not within its control. In addition, certain features associated with the financings, such as anti-dilution protection afforded the
financing agreements render the number of shares issuable to be indeterminate. In these instances, EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, requires
allocation of the proceeds between the various instruments and the derivative elements carried at fair values. The following tabular presentation reflects the allocation of the proceeds on the date of the financings:



|                             |  |           |            |   |             |   |           |               |  |   |            |  
|---------------------------- |  | --------- | ---------- | - | ----------- | - | --------- | ------------- |  | - | ---------- | -
|                             |  | Term Note |            |   | MinimumNote |   |           | RevolvingNote | 
|Allocation:                  |  |           |            |   |             |   |           |               |  |   |            |  
|Warrants and options         |  | $         | 3,578,591  |   |             | $ | 1,192,864 |               |  | $ | 3,101,445  |  
|Embedded derivative features |  |           | 1,932,632  |   |             |   | 644,211   |               |  |   | 2,600,000  |  
|Debt instrument              |  |           |           |   |             |   |          |               |  |   |           |  
|Derivative loss              |  |           | (2,511,223 | ) |             |   | (837,075  | )             |  |   | (1,701,445 | )
|                             |  |           |            |   |             |   |           |               |  |   |            |  
|Total proceeds               |  | $         | 3,000,000  |   |             | $ | 1,000,000 |               |  | $ | 4,000,000  |  
|                             |  |           |            |   |             |   |           |               |  |   |            |  



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YEARS ENDED DECEMBER 31, 2006 AND 2005



Derivative losses arose in connection with the allocation of proceeds to derivative financial
instruments at their respective fair values, which amounts exceed amounts received by the Company in connection with the financing arrangement. See Fair Value of Financial Instruments, below, for additional information about the Companys
financial instruments.

The discount to the debt instruments resulting from the aforementioned allocation is being amortized through
periodic charges to interest expense using the effective interest method for the Term and Minimum Notes and the straight-line method for the Revolving Note.

The following tabular presentation reflects the amortization of the debt discounts included in interest for each instrument:



|                             |  |           |           |             |   |               |  |       |           |  |   |          
|---------------------------- |  | --------- | --------- | ----------- | - | ------------- |  | ----- | --------- |  | - | ---------
|                             |  | Term Note |           | MinimumNote |   | RevolvingNote |  | Total
|Year ended December 31, 2006 |  | $         | 1,389,693 |             | $ | 168,740       |  | $     | 1,016,254 |  | $ | 2,574,687
|Year ended December 31, 2005 |  | $         | 916,568   |             | $ | 104,439       |  | $     | 2,613,458 |  | $ | 3,634,465



| | 3. | Fair Value of Financial Instruments
| | -- | -----------------------------------

The carrying
values of cash, accounts receivable, accounts payable, accrued expenses and bank borrowings generally approximate the respective fair values of these instruments due to their current nature.

The fair values of convertible notes for disclosure purposes only are estimated based upon the present value of the estimated cash flows at 12.75% credit
risk adjusted interest rate for convertible instruments. As of December 31, 2006, estimated fair values and respective carrying values for debt instruments are as follows:



|                                                         |  |            |           |               |   |          
|-------------------------------------------------------- |  | ---------- | --------- | ------------- | - | ---------
|Debt Instrument                                          |  | Fair Value |           | CarryingValue
|$1,500,000 Face Value Convertible Secured Term Note      |  | $          | 1,954,577 |               | $ | 648,654  
|                                                         |  |            |           |               |   |          
|$1,000,000 Face Value Convertible Secured Minimum Note   |  | $          | 930,751   |               | $ | 185,609  
|                                                         |  |            |           |               |   |          
|$4,000,000 Face Value Convertible Secured Revolving Note |  | $          | 3,723,004 |               | $ | 3,874,889
|                                                         |  |            |           |               |   |          



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



| | 4. | Derivative Financial Instruments
| | -- | --------------------------------

The Company
generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. However, certain other financial instruments, such as warrants and embedded
conversion features that are indexed to the Companys common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of
the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair
value and subsequently adjusted to fair value at the close of each reporting period.

The caption Derivative Financial Instruments consists
of (i) the fair values associated with derivative features embedded in the Laurus Convertible Secured Term Notes and (ii) the fair values of the detachable warrants and options that were issued in connection with those financing
arrangements.

On July 27, 2005, Laurus Master Fund exercised common stock options for the purchase of 19,000,000 shares of common
stock at the strike price of $0.01 per share. On that date, the fair value of the freestanding derivative associated with the stock options exercised, amounting to $2,470,000, was reclassified to stockholders equity.

On July 31, 2006, Laurus Master Fund exercised common stock options for the purchase of 5,013,601 shares of common stock at the strike price of $0.01
per share. On that date, the fair value of the freestanding derivative associated with the stock options exercised, amounting to approximately $513,000, was reclassed to stockholders equity.

The following tabular presentation reflects the components of Derivative financial instruments on the Companys balance sheet at December 31,
2006:



|                                                |  |      |          
|----------------------------------------------- |  | ---- | ---------
|(Assets) Liabilities:                           |  | 2006
|Embedded derivative instruments                 |  | $    | 487,084  
|Freestanding derivatives (warrants and options) |  |      | 518,512  
|                                                |  |      |          
|                                                |  | $    | 1,005,596
|                                                |  |      |          



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



The following tabular presentation reflects the number of common shares into which the aforementioned
derivatives are indexed at December 31, 2006:



|                                    |  |           
|----------------------------------- |  | ----------
|                                    |  | 2006      
|Common shares indexed:              |  |           
|Embedded derivative instruments     |  | 33,144,287
|Freestanding derivatives (warrants) |  | 11,162,790
|                                    |  |           
|                                    |  | 44,307,077
|                                    |  |           

Derivative gain (loss) for the years ended December 31, 2006 and 2005 associated with
adjustments recorded to reflect the aforementioned derivatives at fair value amounted to $3,130,601 and ($592,521) respectively, (including the $5,049,743 derivative loss recorded on the transaction date).

