UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
  FORM
10-KSB/A
 
 AMENDMENT
NO. 2
 
 o ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For
the Fiscal Year Ended December 31, 2006
  Commission
File Number:   000-26673
  
 ETHOS
ENVIRONMENTAL, INC.
 (Name of
Small Business Issuer in Its Charter)
  Nevada
              
              88-0467241(State
      or Other Jurisdiction
              
              IRS
      Employerof
      Incorporation or Organization)
              
              Identification
      Number
  6800
Gateway Park
 San
Diego, CA 92154
 (619)
575-6800
 (Address
and Telephone Number of Principal Executive Offices)
  Securities
      registered under Section 12(b) of the Exchange Act:Title
      of each class registered:
              Name
      of each exchange on which registered:None
              Over-the-Counter
      Bulletin BoardSecurities
      registered under Section 12(g) of the Exchange Act:Common
      Stock, par value $0.001
                (Title
      of class)
  Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.    Yes   ̈    No  x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act.    ̈
 
 Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yesx Noo
  Table of Contents
 1
 Indicate by check mark whether the
registrant is a shell company as defined in Rule 12b-2 of the Exchange
Act.  Yeso Nox
  Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B not contained in
this form, and no disclosure will be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
Yeso Nox
  Revenues
for year ended December 31, 2006: $4,768,013.
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was approximately $85,254,407 as of April 16, 2007 based upon the
average bid and asked price of the registrant’s common stock on the Over the
Counter Bulletin Board.
  Number of
shares of the registrant’s common stock outstanding as of April 16, 2007 was:
23,681,687.
  Transitional Small Business Disclosure
Format: Yeso Nox
 
  DOCUMENTS
INCORPORATED BY REFERENCE
  Portions
of the Company’s definitive proxy statement for its 2006 Annual Meeting of
Shareholders are incorporated by reference in Part I and III of this Form
10-KSB.
 
 EXPLANATORY
NOTE:
 
 This
Form 10-KSB/A is being filed to restate the Consolidated Statements of
Stockholders Equity and to more fully explain certain stock-based
compensation.  These changes are reflected in the Management
Discussion & Analysis, in the Financial Statements and in Note 1 to the
Financial Statements.
  Table of Contents
 2
 Ethos
Environmental, Inc.
 ANNUAL
REPORT ON FORM 10-KSB
  FOR
THE YEAR ENDED DECEMBER 31, 2006
 
 INDEX
  PART
      I
              PageItem 1.
              Description
      of Business
              5The
      CompanyProductsTrademarksSignificant
      EventsItem 2.
              Properties
              32Item 3.
              Legal
      Proceedings
              33Item 4.
              Submission
      of Matters to a Vote of Security Holders
              33PART
      IIItem 5.
              Market
      for Common Equity and Related Stockholder Matters
              34Item 6.
              Management’s
      Discussion and Analysis or Plan of Operation
              35Item 7.
              Financial
      Statements
              44Item 8.
              Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
              56Item 8A.
              Controls
      and Procedures
              56Item 8B.
              Other
      Information
              57PART
      IIIItem 9.
              Directors,
      Executive Officers and Corporate Governance
              57Item 10.
              Executive
      Compensation
              58Item 11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              60Item 12.
              Certain
      Relationships and Related Transactions
              61Item 13.
              Exhibits
              61Item 14.
              Principal
      Accountant Fees and Services
              62
  
 Table of Contents
 3
 FORWARD-LOOKING
STATEMENTS
  This
Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These forward-looking statements are not
historical facts but rather are based on current expectations, estimates and
projections. We use words such as “anticipate,” “expect,” “intend,” “plan,”
“believe,” “foresee,” “estimate” and variations of these words and similar
expressions to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and other factors, some of which are beyond our control, are difficult to
predict and could cause actual results to differ materially from those expressed
or forecasted. These risks and uncertainties include the following:
  ·
              The
      availability and adequacy of our cash flow to meet our
      requirements;
  ·
              Economic,
      competitive, demographic, business and other conditions in our local and
      regional markets;
  ·
              Changes
      or developments in laws, regulations or taxes in our
    industry;
  ·
              Actions
      taken or omitted to be taken by third parties including our suppliers and
      competitors, as well as legislative, regulatory, judicial and other
      governmental authorities;
  ·
              Competition
      in our industry;
  ·
              The
      loss of or failure to obtain any license or permit necessary or desirable
      in the operation of our business;
  ·
              Changes
      in our business strategy, capital improvements or development
      plans;
  ·
              The
      availability of additional capital to support capital improvements and
      development; and
  ·
              Other
      risks identified in this report and in our other filings with the
      Securities and Exchange Commission or the
SEC.
  You
should read this report completely and with the understanding that actual future
results may be materially different from what we expect. The forward looking
statements included in this report are made as of the date of this report and
should be evaluated with consideration of any changes occurring after the date
of this Report. We will not update forward-looking statements even though our
situation may change in the future and we assume no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
  Use
of Term
  Except as
otherwise indicated by the context, references in this report to “Company,”
“ETEV,” “we,” “us” and “our” are references to the pre-merger business of Victor
Industries, Inc. and post-merger business of Ethos Environmental, Inc.  All
references to “USD” or “$” refer to the legal currency of the United States of
America.
 
 Table of Contents
 4
 PART
I
 
 Item 1.    Description of Business
  Overview
  The
mission of Ethos Environmental is to be recognized as the industry standard for
high quality, non-toxic cleaning and lubricating products that increase fuel
mileage and reduce these ecologically damaging emissions from vehicles, and at a
price everyone can afford.  The goal of the company is to make the
world a better place, “one gallon at a time”. According to the Environmental
Protection Agency (EPA), “The burning of fuels releases carbon dioxide (CO2) into the
atmosphere and contributes to climate change [Global Warming], but these
emissions can be reduced by improving your car’s fuel
efficiency.”  Air pollution caused by cars, trucks and other vehicles
burning petroleum-based fuels is one of the most harmful and ubiquitous
environmental problems. Furthermore, local accumulation in heavy traffic is the
greatest source of community ambient exposure, largely because carbon monoxide
is formed by incomplete combustion of carbon containing fuels.
 
 Ethos
Environmental manufactures and distributes a unique line of fuel reformulators
that contain a blend of low and high molecular weight esters.  The
product adds cleaning and lubrication qualities to any type of fuel or motor
oil.  The overall benefits are increased fuel mileage, reduced
emissions and reduced maintenance costs as the product allows engines to perform
cooler, smoother and with more vigor.
 
 Esters
 
 In the
simplest terms, esters can be defined as the reaction products of acids and
alcohols. Thousands of different kinds of esters are commercially produced for a
broad range of applications. Within the realm of synthetic lubrication, a
relatively small substantial family of esters have been found to be very useful
in severe environment applications.
 
 Esters
lubricants have already captured certain niches in the industrial market such as
reciprocating air compressors and high temperature industrial oven chain
lubricants. When one focuses on high temperature extremes and their telltale
signs such as smoking, wear, and deposits, the potential applications for the
problem solving ester lubricants are virtually endless.
 