Fair value considerations for derivative financial instruments:

Freestanding derivative instruments, consisting of warrants and options that arose from the Laurus financing are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the
relevant assumptions that address the features underlying these instruments. Significant assumptions included in this model as of December 31, 2006 are as follows:



|                |  |   |            |   |  |   |         |  
|--------------- |  | - | ---------- | - |  | - | ------- | -
|Holder          |  |   | Laurus     |   |  |   | Laurus  |  
|Instrument      |  |   | Warrants   |   |  |   | Options |  
|Exercise prices |  | $ | 0.23$0.28 |   |  | $ | 0.01    |  
|Term (years)    |  |   | 4.25       |   |  |   | 4.25    |  
|Volatility      |  |   | 139.041    | % |  |   | 139.041 | %
|Risk-free rate  |  |   | 4.25       | % |  |   | 4.25    | %

Embedded derivative instruments consist of multiple individual features that were embedded in the
convertible debt instruments. The Company evaluated all significant features of the hybrid instruments and, where required under current accounting standards, bifurcated features for separate report classification. These features were, as
attributable to each convertible note, aggregated into one compound derivative financial instrument for financial reporting purposes. The compound embedded derivative instruments are valued using the Flexible Monte Carlo methodology because that
model embodies certain relevant assumptions (including, but not limited to, interest rate risk, credit risk, and Company-controlled redemption privileges) that are necessary to value these complex derivatives.

Significant assumptions included in this model as of December 31, 2006 are as follows:



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



|                         |  |   |         |   |  |   |         |   |  |   |          |  
|------------------------ |  | - | ------- | - |  | - | ------- | - |  | - | -------- | -
|Holder                   |  |   | Laurus  |   |  |   | Laurus  |   |  |   | Laurus   |  
|Instrument               |  |   | Term    |   |  |   | Minimum |   |  |   | Revolver |  
|Conversion prices        |  | $ | 0.19    |   |  | $ | 0.19    |   |  | $ | 0.20     |  
|Actual term (years)      |  |   | 1.25    |   |  |   | 1.25    |   |  |   | 1.25     |  
|Equivalent volatility    |  |   | 147.657 | % |  |   | 147.657 | % |  |   | 147.657  | %
|Equivalent interest rate |  |   | 6.58    | % |  |   | 6.58    | % |  |   | 6.58     | %
|Equivalent yield rate    |  |   | 21.783  | % |  |   | 21.783  | % |  |   | 21.783   | %

Equivalent amounts reflect the net results of multiple modeling simulations that the Monte Carlo
Simulation methodology applies to underlying assumptions.



| | 5. | Goodwill
| | -- | --------

Goodwill as of December 31, 2005 was
$15,323,152, and consisted solely of the amount resulting from the acquisition on August 20, 2004 of Electric Machinery Enterprises, Inc.

In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), and Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), the Company reviews the carrying amount of the goodwill associated with the acquisition of EME for impairment annually, or sooner
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This amount is tested by comparing its carrying amount to fair value. Impairment of goodwill is tested using a two step method. The first step is
to compare the fair value of the reporting unit to its book value, including goodwill. If the fair value of the unit is less than its book value, the Company than determines the implied fair value of goodwill by deducting the fair value of the
reporting units net assets, exclusive of goodwill, from the fair value of the reporting unit to determine the implied value of goodwill. If the book value of goodwill is greater than its implied fair value, the Company writes down goodwill to
its implied fair value. As of December 31, 2006, the Company has determined that the implied fair value was less than its book value and has recorded an impairment charge of $9,323,152.



| | 6. | Sale of Subsidiary
| | -- | ------------------

On March 23, 2005, the
Company closed on the sale of EM Enterprises General Contractors, Inc., a subsidiary of EME for $900,000. Pursuant to the EMEGC Stock Sale Agreement, the transaction has been accounted for with an effective date of January 1, 2005. The
proceeds of the sale went to the secured creditor as a part of accomplishing the satisfaction of the secured Laurus debt.



| | 7. | Contracts in Progress
| | -- | ---------------------

Uncompleted contracts are
summarized as follows at December 31, 2006:



|                                            |  |   |             |  
|------------------------------------------- |  | - | ----------- | -
|Costs incurred on uncompleted contracts     |  | $ | 32,688,744  |  
|Estimated earnings on uncompleted contracts |  |   | 5,017,348   |  
|                                            |  |   |             |  
|                                            |  |   | 37,706,092  |  
|Less billings to date                       |  |   | (38,676,684 | )
|                                            |  |   |             |  
|                                            |  | $ | (970,592    | )
|                                            |  |   |             |  

The components of this amount are included on the balance sheet under the following captions:



|                                                                            |  |   |            |  
|--------------------------------------------------------------------------- |  | - | ---------- | -
|Costs and estimated earnings in excess of billings on uncompleted contracts |  | $ | 1,692,063  |  
|                                                                            | 
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |   | (2,662,655 | )
|                                                                            |  |   |            |  
|                                                                            |  | $ | (970,592   | )
|                                                                            |  |   |            |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



| | 8. | Inventory
| | -- | ---------

Inventory consists of the following at
December 31, 2006:



|                                  |  |   |          
|--------------------------------- |  | - | ---------
|Electrical and construction parts |  | $ | 1,280,777
|B-100, biodiesel fuel             |  |   | 1,464,766
|                                  |  |   |          
|                                  |  | $ | 2,745,543
|                                  |  |   |          



| | 9. | Property, Plant and Equipment
| | -- | -----------------------------

Property, plant and
equipment consisted of the following at December 31, 2006:



|                              |  |   |            |  
|----------------------------- |  | - | ---------- | -
|Land                          |  | $ | 52,244     |  
|Buildings                     |  |   | 2,100,039  |  
|CAVD Reactor                  |  |   | 2,969,793  |  
|Equipment                     |  |   | 1,315,671  |  
|Vehicles                      |  |   | 1,059,392  |  
|Furniture, fixtures and other |  |   | 132,223    |  
|                              |  |   |            |  
|                              |  |   | 7,629,362  |  
|Less accumulated depreciation |  |   | (2,882,946 | )
|                              |  |   |            |  
|                              |  | $ | 4,746,416  |  
|                              |  |   |            |  



| | 10. | Notes Payable
| | --- | -------------

Notes payable at December 31,
2006 consists of an insurance premium finance agreement, payable in nine monthly payments of $6,403, bearing interest at 10.35%.



| | 11. | Commitments and Contingencies
| | --- | -----------------------------

Lease
obligations:

The Company leases vehicles and certain office equipment under noncancellable operating leases for periods up to four
years. In addition, the Company conducts its operations in a facility leased from a related corporation owned by certain stockholders of the Company.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



The total rent expense for the years ended December 31, 2006 and 2005 were approximately
$961,000 and $953,000 respectively, of which approximately $762,000 and $658,000, respectively, were for the facility leased from the related corporation.

Approximate future minimum rentals on noncancellable operating leases at December 31, 2006 are as follows:



|                         |  |   |        
|------------------------ |  | - | -------
|Year ending December 31, |  |  
|2007                     |  | $ | 232,911
|2008                     |  |   | 197,273
|2009                     |  |   | 164,651
|                         |  |   |        
|                         |  | $ | 594,835
|                         |  |   |        

Legal proceedings:

The Company is involved in litigation with Ruggero Maria Santilli (Santilli), The Institute for Basic Research, Inc. (IBR), and
Hadronic Press, Inc. (Hadronic) concerning certain aspects of the Companys liquid waste technologies.

The matters
contemplated above will be referred to as the Santilli Suit and the Hadronic Suit. Hadronic claims to own the intellectual property rights to one or more aspects of the Companys liquid waste technologies. Management
continues to believe that the Company owns all of the intellectual property rights necessary to commercialize and further develop its liquid and solid waste technologies without resorting to a license from any third parties.

During 2004, the Company attempted to reach agreement with Santilli and his related parties to resolve the differences between the parties. As of this
date, the Company is still interested in resolving these differences.

The litigation described above does not involve the technology the
Company is developing in connection with its efforts for the processing of used automotive tires.

The Company is also involved in disputes
with vendors for various alleged obligations associated with operations that were discontinued in prior years. Several disputes involve deficiency balances associated with lease obligations for equipment acquired by the Company for its contract
manufacturing and BORS Lift operations that were discontinued during calendar 2000. The machinery and equipment associated with many of these obligations has been sold with the proceeds paid to the vendor or the equipment has been returned to the
vendor. Several of the equipment leasing entities claim that balances on the leases are still owed.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



CNC Associates, Inc. obtained a judgment in September of 2000 in the amount of approximately $400,000
relative to one of these deficiency balances.

On May 9, 2007, and pursuant to Florida Statures section 56.29, the Pinellas County Circuit
Court has ordered by May 19, 2007, that EarthFirst Technologies, Incorporated;

(a) turn over to CNC the EFTI treasury shares or if there
are no issued treasury shares, then EFTI is directed to reissue the shares to CNC in partial satisfaction of the judgment; and

(b) turn
over to the Pinellas County Sheriff, 100% of the shares of SolarDiesel Corporation , and such shares are to be sold by a publicly advertised sheriff sale.

EarthFirst intends to file a motion for rehearing on and reconsideration of this order which will have the effect of suspending the order until the motion is decided.

We are involved in litigation with the liquidator of Amwest Surety Company based on a final judgment entered against Amwest in the amount of $432,471 in
favor of Sunhouse Construction. Amwest is seeking recovery from Electric Machinery Enterprises, Inc. for this amount. There is no reasonable manner to determine with any degree of certainty as to the outcome of the objection to Amwestss claim.
As this claim pertains to transactions that occurred prior to EMEs bankruptcy, settlements if any would fall under the reorganization plan for unsecured creditors capping the amount to 75% of the allowed claim, payable over 5 years. At this
time, management is aggressively defending against this claim, and has not made any provision for a liability associated with it.

Included
in the balance of accrued expenses and other current liabilities is our $700,000 estimate of the amount at which the matters contemplated above will ultimately be resolved. While management believes the amounts recorded are adequate, there can be no
assurance that actual liabilities that may result from the resolution of these matters will not exceed recorded amounts.

The Company has
other litigation and disputes that arise in the ordinary course of its business. Management does not believe the resolution of these matters will have a material effect on the Companys financial position or results of operations.



| | 12. | Retirement Plan
| | --- | ---------------

EFTI adopted the EarthFirst
Technologies, Incorporated 401(k) Savings Plan effective October 1, 2005. The Plan covers all employees of the Company employed on October 1, 2005 who have attained the age of 21. Otherwise, eligibility to participate in the Plan is
established after having completed six months of service and having attained age 21. The Plan provides for a matching contribution equal to 25% of the amount of salary reduction deferral elected by the employee up to 4% of the employees annual
payroll compensation.

EME adopted a 401(k) savings plan effective January 1, 1997. The Plan covered all employees who were at least 18
years of age with one or more years of service. The Company did not make any discretionary contributions for the years ended December 31, 2006 or 2005. Effective November 1, 2005, the Electric Machinery Enterprises, Inc. 401(k) Savings
Plan was merged into the EarthFirst Technologies, Incorporated 401(k) Savings.



| | 13. | Employee Stock Ownership Plan and Trust
| | --- | ---------------------------------------

On
December 12, 2004, Electric Machinery Enterprises, Inc. (EME) terminated the EME Employee Stock Ownership Plan (the Plan). All employees who were not fully vested became 100% vested as of December 12, 2004. During
the first quarter of 2005, Participants of the Plan received a distribution of their respective shares of stock of EarthFirst Technologies, Inc. that was held in the EME Employee Stock Ownership Trust on their behalf. EME has no obligation for the
repurchase of the stock distributed to the participants of the Plan because the shares are publicly traded and, as such, there is a market available in which the participants may sell their shares.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



| | 14. | Related Party Transactions
| | --- | --------------------------

Material related party
transactions that have been entered into by the Company that are not otherwise in these notes are summarized below:

On February 23,
2005, the balance of amounts then due to the Companys principal stockholder in the amount of $9,204,157 was converted into 189,643,210 shares of the Companys common stock.

The Company leases and rents the real property, building, and all other improvements located at 2515 E Hanna Avenue, Tampa, Florida 33610 from Hanna
Properties, Inc., a related party affiliated with Jaime Jurado, the Vice Chairman of EFTI. Mr. Jurado owns 45.425% of the common stock of Hanna Properties, Inc. This property consists of 29,680 sq. ft. of office space, 80,320 sq. ft. of
warehouse space and 26,992 sq. ft. of garage and workshop space. Monthly rental including sales tax, but excluding real estate taxes and insurances is $52,133. This lease obligation was assumed pursuant to EMEs reorganization plan for a period
of two years. At present, the Company is occupying the premises on a month to month basis. This location is the corporate headquarters of EarthFirst Technologies Incorporated and its subsidiaries. Amounts due to this related party under this
agreement at December 31, 2006 is $312,305.