 In many
ways esters are very similar to the more commonly known and used synthetic
hydrocarbons or PAOs. Like PAOs, esters are synthesized form relatively pure and
simple starting materials to produce predetermined molecular structures designed
specifically for high performance lubrication. Both types of synthetic base
stocks are primarily branched hydrocarbons which are thermally and oxidatively
stable, have high viscosity indices, and lack the undesirable and unstable
impurities found in conventional petroleum based oils. The primary structural
difference between esters and PAOs is the presence of multiple ester linkages
(COOR) in esters which impart polarity to the molecules. This polarity affects
the way esters behave as lubricants in the following ways:
 
 Volatility: The polarity of
the ester molecules causes them to be attracted to one another and this
intermolecular attraction requires more energy (heat) for the esters to transfer
from a liquid to a gaseous state. Therefore, at a given molecular weight or
viscosity, the esters will exhibit a lower vapor pressure which translates into
a higher flash point and a lower rate of evaporation for the lubricant.
Generally speaking, the more ester linkages in a specific ester the higher its
flash point and the lower its volatility.
 
 Lubricity: Polarity also
causes the ester molecules to be attracted to positively charged metal surfaces.
As a result, the molecules tend to line up on the metal surface creating a film
which requires additional energy (load) to penetrate. The result is a stronger
film which translates into higher lubricity and lower energy consumption on
lubricant applications.
 
 Detergency/Dispersency: The
polar nature of esters also makes them good solvents and dispersants. This
allows the esters to solubilize or disperse oil degradation by-products which
might otherwise be deposited as varnish or sludge, and translates into cleaner
operation and improved additive solubility in the final lubricant.
 
 Table of Contents
 5
 Biodegradability: While stable
against oxidative and thermal breakdown, the ester linkage provides a vulnerable
site for microbes to begin their work of biodegrading the ester molecule. This
translates into very high biodegradability rates for ester lubricants and allows
more environmentally friendly products to be formulated.
 
 Ethos
Environmental manufactures and distributes Ethos FR, a unique combination of
high-quality, non-toxic, specially designed esters that uses only the elements
of carbon, hydrogen and oxygen. It significantly reduces emissions, fuel
consumption, and engine maintenance costs. Ethos FR provides an immediate,
cost-effective strategy for fighting air pollution caused by fossil fuels and
the internal combustion engine. This combination of low molecular cleaning
esters and the high molecular lubricating esters, reformulates any fuel whether
it’s gasoline, diesel, methanol, ethanol, LNG, compressed natural gas or
bio-diesel. When blended with fuels, Ethos FR reduces the emissions of
hydrocarbons (HC), nitrogen oxides (NOx), carbon monoxide (CO), particulate
matter (PM) and other harmful products of combustion. Yet, the emission of O2 is
significantly increased. An EPA registered laboratory, confirms that Ethos FR is
99.99976% clean upon ignition and ashless upon combustion. Ethos FR is free of
carcinogens.
 
 Ethos FR
is a light colored, multi-functional fuel reformulator. It is designed for use
in all fuels to increase power and mileage, dissolve gums and varnishes,
lubricate upper cylinder components and keep the entire fuel system clean and
highly lubricated. It is recommended for use at 1 part in 1280, which is equal
to 1 fluid ounce of Ethos FR per 10 gallons of fuel.
 
 Typical
      SpecificationsTests
              ResultsViscosity
      @ 37.8o C,CS
              10.39Viscosity
      @ 100o F, SSU
              60.2Specific
      Gravity @ 15.6/15.6oC
              0.93API
      Gravity, Degrees
              26.6Flash
      Point, COC, oC (oF)
              149oC
      (300oF)Color
      and Appearance
              Light,
      bright and clearSediment
              None
 
 Ethos
Environmental offers a cost-effective solution to relieve skyrocketing fuel
prices and help lessen environmental regulatory pressures. Ethos products
address one problem that has two side effects, wasted fuel and air pollution. Fuel
burns inefficiently in an internal combustion engine and that inefficiency leads
to wasted fuel transformed into toxic emissions. Ethos products make fuel burn
more efficiently so it significantly improves both of the aforementioned adverse
effects. Most important, the use of Ethos results in fuel cost savings to the
customer.
 
 Fuel
and Maintenance Costs Savings:
 
 •
Increases Miles-Per-Gallon between 7% and 19% Fleet-Wide
 •
Enhances Engine Performance by Reducing Heat Produced by Friction
 
 Fines
and Downtime are Reduced Due To Air Pollution:
 
 • Reduces
Toxic Emissions By 30% or More
 • Free Of
Carcinogens
 •
Non-Toxic & Non-Hazardous
 • Not a
Petrochemical
 •
99.99976% Ashless upon Combustion
 
 Table of Contents
 6
 
 Repairs:
 
 •
Improves Combustion
 • Cleans
Fuel System
 •
Lubricates Moving Components
 • Extends
Engine Life by Reducing Friction
 
 How
Do Ethos Products Work?
 
 Ethos
products reformulate any fuel, resulting in two important benefits. The first
benefit is the added lubricity to the engine. The second is adding cleansing
properties to the fuel. All of the internal components benefit from the
cleansing and lubricating action including the fuel lines, filters, carburetors,
spark plugs and injectors. Ethos also conditions the engine seals, keeping them
tighter for a longer period of time. A cleaner, more lubricated engine runs
smoother, requires less maintenance and reduces engine heat significantly,
thereby returning horsepower closer to the manufacturer’s specifications. Ethos
removes carbon deposits that cause fuel to combust incompletely, resulting in
wasted fuel that creates toxic emissions. The combination of cleaning and
lubricating esters in our products stabilize the fuel without changing its
specifications.
 
 In Ethos
FR®, for example, a group of low molecular weight esters clean the dirty
deposits formed by fuels and the combustion process. These deposits lower
performance of an engine making it less fuel-efficient. Causing it to exhaust
raw fuel, which is the primary contributor to pollution. A group of high
molecular weight esters lubricate the engine surfaces as the fuel runs through
it. Their molecular structure is small enough to penetrate the metal and form a
lubricating layer between surfaces. This process allows the moving components of
an engine to operate smoother and with less power-robbing friction and
heat.
 
 The
primary task for the Company is to distinguish itself as an industry leader in
the reduction of fuel costs and emission problems at a profit gain to the
commercial user. Part of the challenge before us is to differentiate Ethos
products from two types of products in this industry, additives - that are
purported to increase fuel mileage and oxygenates - which are mandated to lower
emissions. Both additives and oxygenates provide short-term benefits at the
price of long-term engine or environmental problems.
 
 Additives
contain highly refined petrochemicals or compressed hydrocarbons that promise
better fuel mileage and sometimes lower emissions, by “cleaning” the engine.
Used mainly by individual consumers, they are expensive and commonly sold at the
auto parts and retail stores. More than five thousand EPA-registered fuel
additives compete in the retail market and although the EPA requires that such
products be registered, that registration constitutes neither endorsement nor
validation of the product’s claims.
 
 Oxygenates,
such as methyl tertiary butyl ether (MTBE) and Ethanol, are intended to lower
emissions by adding oxygen to the fuel. Ethos FR® products
actually complement federally mandated oxygenates by lowering emissions, but as
mentioned earlier, Ethos FR® is not
an oxygenate and cannot be used for the purpose of complying with current
language federal legislation.
 
 In
contrast, Ethos products have cleaning properties that contribute to the
lubrication of the engine instead of destroying it. The ester-based formula
dissolves the gums and residues and adds important lubrication that an engine
needs. The engine stays clean and lubricated, allowing it to run smoothly and
efficiently.
 