On August 29, 2005, the Company issued 83,000,000 shares of common stock as stock based
compensation to entities affiliated with or controlled by John Stanton, Chairman of the Board, for services rendered from the inception of his involvement with the Company through the acquisition and reorganization of EME. Included in this issuance
were those shares entitled to be issued by EFTI as a plan proponent to the EME bankruptcy, and authorized by the Fourth Amended Plan of Reorganization of EME pursuant to Section 1145 of the Bankruptcy Code. Compensation expense associated with
this transaction, calculated based upon the market price of the Companys stock on the date of grant was $18,260,000.

In January 2006,
the Company, through its subsidiary SolarDiesel Corporation (formerly EarthFirst Americas, Incorporated), entered into a revolving line of credit promissory note in the amount of $3,000,000 with US Sustainable Energy Corp., an entity
related to John Stanton, the Companys Chairman of the Board, Chief Executive Officer, and President. In June 2006, the amount of the revolving line of credit promissory note was increased to $5,000,000, and the terms were modified to require
no payments until January 2009. The Promissory note accrues interest at the rate of 6%. Simultaneously with the execution of the promissory note, the Company entered into a security agreement pledging as collateral all of the Companys right
title and interest in and to all Palm Oil and Palm Methyl ester Products, and any and all assets associated with the biofuels business of SolarDiesel Corporation. As of December 31, 2006, the balance including accrued interest was $4,561,660.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



| | 15. | Stockholders equity
| | --- | -------------------

Common stock:

On April 29, 2005, the Company filed Schedule 14C, preliminary information statement in connection with certain actions to be taken
pursuant to the written consent of the stockholders of the Company holding a majority of the outstanding shares of common stock in lieu of a special meeting.

This information statement was filed for the purpose of amending the articles of incorporation to increase the number of authorized shares of common stock to 750,000,000.

On June 21, 2005, the Company paid certain professional fees related to pursuit of claims in the total amount of $893,000. The payment of this amount
included the issuance of 4,633,333 unrestricted common shares, representing $695,000 of the total. The balance was paid in cash.

On
March 23, 2006, the Company issued 250,000 shares of its common stock with a fair value of $37,500 to BGM Ventures, LLC under its professional services agreement.

On December 31, 2006, the Company issued 250,000 shares of its common stock with a fair value of $20,000 to BGM Ventures, LLC under its professional services agreement.

On April 6, 2006, the Company issued 700,000 shares of its common stock upon the cashless exercise of employee stock options.

Stock Options:

In 2001, the Board of
Directors approved the 2001 Equity Incentive Plan. The total number of shares to which options may be granted under the plan is 20,000,000 shares. Generally the option price is fixed at no less than 100% of the fair market value of the shares at the
date the option is granted and expire on the earlier of three months after termination of employment or ten years from the date of grant. On December 14, 2006, the Company issued options to purchase 10,000,000 shares of the Companys
common stock under this plan at an exercise price of $0.045 per share (fair value of $162,444).

See Note 2 for options issued to Laurus.

See Note 4 for Laurus option exercises.

A summary of the status of the Companys outstanding stock options as of December 31, 2006 and 2005, and the changes during the years ending on those dates, is presented below:



|                                                                     |  |             |   |  |                                |    
|-------------------------------------------------------------------- |  | ----------- | - |  | ------------------------------ | ---
|                                                                     |  | Shares      |   |  | Weighted AverageExercise Price
|Options outstanding, January 1, 2005                                 |  | 7,250,000   |   |  | $                              | .13
|Options granted in 2005                                              |  | 24,570,668  |   |  |                                | .01
|Options exercised in 2005                                            |  | (19,000,000 | ) |  |                                | .01
|Options expired in 2005                                              |  | (250,000    | ) |  |                                | .05
|                                                                     |  |             |   |  |                                |    
|Options outstanding, December 31, 2005                               |  | 12,570,668  |   |  |                                | .08
|                                                                     |  |            
|Options granted in 2006                                              |  | 10,000,000  |   |  |                                | .05
|Options exercised in 2006                                            |  | (6,570,668  | ) |  |                                | .02
|Options expired in 2006                                              |  | (466,200    | ) |  |                                | .21
|                                                                     |  |             |   |  |                                |    
|Options outstanding, December 31, 2006, all of which are exercisable |  | 15,533,800  |   |  | $                              | .08
|                                                                     |  |             |   |  |                                |    



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



A Summary of the status of the Companys non vested stock options as of December 31, 2006, and
changes during the year the ended, is presented below:



|                             |  |            |  |                                       |     
|---------------------------- |  | ---------- |  | ------------------------------------- | ----
|                             |  | Shares     |  | Weighted average Grant date fairvalue
|Non vested December 31, 2005 |  |           |  | $                                     | 0.00
|Granted                      |  | 10,000,000 |  | $                                     | 0.03
|Vested                       |  | 5,570,000  |  | $                                     | 0.03
|Forfeited                    |  |           |  | $                                     | 0.00
|                             |  |            |  |                                       |     
|Non vested December 31, 2006 |  | 4,430,000  |  | $                                     | 0.03
|                             |  |            |  |                                       |     

As of December 31, 2006, there was $126,255 of total unrecognized compensation cost related to non
vested share-based compensation expected to be recognized over the next year.



|              |  |                     |  |                              |  |                              |      |                          |   |         |  |                              |  |                              |  |                          |      |  |   |       
|------------- |  | ------------------- |  | ---------------------------- |  | ---------------------------- | ---- | ------------------------ | - | ------- |  | ---------------------------- |  | ---------------------------- |  | ------------------------ | ---- |  | - | ------
|              |  | Options Outstanding |  | Options Exercisable         
|Range ofprice |  | Number              |  | Weightedaverageremaininglife |  | WeightedaverageExerciseprice |      | AggregateInstrinsicvalue |   | Number  |  | Weightedaverageremaininglife |  | WeightedaverageExerciseprice |  | AggregateInstrinsicvalue
|$0.01-$0.22   |  | 15,533,800          |  | 7.9                          |  | $                            | 0.08 |                          | $ | 150,000 |  | 11,103,800                   |  | 7.0                          |  | $                        | 0.09 |  | $ | 83,550

Weighted average grant date fair values of stock options are as follows:



|                  |  |                |  |                      
|----------------- |  | -------------- |  | ---------------------
|Number of options |  | Exercise price |  | Grant date fair value
|10,000,000        |  | $0.04          |  | $0.03                

The total intrinsic value of options exercised during 2006 was $557,066

Common stock warrants:

On
March 30, 2005, the Company issued warrants to purchase 11,162,790 shares of the Companys common stock in conjunction with the credit facility with the Laurus Master Fund at a purchase price of $0.23 for the first 5,581,395 shares and
$.28 for the remaining 5,581,395 shares, exercisable for a period of seven years.

On October 13, 2006, for services received, the
Company issued warrants to purchase 18,000,000 shares of the Companys common stock at an exercise price of $0.08, exercisable for a period of three years. (fair value of $729,000)

On October 21, 2006, for services received, the Company issued warrants to purchase 400,000 shares of the Companys common stock at an exercise
price of $0.19, exercisable for a period of two years. (fair value of $38,680)

Stock issuances for services:

During 2005, the Company issued shares of unregistered common stock to settle certain disputes. The shares issued have been valued at prices that
approximate prices for cash sales of similar stock to others during the same periods.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



| | 16. | Stock Compensation, Stock Options and Warrants
| | --- | ----------------------------------------------

In
2001, the Board of Directors approved the 2001 Equity Incentive Plan. The total number of shares to which options may be granted under the plan is 20,000,000 shares. Generally the option price is fixed at no less than 100% of the fair market value
of the shares at the date the option is granted and expire on the earlier of three months after termination of employment or ten years from the date of grant. Options generally become fully vested three to four years from the date of grant and
expire five years from the date of grant. At December 31, 2006, the Company had 10,000,000 shares available for future stock option grants under existing plans.

We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant. The assumptions employed in the calculation of the fair value of share-based compensation expense
for the year ended December 31, 2006 were calculated as follows:



| |  |  | Expected dividend yieldNone.
| | - |  | -----------------------------



| |  |  | Expected volatilitybased on the Companys historical market price at consistent points in a period equal to the expected life of the options.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risk-free interest ratebased on the U.S. Treasury yield curve in effect at the time of grant.
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Expected life of optionscalculated using the simplified method as prescribed in Staff Accounting Bulletin No. 107, where the expected life is equal to the sum
of the vesting period and the contractual term divided by two (employees) or calculated as the option or warrant term (non-employees).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table summarizes the assumptions used to estimate the fair value of stock options and warrants granted during the years ended December 31, 2006 and 2005.



|                                       |  |      |            |   |      |   |            |  
|-------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                       |  | 2006 |            |   | 2005 |  
|Expected dividend yield                |  |      | 0          | % |      |   | 0          | %
|Expected volatility                    |  |      | 139.041    | % |      |   | 71.71      | %
|Risk-free interest rate                |  |      | 4.72       | % |      |   | 4.25       | %
|Expected life of options               |  |      | 3.74 years |   |      |   | 4.25 years |  
|Weighted average grant date fair value |  | $    | 0.04       |   |      | $ | 0.09       |  

Compensation expense related to common stock options and warrants was approximately $926,000 and
$695,000 for the years ended December 31, 2006 and 2005, respectively. The tax benefit from the exercise of common stock options and warrants was not significant during 2006. At December 31, 2006, there was $126,000 of unrecognized compensation cost
related to share-based payments which is expected to be recognized over a weighted average period of 1.1 years.

The following table
represents stock option and warrant activity as of and for the two years ended December 31, 2006:



|                                                     |  |                  |   |  |                              |      |                                          |           |                         |   |          
|---------------------------------------------------- |  | ---------------- | - |  | ---------------------------- | ---- | ---------------------------------------- | --------- | ----------------------- | - | ---------
|                                                     |  | Number of Shares |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractual Life |           | AggregateIntrinsicValue
|Options and Warrants Outstanding  January 1, 2005   |  | 7,250,000        |   |  | $                            | 0.13 |                                          |           |                         |   |          
|                                                     |  |                  |   |  |                              |      |                                          |           |                         |   |          
|Granted                                              |  | 35,733,458       |   |  |                              | 0.09 |                                          |           |                         |   |          
|Exercised                                            |  | (19,000,000      | ) |  |                              | 0.01 |                                          |           |                         |   |          
|Forfeited/cancelled/expired                          |  | (250,000         | ) |  |                              | 0.05 |                                          |           |                         |   |          
|                                                     |  |                  |   |  |                              |      |                                          |           |                         |   |          
|                                                     |  |                  |   | 
|Options and Warrants Outstanding  December 31, 2005 |  | 23,733,458       |   |  | $                            | 0.16 |                                          |           |                         |   |          
|                                                     |  |                  |   |  |                              |      |                                          |           |                         |   |          
|Granted                                              |  | 28,400,000       |   |  |                              | 0.07 |                                          |           |                         |   |          
|Exercised                                            |  | (6,570,668       | ) |  |                              | 0.02 |                                          |           |                         | $ | 569,000  
|Forfeited/cancelled/expired                          |  | (466,200         | ) |  |                              | 0.22 |                                          |           |                         |   |          
|                                                     |  |                  |   |  |                              |      |                                          |           |                         |   |          
|Options and Warrants Outstanding  December 31, 2006 |  | 45,096,590       |   |  | $                            | 0.12 |                                          | 2.4 years |                         | $ | 1,381,000
|                                                     |  |                  |   |  |                              |      |                                          |           |                         |   |          
|Options and Warrants Exercisable  December 31, 2006 |  | 40,666,590       |   |  | $                            | 0.13 |                                          | 2.7 years |                         | $ | 84,000   
|                                                     |  |                  |   |  |                              |      |                                          |           |                         |   |          

The total grant date fair value of options and warrants vested during the years ended December 31,
2006 and 2005 was approximately $926,000 and $695,000, respectively.

The following table summarizes information about outstanding and
exercisable stock options and warrants at December 31, 2006:



|                         |  |                        |  |                              |      |                                  |      |                        |            |                              |   |     
|------------------------ |  | ---------------------- |  | ---------------------------- | ---- | -------------------------------- | ---- | ---------------------- | ---------- | ---------------------------- | - | ----
|                         |  | Outstanding Options    |  |                              |      | Exercisable Options             
|Range of Exercise Prices |  | Outstandingat 12/31/06 |  | WeightedAverageExercisePrice |      | RemainingContractualLife inYears |      | Exercisableat 12/31/06 |            | WeightedAverageExercisePrice
|$0.01 - $1.00            |  | 45,096,590             |  | $                            | 0.12 |                                  | 2.40 |                        | 40,666,590 |                              | $ | 0.13
|                         |  |                        |  |                              |      |                                  |      |                        |            |                              |   |     



| | 17. | Managements plans regarding liquidity and capital resources:
| | --- | -------------------------------------------------------------

Prior to its acquisition of EME in late 2004, the Company experienced net losses and, as such, experienced negative operating cash flows. The Company has historically funded these negative operating cash flows with
proceeds from sales of common and preferred stock, as well as notes and convertible debentures and related party loans.