 Both E85
and biodiesel, such as B5, are alternative measures currently being considered
for use by the federal government.  However, these alternative
measures rely entirely on agricultural resources such as corn, barley, wheat and
vegetable oils.  Realistically, the agricultural sector of the economy
cannot hope to produce sufficient quantities of these products to cause an
appreciable effect on global warming.  This is a problem not facing
Ethos as the product is readily available and continuously produced at a lower
price.
 
 While the
debate on emissions reduction solutions continues, Ethos Environmental is making
a difference in cleaning the air today while reducing fuel costs to its
customers.  Extensive road tests with Ethos FR® have
proven that commercial fleets, on average, increase fuel mileage between 7% and
19% and reduce emissions by more than 30%.  Ethos FR® is
non-toxic, non-hazardous and works with any fuel used in cars, trucks, buses,
RV’s, ships, trains and generators.
 
 Table of Contents
 7
 The
overall result is that Ethos FR® makes
engines combust fuel more efficiently.  When an engine uses each
measure of fuel to the maximum degree possible, it has two very important
benefits.  It reduces fuel consumption and reduces non-combusted
residues that an engine expels in the form of exhaust emissions such as
hydrocarbons, nitrogen oxides, carbon monoxide, particulate matter and other
harmful products of combustion.  Unused fuel is saved in the fuel
tank, waiting to be used efficiently by the engine, instead of exhausted in the
form of toxic emissions.  Ethos FR® reduces
emissions without adding any of its own components to the exhaust since it is
99.99976% ash-less upon combustion, and free of carcinogenic
compounds.
 
 Ethos
Environmental is also at the forefront in the development of new blending
methods and is positioned to become an industry leader with new products
currently under development.
 
 Our
Corporate History
 
 We were
originally incorporated under the laws of the State of Idaho on January 19, 1926
under the name of Omo Mining and Leasing Corporation. The Company was renamed
Omo Mines Corporation on January 19, 1929. The name was changed again on
November 14, 1936 to Kaslo Mines Corporation and finally Victor Industries, Inc.
on December 24, 1977.
 
 As Victor
Industries, Inc., the Company developed, manufactured, and marketed products
related to the use of the mineral known as zeolite. Zeolites have the unique
distinction of being nature's only negatively charged mineral. Zeolites are
useful for metal and toxic chemical absorbents, water softeners, gas absorbents,
radiation absorbents and soil and fertilizer amendments.
 
 Reverse
Acquisition of Ethos
 
 On
November 2, 2006, as part of a two-step reverse merger, the Company merged with
and into Victor Nevada, Inc. a newly incorporated entity for the purpose of
redomiciling under the laws of the State of Nevada. Concurrently therewith, we
completed the merger transaction with Ethos Environmental, Inc., a privately
held Nevada corporation “Ethos”. The Company was the surviving entity. To more
adequately reflect the new direction of the Company, the name was
changed to Ethos Environmental, Inc. and the Company adopted the business
plan of Ethos.
  Acquisition
 
 On April
20, 2006, Victor Industries, Inc., with the approval of its Board of Directors,
executed an Agreement and Plan of Merger with San Diego, CA based Ethos
Environmental, Inc., a Nevada corporation.
 
 At a
meeting of the shareholders of the Company held on October 30, 2006, a majority
of shareholders voted in favor of the merger. On November 2, 2006, the merger
was consummated. As part of the merger, the Company redomiciled to Nevada, and
changed its name to Ethos Environmental, Inc. In addition thereto, and as part
of the merger, the Company set a record date of November 16, 2006 for a reverse
stock split of 1 for 1,200.
 
 The
merger provides for a business combination transaction by means of a merger of
Ethos with and into the Company, with the Company as the corporation surviving
the merger. Under the terms of the merger, the Company acquired all issued and
outstanding shares of Ethos in exchange for 17,718,187 shares of common stock of
the Company. Shares of Company common stock, representing an estimated 97% of
the total issued and outstanding shares of Company common stock, was issued to
the Ethos stockholders. Ethos shareholders were able to exchange their shares
beginning on or after November 16, 2006, the record date set for the reverse
stock split.
  The
shares issued by the registrant (17,718,187) were revalued at the new par value
of $.0001.  Another adjustment to common stock and additional paid in
capital was generated due to the cancellation of pre-merger shares
(17,717,477).  Due to the effect of the reverse merger, the Buyer’s
shares outstanding (479,500) were converted to common stock and the effect of
the net assets acquired was adjusted to additional paid in
capital.  During the year, another 4,910,000 shares of common stock
were issued for services based upon the price at date of
issuance.
  Table of Contents
 8
 The
merger was intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code and no gain or loss will be
recognized by the Company as a result of the merger.
 
 The
merger is accounted for under the purchase method of accounting as a reverse
acquisition in accordance with U.S. generally accepted accounting principles for
accounting and financial reporting purposes. Under this method of accounting,
Ethos is treated as the “accounting acquirer” for financial reporting purposes.
In accordance with guidance applicable to these circumstances, the merger was
considered to be a capital transaction in substance. Accordingly, for accounting
purposes, the merger was treated as the equivalent of Ethos issuing stock for
the net monetary assets of the Company. The net monetary assets of the Company
have been stated at their fair value.
  In
connection with the merger, Lana Pope and Dave Boulter voluntarily resigned from
the board of directors of the Company on November 3, 2006.
  Following
such resignations, as a result of the merger, three persons became the Company’s
board of directors: Enrique de Vilmorin, President, Chief Executive Officer, and
Director, Jose Manuel Escobedo, Director and Secretary, and Luis Willars,
Director and Treasurer.
  A summary
of the merger follows:
 
 ·
              The
      Company was the surviving legal corporation,·
              The
      Company acquired all issued and outstanding shares of Ethos in exchange
      for 17,718,187 shares of common stock of the Company. Shares of Company
      common stock, representing an estimated 97% of the total issued and
      outstanding shares of Company common stock, was issued to the Ethos
      stockholders,·
              The
      shareholders of the Company received pro rata for their shares of common
      stock of Ethos, 17,718,187 shares of common stock of the Company in the
      merger, and all shares of capital stock of Ethos were
      cancelled,·
              The
      officers and directors of Ethos became the officers and directors of the
      Company,·
              The
      name of Victor Industries, Inc. was changed to “Ethos Environmental,
      Inc.”, and·
              Ethos
      requested a new symbol for trading on the Over the Counter Bulletin Board
      (“OTCBB”), which also reflects the reverse stock split of 1 for 1,200, the
      new symbol of the Company is
“ETEV.”
 
 Over the
last decade, the unmatched value of Ethos FR®
products has been proven through millions of miles of on-the-road testing. On
average, customers have achieved a 7% to 19% increase in fuel mileage, and more
than a 30% reduction in emissions.
 
 Ethos
seeks both a cleaner environment and economic success. As the name Ethos
suggests, we are committed to the highest ethical standards - in the product
that we sell, in the relationship with our clients, and in the conduct of our
business. The Company’s approach is to sell Ethos FR®
“one gallon at a time”, earning the trust and loyalty of each customer by
providing products that perform as promised and make a positive difference in
the world.
 
 Products
 
 Ethos
manufactures a unique line of fuel reformulators that contain a blend of low and
high molecular weight esters. Ethos products add cleaning and lubricating
qualities to any type of fuel or motor oil, allowing engines to perform cooler,
smoother and with more vigor. The overall benefits are increased fuel mileage,
reduced emissions, and reduced maintenance costs.
 