Commencing with the
Companys acquisition of EME in late 2004, the Company has restructured many of EMEs liabilities with funding provided by the Laurus credit facility discussed in Note 2 as well as additional related party loans.

As discussed in Note 14, in January 2006, the Company secured a $5,000,000 line of credit with an entity related to the Companys Chairman and Chief
Executive Officer. Approximately $440,000 of this credit facility remains available at December 31, 2006.

We have experienced negative
cash flows from operations of $4,043,159 during 2006 and $3,944,975 during 2005. These negative results have been accommodated in 2006 by large loans from an entity related to the Companys Chairman, while the negative cash flows in 2005 were
addressed through the Laurus credit facility.

In 2006, the Company had a gross profit in the contracting segment of approximately
$4,600,000 as compared to approximately $9,600,000 on less revenue for 2005. As most of the revenue of the Company comes from the contracting segment, this reduction in profitability is the primary reason for the cash shortfall. Bad debt expense of
approximately $2,800,000, a negotiated settlement in Grand Cayman of approximately $1,000,000, and several jobs not realizing the profitability originally estimated have caused the Company difficulty in meeting cash requirements.

At December 31, 2006, the Company had a working capital deficiency of approximately $5,200,000 as compared to a positive working capital of approximately
$4,100,000 as of December 31, 2005. Trade payables have increased significantly as the result of the cash flow difficulties, including payables aggregating approximately $4,900,000 at December 31, 2006 to two electrical parts suppliers that have
historically served as major suppliers for the Company.

In evaluating the factors that caused the negative results of operations during the
last two years, the Company in 2007 is restructuring the contracting segment to increase the quality of job estimating and implementation, as well as reducing selling, general and administrative overhead.

While the Company believes that the revenues earned during 2007 accompanied by its restructuring efforts will be sufficient to bring profitability and a
positive cash flow back to the Company, there can be no assurance that these results will be achieved, and that the Company will not have to raise additional capital to operate.

In the event the Company has to raise additional capital, there can be no assurance that such capital will be available when needed, that it will be
available on satisfactory terms, or available at all.

As described in the report or our independent registered public accountants, the
foregoing factors raise substantial doubt on the ability of the Company to continue as a going concern.



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##### Table of Contents

EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005

| | 18. | Income taxes:
| | --- | -------------

Net deferred tax assets and
liabilities consist of the following:



|                                  |  |      |             |   |      |   |             |  
|--------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                  |  | 2006 |             |   | 2005 |  
|Deferred tax assets:              |  |      |             |   |      |   |             |  
|Net operating loss carry-forwards |  | $    | 23,967,204  |   |      | $ | 19,601,411  |  
|Stock compensation                |  |      | 7,482,226   |   |      |   | 7,120,944   |  
|Intangibles                       |  |      | 3,987,600   |   |      |   | 1,131,754   |  
|Allowance for doubtful accounts   |  |      | 1,208,923   |   |      |   | 108,998     |  
|Interest expense                  |  |      | 852,424     |   |      |   | 852,424     |  
|Other accruals                    |  |      | 272,984     |   |      |   | 334,038     |  
|Derivative loss                   |  |      |            |   |      |   | 231,068     |  
|Other                             |  |      |            |   |      |   | 1,697       |  
|                                  |  |      |             |   |      |   |             |  
|                                  |  |      | 37,771,361  |   |      |   | 29,382,334  |  
|                                  |  |      |             |   |      |   |             |  
|Deferred tax liabilities:         |  |      |             |   |      |   |             |  
|Basis difference intangibles      |  |      | (98,989     | ) |      |   | (98,989     | )
|Derivative loss                   |  |      | (989,788    | ) |      |   |            |  
|                                  |  |      |             |   |      |   |             |  
|                                  |  |      | (1,088,777  | ) |      |   | (98,989     | )
|                                  |  |      |             |   |      |   |             |  
|Valuation Allowance               |  |      | (36,682,584 | ) |      |   | (29,283,345 | )
|                                  |  |      |             |   |      |   |             |  
|                                  |  | $    |            |   |      | $ |            |  
|                                  |  |      |             |   |      |   |             |  

Income tax benefit consists of the following:



|                 |  |      |   |      |   |  
|---------------- |  | ---- | - | ---- | - | -
|                 |  | 2006 |   | 2005
|Current:         |  |      |   |      |   |  
|Federal          |  | $    |  |      | $ | 
|State            |  |      |  |      |   | 
|                 |  |      |   |      |   |  
|Deferred benefit |  |      |  |      |   | 
|                 |  |      |   |      |   |  
|                 |  | $    |  |      | $ | 
|                 |  |      |   |      |   |  

The provision for income tax expense varies from that which would be expected based upon applying
the statutory federal rate to pre-tax accounting loss as follows:

|                                            |  |       |    |  |       |   
|------------------------------------------- |  | ----- | -- |  | ----- | --
|                                            |  | 2006  |    |  | 2005  |   
|Statutory federal rate                      |  | 35.0  | %  |  | 35.0  | % 
|Permanent items                             |  | (0.6  | )  |  | 9.1   |   
|State tax provision, net of federal benefit |  | 4.0   |    |  | 4.0   |   
|Nonconsolidated entities                    |  | 2.9   |    |  | 13.5  |   
|Other                                       |  |      |    |  | (8.5  | ) 
|Valuation allowance                         |  | (41.3 | )  |  | (53.1 | ) 
|                                            |  |       |    |  |       |   
|                                            |  | (0.0  | )% |  | (0.0  | )%
|                                            |  |       |    |  |       |   

At December 31, 2006, the Company had a net operating loss carry-forwards of approximately $61.5
million, which expire from 2012 through 2025.



| | 19. | Segment Information
| | --- | -------------------

Commencing with the
Companys acquisition of EME in the fourth quarter of 2004, and the establishment of SolarDiesel Corporation (formerly EarthFirst Americas, Incorporated) in 2005, the Company operates in three business segments. The waste disposal segment is
focused on research and development and bringing the existing technologies to commercial realization. The Contracting segment operates electrical contracting and subcontracting services on commercial, residential and municipal construction projects
primarily in Florida and the Caribbean. The Caribbean projects are all denominated in U.S. currency. The Biofuels segment is focused on the importing and producing of biodiesel fuels.