 Ethos
fuel reformulating products increase fuel mileage and reduce emissions by
burning fuel more completely. Exhaust is essentially unburned fuel, i.e. wasted
fuel, so when that fuel is used more completely, the engine delivers better
mileage from every tank. Efficient fuel use also improves engine performance due
to the fact that a more complete combustion process obtains increased power from
every engine revolution.
 
 The
management of Ethos Environmental firmly believes that the market for our
product is aggressively expanding.  Worldwide fuel consumption is
approximately 85 million barrels per day and projected by the Energy Information
Administration to continue to grow to 97 million barrels per day by 2015, and
118 million barrels per day by 2030.  Much of the dramatic growth over
the past decade has been fueled by the dramatic expansion of India, China and
Brazil.  As additional undeveloped countries begin to expand, so too
will fuel consumption and the Company’s market base.  In addition,
consumers are becoming more sensitive to increased fuel economy as oil prices
have increased eight times since the late 1990s.
 
 Table of Contents
 9
 Ethos
products reduce fuel emissions, benefiting the environment in two notable
ways:
 
 1.
              The
      use of Ethosproducts reduce
      engine exhaust emissions by 30% or more, including measurable reductions
      in the emission of hydrocarbons (HC), nitrogen oxides (Nox), and carbon
      monoxide (CO).  All of these emissions are highly toxic and
      detrimental to the environment.
 
 2.
              Ethos
      products reduce emissions of particulate matter, especially in
      diesel-powered engines. Diesel fuel is commonly dirty and maintaining a
      diesel engine in the prime condition necessary to reduce emissions is both
      expensive and time-consuming.  As a result, diesel engines are a
      constant source of air contaminants. In most industrialized countries,
      including the U.S., diesel engines are one of the largest sources of air
      pollution. When Ethos products are added to diesel fuel, the engine runs
      cleaner, smoother and cooler - significantly reducing sooty exhaust.
      Engines treated with Ethos run with less friction, heat and noise. Fuel
      and lubricating systems, filters, tanks, and injectors last longer,
      reducing maintenance costs.
 
 
 Ethos has
two products, Ethos FR® and Ethos Bunker Fuel Conditioner (“Ethos BFC”). There
are two esters used in each product, a light ester and a heavy ester.  For
the Ethos FR®, we obtain the esters from Hatco and Cognis.  The mineral oil
used in the Ethos FR® is obtained, primarily, from Chevron, and, at times, from
Proctor and Gamble.
 
 Ethos FR®
can be used in any fuel. Ethos BFC is primarily used for Maritime Diesel Fuels
and Power Plant Diesel Fuel, or external combustion engines.  Ethos BFC
uses two esters distinct from those used in the Ethos FR® as the diesel fuel
used in external combustion engines is heavier and thicker than normal diesel
fuel. We obtain the heavy ester for the Ethos BFC from Tekat (a Netherlands
Company headquartered in the UK).  The light ester is purchased from
Cognis. While there is no toxicity in the Ethos FR®, Ethos BFC has some degree
of toxicity, though not much.
 
 Ethos
products provide risk-free benefits with an economic gain to the client. To
date, all customers have testified, either verbally or in writing, that they
experienced a monetary gain on fuel savings, with all stating that they
experienced an average improvement in mileage per gallon between 7% and 19%,
depending on the fuel (gasoline or diesel), the vehicle used, and the individual
driver’s practices and driving traits.
 
 Trademarks
 
 We own
the following trademark(s) used in this document (which is registered with the
United States Patent and Trademark Office under Registration Number 3,015,561):
Ethos FR®.
Trademark rights are perpetual provided that we continue to keep the mark in
use. We consider these marks, and the associated name recognition, to be
valuable to our business.
 
 Air
Quality Standards
 
 It is
believed that with the increased worldwide focus on the greenhouse effects of
petroleum products, the ability of Ethos to reduce emissions by 30% can only
increase the Company’s market presence.Political and media
pressures are causing more people to become concerned about our environment and
the effects of global warming.  For example, per the National Snow and
Ice Data Center in Boulder, Colorado, the ice cover in the Arctic Ocean has
shattered the all-time low record during the summer months of
2007.  Most researchers had anticipated the complete disappearance of
the Arctic ice pack during the summer months would not happen until after the
year 2070, but now believe it could happen as early as 2030.
 
 Table of Contents
 10
 Ethos
Environmental began the manufacturing and marketing of Ethos products after ten
years of successful product testing. During the early years, widespread public
environmental concerns were only beginning to surface. Air quality standards
were non-existent and fuel costs were low, making penetration of the market an
uphill battle.
 
 In recent
years most of the improvements in air quality have come through advancements in
engine technologies.  Through catalytic converters and computer
controlled air and fuel injection systems, engineers have designed cars that use
fuel much more efficiently and pollute far less than ever before.  But
as new engine technologies have reached their limits, the government has turned
its attention to the oil companies to produce cleaner-burning
fuels.
 
 The
approach of Ethos Environmental is to sell our products “one gallon at a time”,
earning the respect and trust of each user. Over the past decade, our products
have gone though extensive miles of road tests, with all such testing verifying
the ability of our products to significantly reduce emissions while improving
gas mileage.  Now, at a time of skyrocketing fuel costs, the value of
Ethos products is paying off for a long list of domestic customers and a growing
contingent of international clients.
 
 Market
Research
 
 Air
pollution caused by cars, trucks and other vehicles burning petroleum-based
fuels is one of the most harmful and ubiquitous environmental problems.
Furthermore, local accumulation in heavy traffic is the greatest source of
community ambient exposure, largely because carbon monoxide is formed by
incomplete combustion of carbon containing fuels.
 
 Diesel
exhaust is a major contributor of particulate matter concentrations.
Representing only 2 percent of the vehicles on the road, diesel powered vehicles
generate more than half of the particulates and nearly a third of the nitrogen
oxides in the air, according to a study by the California Air Resources
Board.  Air pollution monitoring efforts by the American Lung
Association indicate that diesel accounts for 70% of the cancer risk.
Furthermore, pioneers in the study of global warming factors have come to
believe that particulate matter, such as that emitted by diesel engines, plays a
far more critical role in the development of the “greenhouse effect” than
previously suspected.
 
 To combat
this problem the U.S. Environmental Protection Agency developed a two-step plan
to significantly reduce pollution from new diesel engines. (New Emission
Standards for Heavy-Duty Diesel Engines Used In Trucks and Buses) (October 1997,
EPA 420-F-97-016).  The first step set new emissions standards for
diesel engines beginning in 2000. The second step sets even more stringent
emission standards that will take effect in 2007, combined with mandated
reductions in the sulfur levels of all diesel fuel.
 
 As crude
oil is heated, various components evaporate at increasingly higher temperatures.
First to evaporate is butane, the lighter-than-air gas used in cigarette
lighters, for instance. The last components of crude oil to evaporate, and the
heaviest, include the road tars used to make asphalt paving. In between are
gasoline, jet fuel, heating oil, lubricating oil, bunker fuel (used in ships),
and of course diesel fuel. The fuel used in diesel engine applications such as
trucks and locomotives is a mixture of different types of molecules of hydrogen
and carbon and include aromatics and paraffin. Diesel fuel cannot burn in liquid
form. It must vaporize into its gaseous state. This is accomplished by injecting
the fuel through spray nozzles at high pressure. The smaller the nozzles and the
higher the pressure, the finer the fuel spray and vaporization. When more fuel
vaporizes, combustion is more complete, so less soot will form inside the
cylinders and on the injector nozzles. Soot is the residue of carbon, partially
burned and unburned fuel.
 
 Sulfur is
also found naturally in crude oil. Sulfur is a slippery substance and it helps
lubricate fuel pumps and injectors. It also forms sulfuric acid when it burns
and is a catalyst for the formation of particulate matter (one of the exhaust
emissions being regulated). In an effort to reduce emissions, the sulfur content
of diesel fuel is being reduced through the refinery process, however, the
result is a loss of lubricity.
 
 Table of Contents
 11
 Diesel
fuel has other properties that affect its performance and impact on the
environment as well. The main problems associated with diesel fuel
include:
 
 ·
              Difficulty
      getting it to start burning o Difficulty getting it to burn completely o
      Tendency to wax and gel
 ·
              With
      introduction of low sulfur fuel, reduced
  lubrication
 ·
              Soot
      clogging injector nozzles
 ·
              Particulate
      emissions
 ·
              Water
      in the fuel
 ·
              Bacterial
      growth
 
 Today’s
advanced diesel engines are far cleaner than the smoke-belching diesels of
recent decades. Unfortunately, even smokeless diesel engines are not clean
enough to meet current stricter air pollution regulations.
 
 While
diesel engines are the only existing cost-effective technology making
significant inroads in reducing “global warming” emissions from motor vehicles,
it is not sufficient to satisfy regulators and legislators. Diesel engines will
soon be required to adhere to stringent regulatory/legislative guidelines that
meet near “zero” tailpipe emissions, especially on smog-forming nitrogen oxides
(NOx), particulate matter (PM) and “toxins”; the organic compounds of diesel
exhaust.
 
 The U.S.
Department of Energy, Energy Information Administration (“EIA”) estimates that
worldwide annual consumption of diesel fuel approximates 210 billion U.S.
gallons. A breakdown of this estimate is summarized as follows:
 
 
 
 Based o
further EIA published data, the following table* depicts domestic distillate
fuel oil consumption by energy use for 2001.
 
 
 
 *
Sources: Energy Information Administration’s Form EIA-821, “Annual Fuel Oil and
Kerosene Sales Report,” for 1997-2001 and “Petroleum Supply Annual,” Volume 1,
1997-2001. Totals may not equal sum of components due to independent
rounding.
 
 Table of Contents
 12
 When
blended with fuels, Ethos products reduce the emissions of hydrocarbons (HC),
nitrogen oxides (Nox) carbon monoxide (CO), particulate matter (PM) and other
harmful compounds of combustion.  Given these conditions, the
commercial fuels consumer market represents an important target for Ethos
Environmental.
 
 Competition
 
 The
market for products and services that increase diesel fuel economy, reduce
emissions and engine wear is rapidly evolving and intensely competitive and
management expects it to increase due to the implementation of stricter
environmental standards. Competition can come from other fuel additives, fuel
and engine treatment products and from producers of engines that have been
modified or adapted to achieve these results. In addition, we believe that new
technologies, including additives, will further increase
competition.
 
 Alternative
fuels, gasoline oxygenates and ethanol production methods are continually under
development. A number of automotive, industrial and power generation
manufacturers are developing more efficient engines, hybrid engines and
alternative clean power systems using fuel cells or clean burning gaseous fuels.
Vehicle manufacturers are working to develop vehicles that are more fuel
efficient and have reduced emissions using conventional gasoline. Vehicle
manufacturers have developed and continue to work to improve hybrid technology,
which powers vehicles by engines that utilize both electric and conventional
gasoline fuel sources. In the future, the emerging fuel cell industry offers a
technological option to address increasing worldwide energy costs, the long-term
availability of petroleum reserves and environmental concerns.
 
 The
diesel fuel additive business and related anti-pollutant businesses are subject
to rapid technological change, especially due to environmental protection
regulations, and subject to intense competition. We compete with both
established companies and a significant number of startup enterprises. We face
competition from producers and/or distributors of other diesel fuel additives
(such as Lubrizol Corporation, Chevron Oronite Company, Octel Corp., Clean
Diesel Technologies, Inc. and Ethyl Corporation), from producers of alternative
mechanical technologies (such as Algae-X International, Dieselcraft, Emission
Controls Corp. and JAMS Turbo, Inc.) and from alternative fuels (such as
bio-diesel fuel and liquefied natural gas) all targeting the same markets and
claiming increased fuel economy, and/or a decrease in toxic emissions and/or a
reduction in engine wear.
 
 Ethos FR®
and Ethos BFC areunique, and comparative fuel reformulators do not exist.The
primary task for the Company is to distinguish itself as an industry leader in
the reduction of fuel costs and emission problems at a profit gain to the
commercial user.  Part of the challenge before us is to differentiate
Ethos products from two types of products in this industry, additives - that are
purported to increase fuel mileage and oxygenates - which are mandated to lower
emissions. Both provide short-term benefits at the price of long-term engine or
environmental problems.
 
 Additives
contain highly refined petrochemicals or compressed hydrocarbons that promise
better fuel mileage and sometimes lower emissions, by “cleaning” the engine.
Used mainly by individual consumers, they are expensive and commonly sold at the
auto parts and retail stores. More than five thousand EPA-registered fuel
additives compete in the retail market and although the EPA requires that such
products be registered, that registration constitutes neither endorsement nor
validation of the product’s claims.
 
 Oxygenates,
such as methyl tertiary butyl ether (MTBE) and Ethanol, are intended to lower
emissions by adding oxygen to the fuel. Ethos FR® products
actually complement federally mandated oxygenates by lowering emissions, but as
mentioned earlier, Ethos FR® is not
an oxygenate and cannot be used for the purpose of complying with current
language federal legislation.
 
 In
contrast, Ethos FR® products
have cleaning properties that contribute to the lubrication of the engine
instead of destroying it. The ester-based formula dissolves the gums and
residues and adds important lubrication that an engine needs.  The
engine stays clean and lubricated, allowing it to run smoothly and
efficiently.
 
 Table of Contents
 13
 Marketing
Strategy
 
 Ethos
products are ideally positioned to capitalize on increasing fuel prices and
regulatory pressure to tighten emissions standards.  Fuel is a
significant operating cost for companies that use cars, trucks or vessel fleets
in their daily business, especially where competitive markets make it difficult
to pass along fuel increases. Every hike in the price of fuel hurts the
profitability of that company.  For these businesses, obtaining better
mileage offers a crucial competitive edge, and the goal of Ethos Environmental
is to help them maximize their fuel use and maintain profitability.
 
 From its
earliest days, Ethos has focused on the product demonstration as the most
effective means of introducing Ethos FR® to
potential users. During this demonstration phase, Ethos supplies product to
treat a sample of the fleet at no cost to the client. It is vital that the
customer understand and prove the effectiveness of Ethos FR® in their
fleets. This demonstration phase will last as long as necessary to quantify the
value and projected savings possible once the entire fleet is
treated.
 