F-29



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##### Table of Contents

EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



SEGMENT INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2006 IS AS FOLLOWS:



|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|-------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------- | - | ----------- | -------- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                             |  | WasteDisposal |            |   | Contracting |   |             | Biofuels |  |   | Total       |  
|Revenue                                                                                      |  | $             |           |   |             | $ | 44,135,532  |          |  | $ | 1,235,973   |   |  | $ | 45,371,505  |  
|Cost of Sales                                                                                |  |               |           |   |             |   | 39,276,354  |          |  |   | 1,517,203   |   |  |   | 40,793,557  |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Gross profit (loss)                                                                          |  |               |           |   |             |   | 4,859,178   |          |  |   | (281,230    | ) |  |   | 4,577,948   |  
|Selling, general and administrative expenses                                                 |  |               | 730,796    |   |             |   | 8,918,164   |          |  |   | 786,325     |   |  |   | 10,435,285  |  
|Impairment of goodwill                                                                       |  |               |           |   |             |   | 9,323,152   |          |  |   |            |   |  |   | 9,323,152   |  
|Research and development expenses                                                            |  |               | 853,034    |   |             |   |            |          |  |   |            |   |  |   | 853,034     |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|                                                                                             |  |               |            |  
|Income (loss) from operations before reorganization item, income taxes and majority interest |  |               | (1,583,830 | ) |             |   | (13,382,138 | )        |  |   | (1,067,555  | ) |  |   | (16,033,523 | )
|Other income (expense)                                                                       |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Gain on extinguishment of debt, bankruptcy                                                   |  |               |           |   |             |   | 145,684     |          |  |   |            |   |  |   | 145,684     |  
|Claims recovery                                                                              |  |               |           |   |             |   | 1,100,000   |          |  |   |            |   |  |   | 1,100,000   |  
|Interest expense                                                                             |  |               | (5,246     | ) |             |   | (85,971     | )        |  |   | (130,250    | ) |  |   | (221,467    | )
|Miscellaneous income                                                                         |  |               |           |   |             |   | 142,005     |          |  |   | 56,518      |   |  |   | 198,523     |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|                                                                                             |  |               |            |  
|Loss before reorganization item, Income taxes and minority interest                          |  |               | (1,589,076 | ) |             |   | (12,080,420 | )        |  |   | (1,141,287  | ) |  |   | (14,810,783 | )
|Reorganization item, professional fees related to bankruptcy and pursuit of claims           |  |               |           |   |             |   | (826,498    | )        |  |   |            |   |  |   | (826,498    | )
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Loss before minority interest                                                                |  |               | (1,589,076 | ) |             |   | (12,906,918 | )        |  |   | (1,141,287  | ) |  |   | (15,637,281 | )
|Minority interest                                                                            |  |               |           |   |             |   |            |          |  |   |            |   |  |   |            |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Net Loss                                                                                     |  | $             | (1,589,076 | ) |             | $ | (12,906,918 | )        |  | $ | (1,141,287  | ) |  | $ | (15,637,281 | )
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Total Assets                                                                                 |  | $             | 2,981,207  |   |             | $ | 19,562,865  |          |  | $ | 1,702,040   |   |  | $ | 24,246,112  |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Goodwill                                                                                     |  | $             |           |   |             | $ | 6,000,000   |          |  | $ |            |   |  | $ | 6,000,000   |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Reconciliation of Segment Amounts Reported to Condensed Consolidated Amounts                 |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Revenue                                                                                      |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Total revenues for reportable segments                                                       |  |               |            |   |             |   |             |          |  | $ | 45,371,505  |   |  |   |             |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Total consolidated revenue                                                                   |  |               |            |   |             |   |             |          |  | $ | 45,371,505  |   |  |   |             |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|                                                                                             |  |               |            |  
|Net loss                                                                                     |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Total income (loss for reportable segments                                                   |  |               |            |   |             |   |             |          |  | $ | (15,637,281 | ) |  |   |             |  
|Unallocated amounts relating to corporate operations                                         |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Miscellaneous income                                                                         |  |               |            |   |             |   |             |          |  |   | 16,791      |   |  |   |             |  
|Selling, general and administrative expenses                                                 |  |               |            |   |             |   |             |          |  |   | (4,038,192  | ) |  |   |             |  
|Interest expense                                                                             |  |               |            |   |             |   |             |          |  |   | (3,340,728  | ) |  |   |             |  
|Derivative gain                                                                              |  |               |            |   |             |   |             |          |  |   | 3,130,601   |   |  |   |             |  
|Professional fees - pursuit of claims                                                        |  |               |            |   |             |   |             |          |  |   | (3,479      | ) |  |   |             |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Total consolidated net loss                                                                  |  |               |            |   |             |   |             |          |  | $ | (19,872,288 | ) |  |   |             |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Assets                                                                                       |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Total assets for reportable segments                                                         |  |               |            |   |             |   |             |          |  | $ | 24,246,112  |   |  |   |             |  
|Corporate investments and other assets                                                       |  |               |            |   |             |   |             |          |  |   | 421,047     |   |  |   |             |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Total consolidated assets                                                                    |  |               |            |   |             |   |             |          |  | $ | 24,667,159  |   |  |   |             |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|SEGMENT INFORMATION FOR THE YEAR ENDED DECEMBER 31,
2005 IS AS FOLLOWS:                      | 
|                                                                                             |  | WasteDisposal |            |   | Contracting |   |             | Biofuels |  |   | Total       |  
|Revenue                                                                                      |  |               | 11,770     |   |             | $ | 41,562,369  |          |  | $ | 169,181     |   |  | $ | 41,743,320  |  
|Cost of Sales                                                                                |  |               |           |   |             |   | 31,872,678  |          |  |   | 171,526     |   |  |   | 32,044,204  |  
|                                                                                             |  |               |            |   |             |   |             |          |  |   |             |   |  |   |             |  
|Gross margin                                                                                 |  |               | 11,770     |   |             |   | 9,689,691   |          |  |   | (2,345      | ) |  |   | 9,699,116   |  
|Selling, general and administrative                                                          |  |               | 857,403    |   |             |   | 4,843,957   |          |  |   | 510,034     |   |  |   | 6,211,394   |  
|Research and development                                                                     |  |               | 408,205    |   |             |   |             |          |  |   |             |   |  |   | 408,205     |  