 Through
this demonstration process, we prove to each customer that they can realize the
benefits of reduced emissions, smoother-running vehicles and lower maintenance
costs at virtually no risk, because the reduction in fuel usage will more than
cover the expense of using Ethos FR®. In
fact, the addition of Ethos FR® will
result in fuel savings beyond the cost of treatment, resulting in monetary gain
to the user.
 
 Commercial
fleets vary in size from a few to thousands of vehicles. Such fleets generally
produce immediate sales results because administrative requirements are minimal
and the product demonstration phase is brief.  Typically, a sample of
the fleet is treated and the potential customer is quickly able to quantify the
value and project the savings that the use of Ethos FR® will
produce. Usually a fleet’s oldest and dirtiest vehicles, or vehicles out of
warranty, are included in the demonstration. Such vehicles amplify the
effectiveness of the products and help to ease any initial client objections
regarding manufacturer warranties. Once the demonstration is underway, Ethos
FR®
products sell themselves, increasing fuel mileage between 7% and 19% and
reducing emissions by more than 30%.  Once the effectiveness of the
product has been established, a conscientious customer-service program ensures
continued use.
 
 The Ethos
Environmental strategy has been to approach each market from the perspective of
the customer’s strongest motivation, whether to reduce fuel costs or reduce
engine emissions. From a marketing standpoint, it is most cost-effective for
Ethos Environmental to focus on commercial fuel users that keep track of
maintenance and operating expenses. These consumers are more sensitive to
pressures from rising fuel costs and more concerned about meeting emissions
standards.
 
 Rising
fuel costs will always be a marketing advantage for Ethos. Higher fuel prices
decrease the cost to treat each gallon of fuel; resulting in even greater
savings to Ethos clients.  The Company’s marketing strategy
strengthens as the price of fuel increases.  Even where cost savings
are a client’s primary motivator, the use of Ethos FR®
identifies the user as an environmentally conscientious business. It also
creates goodwill within the community through the reduction of unhealthy and
unsightly exhaust emissions.
 
 Ethos
FR – Proof of Performance
 
 An
integral part of our sales process is to conduct proof of performance
demonstrations for potential customers wherein we accumulate historical data
that documents the effects of the use of Ethos FR® (i.e.
advantages in terms of increased fuel economy, a decrease in engine wear and
reductions in toxic emissions) on that customer’s specific vehicles or vessels.
In connection with the proof of performance demonstrations, we provide fleet
monitoring services and forecasts of fuel consumption for purposes of the
prospective customer’s own analysis.
 
 The results below are test
results of customer experiences using Ethos FR®.  The
first results are for a fleet of trucks for Allied Waste.  The second
results are for Ecuador for Ethos BFC used in external combustion
engines.  On our website are results for other customers
including:  US Department of Justice; LA Transport; Lucar Transport;
Mission Linen Supply; Vista City; China City Bus Company; Oceanside School
District; San Diego Port District; and the Shenzhen Public Transport
Group.  In all tests the results have been consistent, with a 7% to
19% cost saving, and an over 30% reduction in emissions.
 
 Following
is a Management Report outlining the process and methodology of the testing of
Ethos FR®
for Allied Waste Services:
 
 
 
 Table of Contents
 14
 MANAGEMENT
REPORT
 
 Testing
of Ethos Fuel Reformulator
 Allied
Waste Services, Southwestern Region
 
 Overview
 
 Ethos FR
has been used, without interruption, at multiple Allied Waste locations in
Southern California since the year 200.
 
 Based on
the positive results realized at those locations (estimated at a 10 reduction in
fuel consumption plus significant reductions in maintenance/repair costs and
emissions) an initial test was conducted at one location in the Southwestern
Region of Allied Waste during the months of July and August,
2006.  The results of this initial 4 week test showed an estimated
reduction in fuel consumption of 10.35%, as measured by gallons per engine hour,
compared to a baseline period of the previous 12 months (July 2005 through June
2006).
 
 Based on
these positive results, a second phase of testing was initiated in May 2007
encompassing 4 locations in the Southwestern Region.  The period of
testing was generally the months of May, June and July 2007, however, one
location continued Ethos use through August.  The detailed data
obtained from this testing period is content of this report.
 
 Testing Procedures and Data
Compilation & Reporting Methodology
 
 Upon
initiation of the testing period, fuel consumption and engine hour data was
obtained from each location for a baseline period in order to establish a point
of comparison for the test.  The baseline period for each location was
generally the period of January through March, 2007.
 
 The
standard CFA report obtained from each location was the “Fuel Transaction Detail
by Equipment #” report.  This report provides the most comprehensive
daily listing of fuel dispensed and engine hours recorded for each vehicle
during each time period.  It is important to note that detailed reports were used
throughout the compilation of the data contained in this analysis because every
report from every location contains several “anomalies” which could distort the
accuracy of any data from any report.
 
 Most
common among these “anomalies” are:
 
 1.
              Vehicles
      showing fuel consumed but few or no engine hours recorded (which would
      result in a higher fuel per hour calculation than is actually the
      case),
 2.
              Vehicles
      showing no fuel consumed yet have engine hours recorded (which would
      result in a lower fuel per hour calculation than is actually the case),
      or
 3.
              Vehicles
      that do not have recorded data for both comparative
      periods.  This would
include:
 ·
              new
      vehicles that have been added to the fleet (and therefore have no baseline
      data)
 ·
              vehicles
      that have been retired from the fleet or are out of service for repairs or
      maintenance (these vehicles will have baseline data but no data in one or
      more of the test periods).
 
 Raw Data vs. Comparable
Data
 
 Due to
the frequency and significance of the anomalies outlined above, a detailed
process was implemented to ensure that any such reporting inaccuracies did not
undermine the validity of the comparative data obtained during this
test.
 
 The
procedures utilized by Green Fleet Associates were as follows:
 
 1.
              Every
      CFA report that was obtained from every location for every time period as
      reviewed line-by-line, vehicle-by-vehicle to assure the validity of the
      data.  Any obvious anomalies were highlighted on the raw CFA
      report.
 2.
              This
      raw data from the CFA report was transferred to a spreadsheet in order to
      facilitate ongoing side-by-side, vehicle-by-vehicle comparisons of
      baseline to test period data.  Any anomalies or missing data for
      any vehicle was highlighted on the spreadsheet for reach comparative
      period.
 3.
              A
      true “apples-to-apples” comparison was obtained for each time period by
      removing all highlighted items.
 
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 15
 Verification of Ethos
Use
 
 Equally
important in assuring the validity of the data collected was making best efforts
to verify that all of the fuel being consumed by each location during the
testing period was being treated with Ethos.  The method utilized to
check this compliance was a detailed tracking of fuel deliveries compared the
Ethos inventory at each location during the testing period.  While
almost all locations maintained a consistent treatment schedule throughout the
three month testing period, there were some minor exceptions.
 
 The
spreadsheets detailing the baseline & test period data, for each month at
each location are as follows:
 
 
  Table of Contents
 16
 
 
 
 
 
 Following
is a summary of the test results for Ethos Bunker Fuel Conditioner, tested at
Esmeraldas, Ecuador.
 
 1.)
              O2 levels increased by
      41.53 % after the
      application of the Ethos Bunker Fuel
  Conditioner.
 2.)
              CO2
      levels decreased by 7.79% after the application of the Ethos
      BFC.
 3.)
              CO
      levels decreased by 91.75 % after the application of the Ethos Bunker Fuel
      Conditioner.
 4.)
              SO2
      levels decreased by 1.69% after the applications of the Ethos
      BFC.
 5.)
              NO
      levels decreased by .82% after the application of the Ethos
      BFC.
 6.)
              NO2
      levels remained constant at 0.
 7.)
              Nox
      levels decreased by .82% after the application of the Ethos
      BFC.
 8.)
              tf
      levels decreased by 9.18% after the application of the Ethos
      BFC.
 9.)
              ta
      levels decreased by 1.16% after the application of the Ethos
      BFC.
 10.)
              CO2
      max levels decreased by .69% after the application of Ethos
      BFC.
 11.)
              Excess
      air readings increased by 48.14% after the application of the Ethos
      BFC.
  Table of Contents
 17
 
 
 
 Ethos
FR – Proof of Performance Demonstrations
 
 Ethos
Environmental’s fuel reformulating products reduce emissions by burning fuel
more completely, which improves fuel mileage. Exhaust is essentially unburned
fuel, wasted fuel, so when the fuel is used more completely the engine delivers
better mileage from every tank. Efficient fuel use also means improved engine
performance because a more complete combustion process obtains increased power
from each engine revolution.
 
 In the
last decade hundreds of thousands of miles in road tests have been conducted.
Test after test, Ethos products have proven to reduce engine exhaust emissions
by 30% and more, including measurable reductions in the emissions of
hydrocarbons (HC), nitrogen oxides (NOx), carbon monoxide (CO), and sooty
exhaust or particulate matter (PM). All of these emissions are highly toxic and
as a result, fuel mileage increases have been significant, ranging from 7% to
19% fleet wide.
 
 Ethos
Environmental uses an opacity meter, a detection device for diesel vehicles that
measures the percentage of opacity (light obstructed from passage through an
exhaust smoke plume), to demonstrate dramatic reductions in emissions. In more
that 1,000 heavy-duty diesel vehicles treated (a motor vehicle having a
manufacturer’s maximum gross vehicle weight rating (GVWR) greater than 6,000
pounds), emissions were lowered by as much as 90%. The Society of Automotive
Engineers (SAE) recommended practice SAE J1667 “Snap Acceleration Smoke Test
Procedure” to be used for heavy-duty diesel powered vehicles. Attached are
samples of opacity test sheets, taken from diesel-powered engines, demonstrating
the positive results after using Ethos FR®.
  Table of Contents
 18
 
 Target
Markets
 
 According
to the American Petroleum Institute, the United States fuels consumer market is
comprised of the following segments: retail consumer 27%, government agencies
16%, ground fleets 14%, industrial users 10%, aircraft 9%, maritime 6%,
miscellaneous 18%.
 
 The
Company’s typical customers use cars, trucks or vessels in their day-to-day
operations. Fuel is a significant operating cost, and consequently these fleets
are particularly sensitive to fuel price fluctuations and strict emissions
standards. The ideal clients are those with fleet managers and are conscientious
about keeping track of operating expenses. They understand that every hike in
fuel price hurts their profitability, this being a critical factor wherever
competitive markets make it difficult to pass on the price increases to their
clients; thereby making it critical for businesses to obtain better mileage as a
competitive advantage.
 
 Maritime
and government agencies are desirable for their large fuel volume use and
industry credibility.  They offer the Company medium to long-term
sales, since the process requires a longer lead-time to close. The product
demonstration phase and administrative requirements are generally more complex,
particularly with large government institutions. At the same time, they offer
large volume sales and a continual source of staged orders that promote
production stability.
 
 Marine
vessels run on bunker fuel that is less refined than diesel.  A
mid-size ship will use more than half a ton per hour of operation, or 125
gallons of fuel per hour. For example, a mid-size vessel running on bunker on a
typical trip to Japan from Los Angeles will require a half ton per hour, or 180
tons.  This represents a total of 45,000 gallons of fuel that requires
4,500 oz. (35 gallons) of Ethos BFC. This vessel would use approximately one
drum (55gals.) of Ethos BFC per month. Accordingly, maritime customers represent
a large and solid client base.
 
 Table of Contents
 19
 Countries
all around the world are endeavoring to deal with the high costs of petroleum
products and the detrimental effects of those products on the environment, much
like the United States.  The Company has found broad and enthusiastic
acceptance of its Ethos products globally.  During the past three
years, the Company has opened markets in Asia, Latin America, Canada, Australia,
Africa and Europe, often dealing directly with government entities that possess
the power to implement widespread use of Ethos products – whether in citywide
public transportation systems or countrywide fuel distribution
structures.
 
 As with
our domestic client base, international customers of Ethos appreciate the
benefits of improved mileage and reduced emissions.  In countries that
lack the regulatory structures necessary to control vehicle emissions and fuel
efficiency, the benefits of Ethos are even more pronounced.
 
 Customers
 
 We have a
diversified customer list which presently numbers 59 and is composed of state
governments, corporations and high net worth individuals.  There are
two who account for over 10% of our revenue:  Petroindustrial 76.64%
and Petroecuador 10.51%.  We do not have contracts with our
customers.  Purchase orders are used as Ethos products are required
and ordered.  We derive revenue from our customers as discussed in
Note 1, "Organization and Significant Accounting Policies: Revenue Recognition"
of the consolidated financial statements. Two customers accounted for 88% of our
revenues for the fiscal year ended December 31, 2006. One customer accounted for
40% and the second customer accounted for 48%. One of these customers accounted
for 62% of our accounts receivable at December 31, 2006. As our products reach
more customers, the concentration of credit risk will spread out amongst the
base of our clientele, and will lessen the effect of the risk shown during the
year ended December 31, 2006.
 
 Supply
Arrangements
 
 We
presently obtain our raw materials on an exclusive basis from five (5)
suppliers. However, these arrangements are not governed by any formal written
contract. Accordingly, either party may terminate the arrangement at any time,
including the exclusivity aspect of the arrangement. If a supplier is not able
to provide us with sufficient quantities of the product, or chooses not to
provide the product at all (for any reason), or if exclusivity is lost, business
and planned operations could be adversely affected. Although management has
identified alternate suppliers of the products, no assurance can be given that
the replacement products will be comparable in quality to the product presently
supplied to us by current suppliers, or that, if comparable, products can be
acquired under acceptable terms and conditions.
 
 Revenue
and Fixed Assets
 
 The
Company’s revenue is generated in the United States and abroad through our San
Diego, California office, which at present is our only operating
office.  All of the fixed assets are located in the San Diego,
California office.  In February, 2007, the Company entered into a sale
and leaseback arrangement as outlined below under Loan Facilities.
 
 Vendors
 
 The
Company maintains strong relationships with all vendors. We are not dependent
upon any one vendor for our business.
 
 Governmental
Regulation
 
 In the
United States, fuel and fuel additives are registered and regulated pursuant to
Section 211 of the Clean Air Act. 40 CFR Part 79 and 80 specifically relates to
the registration of fuels and fuel additives. Typically, there are registration
and regulation requirements for fuel additives in each country in which they are
sold. In accordance with the Clean Air Act regulations at 40 CFR 79,
manufacturers (including importers) of gasoline, diesel fuel and additives for
gasoline or diesel fuel, are required to have their products registered by the
EPA prior to their introduction into commerce.
 