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##### Table of Contents

EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



| | 18. | Quarterly information (unaudited):
| | --- | ----------------------------------



|                  |  |       |            |   |      |   |            |           |  |   |             |   |  |   |             |  
|----------------- |  | ----- | ---------- | - | ---- | - | ---------- | --------- |  | - | ----------- | - |  | - | ----------- | -
|                  |  | March |            |   | June |   |            | September |  |   | December    |  
|2006              |  |       |            |   |      |   |            |           |  |   |             |   |  |   |             |  
|Revenues          |  | $     | 11,398,462 |   |      | $ | 12,941,939 |           |  | $ | 8,746,062   |   |  | $ | 12,285,042  |  
|Net income (loss) |  | $     | 1,627,526  |   |      | $ | (1,456,923 | )         |  | $ | (3,966,451  | ) |  | $ | (14,076,440 | )
|EPS               |  | $     | .002       |   |      | $ | (.002      | )         |  | $ | (.007       | ) |  | $ | (.023       | )
|                  |  |       |            |  
|                  |  | March |            |   | June |   |            | September |  |   | December    |  
|2005              |  |       |            |   |      |   |            |           |  |   |             |   |  |   |             |  
|Revenues          |  | $     | 8,168,099  |   |      | $ | 9,753,062  |           |  | $ | 10,526,009  |   |  | $ | 13,597,937  |  
|Net income (loss) |  | $     | (4,403,379 | ) |      | $ | 8,691,108  |           |  | $ | (19,954,550 | ) |  | $ | (2,018,279  | )
|EPS               |  | $     | (.012      | ) |      | $ | .018       |           |  | $ | (.041       | ) |  | $ | (.003       | )



| | 19. | EME Bankruptcy and Plan of Reorganization Obligations
| | --- | -----------------------------------------------------

On May 29, 2003, (Petition Date), Electric Machinery Enterprises, Inc. (the Debtor) filed a petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Middle
District of Florida (the Bankruptcy Court). Under Chapter 11, certain claims against the debtor in existence prior to the filing of the petitions for relief under the Bankruptcy Code were stayed while the Debtor continued business
operations as Debtor-In-Possession.

The Plan of Reorganization (the Plan) filed on behalf of Electric Machinery Enterprises,
Inc. was confirmed by the Bankruptcy Court on December 9, 2004. The plan provides for the restructure of debt, and orderly discharge of pre-petition priority and administrative claims.

On March 31, 2005, with the closing of the Laurus Credit Facility, the Company was able to take advantage of discounts available through the approved
reorganization plan for its wholly owned subsidiary, EME., and satisfy all remaining obligations associated with the secured debt, resulting in gains on extinguishment of debt in the amounts of $145,684 and $4,163,740 for the years ended
December 31, 2006 and 2005, respectively.



| | 20. | Suesequent Events
| | --- | -----------------

Subsequent to December 31, 2006,
the Company defaulted on certain terms of the Laurus credit facility in that it ceased making principal and interest payments on a monthly basis.

On April 18, 2007, the Company made an interest payment in the amount of $123,985, and pursuant to correspondence received on that date, the Company is no longer in payment default, and Laurus has agreed to defer the past due principal
payments while working together on a plan that is acceptable to both parties.

Subsequent to March 31, 2007, SolarDiesel Corporation
entered into two credit facility agreements with Fifth Third Bank. Each loan is a revolving facility with a maximum amount available at any one time in the amount of $500,000 for each facility. Advances on each of the facilities in order, are based
on; (1) $1 per gallon of biodiesel purchased, provided that the purchase price must be not less than $2 per gallon, and (2) the purchase price of certain water filtration equipment, limited to $23,000 per piece of equipment, or 65% of cost, or 65%
of value, respectively. Borrowings under the facilities bear interest at from LIBOR plus 2.5% to 2.75%. Both facilities are repayable monthly with any unpaid balance due April 2008. As of May 16, 2007, an aggregate of approximately $775,000 was
outstanding under these facilities.

Subsequent to March 31, 2007, SolarDiesel Corporation made a $500,000 refundable deposit on a facility
lease agreement for the purpose of constructing a biodiesel manufacturing plant on these leased facilities in Illinois. The agreement requires further refundable deposits in 2008 and 2009. The lease term is initially for a period of three years
commencing on October 1, 2007, with four additional three year renewal options. Monthly rentals under the terms of the lease for the initial three year term range from $187,500 to $333,333. Subsequent rentals are subject to increases based upon the
Producers Price Index for industrial commodities.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees.

The aggregate fees billed by Aidman, Piser & Company, P.A. for professional services rendered for the audit of the Companys annual
financial statements for the years ended December 31, 2006 and 2005, the review of the financial statements included in the Companys Forms 10-QSB totaled $211,600 and $161,500 as follows:



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|                   |  | 2006 |         | 2005
|Audit fees         |  | $    | 160,600 |      | $ | 91,385 
|Audit related fees |  |      | 102,300 |      |   | 70,120 
|Tax fees           |  |      |        |      |   |       
|All others         |  |      |        |      |   |       
|                   |  |      |         |      |   |        
|                   |  | $    | 262,900 |      | $ | 161,505
|                   |  |      |         |      |   |        



F-31



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##### Table of Contents

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on May 16, 2007.



EarthFirst Technologies, IncorporatedBy:

/s/ John D. StantonJohn D. Stanton Chief Executive Officer and
President


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of Registrant and in the capacities indicated on May 16, 2007.



|                                                  |  |                                                                          
|------------------------------------------------- |  | -------------------------------------------------------------------------
|Signature                                         |  | Title                                                                    
|                                                  | 
|/s/ John D. Stanton John D. Stanton               |  | Chairman of the Board of Directors, Chief Executive
Officer and President
|                                                  | 
|/s/ Frank W. Barker, Jr Frank W. Barker, Jr.      |  | Chief Financial Officer and Accounting
Officer                           
|                                                  | 
|/s/ Jaime Jurado Jaime Jurado                     |  | Vice Chairman of the Board of Directors                                  
|                                                  | 
|/s/ Nicholas R. Tomassetti Nicholas R. Tomassetti |  | Director                                                                 
|                                                  | 
|/s/ David E. Crow David E. Crow                   |  | Director