 However,
EPA registered additives are derived from petroleum while Ethos FR® is a
reformulator. Even though you “add it” to the fuel, Ethos FR® is not
derived from petroleum and is non-toxic and non-hazardous and therefore not
subject to governmental regulations.  There could be unforeseen future
changes to the registration requirements under the Clean Air Act and Ethos
FR®
may have to seek registration under such new requirements.  In
addition, we currently sell our product outside of the United States and intend
to further expand our sales efforts internationally.  We may need to
seek registration in other countries for the Ethos FR®
product.
 
 Table of Contents
 20
 At this
time the Company is not aware of any present or pending rules or regulations
that would require the Company to seek registration of the Ethos FR® product
either domestically or internationally.
 
 Research
and Development Costs
 
 Research
and development costs are charged to operations when incurred and are included
in operating expenses. The amounts charged for the years ended December 31, 2006
and 2005 amounted to $112,051 and $132,404, respectively. All of these costs are
borne by the Company.
 
 Following
is the Ethos FR® Material
Safety Data Sheet (MSDS)
 
 Table of Contents
 21
 
  Table of Contents
 22
 
 
  Table of Contents
 23
 Employees
 
 As of
March 31, 2007, we had 25 full-time and 10 part-time employees.
 
 RISK
FACTORS
 
 You
should carefully consider the risks described below before investing in the
Company. We consider these risks to be significant to your decision whether to
invest in our Common Stock at this time. If any of the following risks actually
occur, our business, results of operations and financial condition could be
seriously harmed, the trading price of our Common Stock could decline and you
may lose all or part of your investment.
 
 Risks
Related to Our Business
  Due
to the newness of our company and our products, our technology has received only
limited market acceptance.
 
 Our
technology is a relatively new product to the market place.  Although
ever growing concerns and regulations
regarding   the   environment   and   pollution   has   increased   interest
in environmentally friendly products generally, the engine treatment and fuel
reformulator, i.e. additive, market remains an evolving market.  The
Ethos FR®
technology  competes with more established  companies such
as Lubrizol  Corporation,  Chevron Oronite Company
(a  subsidiary  of  Chevron  Corporation),  Octel  Corp.,  Clean  Diesel
Technologies,  Inc.  and
Ethyl  Corporation,  as well as
other  companies  whose products or
services  alter,  modify or adapt diesel  engines
to increase  their fuel efficiency and reduce
pollutants.  Acceptance of Ethos FR® as an
alternative to such traditional products and/or services depends upon a number
of factors including:
 
 ·
              favorable
      pricing vis a vis projected savings from increased fuel
      efficiency
 ·
              the
      ability to establish the reliability of Ethos FR®
      products relative to available fleet
data
 ·
              public
      perception of the product
 
 Since we
market a range of products within only one product line, we are entirely
dependent upon the acceptance of Ethos FR® in the
market place for our success. Our business operations are not diversified. If we
do not generate sufficient sales of the Ethos FR® product,
we will not be successful, and unlikely to be able to continue in
business.
  We
have a limited operating history with significant losses and expect losses to
continue for the foreseeable future, though we expect our sufficient revenues to
sustain our operations.
  We have
yet to establish any history of profitable operations. We have incurred net
losses allocable to shareholders of $6,490,113 and $1,051,637, respectively for
the fiscal years ended December 31, 2006 and 2005. As a result, at
December 31, 2006 we had an accumulated deficit of $9,866,577. We expect,
however, that our revenues will be sufficient to sustain our operations for the
foreseeable future. Our profitability though will require the successful
commercialization of our fuel reformulator.
 
 We
believe that a viable market exists for our technology as there are many
conventional or competitive products in the markets that we have identified for
exploitation. In the event that a viable market for our products cannot be
created as envisaged by our business strategy, we may need to commit greater
resources than are currently available to further develop our technology into a
commercially viable product. Should this occur, we may not be able to continue
operations.
 
 Our
independent auditors have added an explanatory paragraph to their audit report
issued in connection with the financial statements for the year ended
December 31, 2006 relative to our ability to continue as a going concern.
Our financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
  We
rely on commercial arrangements with third parties, and any failure to retain
relationships with these third parties could negatively impact our ability to
develop and market our products.
  Table of Contents
 24
 We
anticipate that our success in creating markets for our products will depend
largely on our ability to identify and establish strategic alliances with
companies and individuals that have experience in manufacturing and distributing
products to the markets we have identified. We have supplied our fuel
reformulator for evaluation purposes to a number of strategic partners and
customers. As such, our plans are dependent on and have been developed on the
assumption that our product(s) will be promoted by our strategic partners and
adopted by potential customers.  Should our commercial arrangements
with current or future strategic partners deteriorate or cease, it can be
expected that this would have a material adverse affect on our financial
conditions, business, results of operations, and continues growth
prospects.
 
 The
Company’s core product may not be acceptable to commercial customers due to
transportation, storage, and handling issues.
  Our core
product is a fuel reformulator. However, as with any new technology, there are
risks associated with the commercial production and use of this product and we
have experienced technical difficulties when deploying in commercial
applications which have required us to take additional precautions when
transporting, storing and handling our product(s). These characteristics may
make the finished product(s) unattractive to certain distributors, customers and
end-users. In addition, the finished fuel may only be stored and dispensed from
tanks that meet stringent standards for cleanliness and not all tanks may be
capable of achieving these standards.
 
 Our
products must be distributed in commercial quantities, in compliance with
regulatory requirements, and at an acceptable cost and these factors could harm
our business and future prospects.
 
 Our
future revenues are unpredictable and our operating results may fluctuate as a
result of the lack of a sales history of our products.
  We expect
to experience significant fluctuations in our future operating results due to a
variety of factors, including (i) demand for our products,
(ii) introduction or enhancement of products by competitors,
(iii) market acceptance of our products, (iv) price reductions by
competitors or changes in how new products are priced, (v) availability of
raw materials of adequate quality and at prices which are economical,
(vi) availability of distribution channels through which our products are
to be sold, (vii) potential costs of litigation and intellectual property
protection, (viii) our ability to attract, train and retain qualified personnel,
(ix) the amount and timing of unforeseeable operating costs and capital
expenditures related to the expansion of our business, operations and
infrastructure, (x) any technical difficulties with respect to the use of
our products, and (xi) effects of current and future governmental
regulations on the sale of our products, which may be significant.
  As a
result of the lack of a sales history of our products, we do not have relevant
historical financial data for any periods on which to forecast revenues or
expected operating expenses in connection with growing revenues in the future.
Our expense levels are based in part on certain expectations with regard to
future revenues. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. As a result, any significant
shortfall in anticipated demand for our products relative to our expectations
would have an immediate adverse effect on the Company’s business, financial
conditions and results of operations.
  Our
ability to operate at a profit is dependent on the price and availability of raw
materials.
  Our
results of operations and financial condition have been and will continue to be
significantly affected by the cost and supply of raw materials used to produce
our product(s). The price of raw materials can be volatile as a result of a
number of factors, such as the overall supply and demand, the level of
government support, and the availability and price of competing
products.
  Generally,
higher prices, in relation to diesel and bio-diesel fuels and related products,
will produce lower profit margins. This is especially true if market conditions
do not allow us to pass through these increased costs to our customers. It is
important that we be able to pass through these higher raw material costs to our
customers. If higher raw material prices were to be sustained for an extended
period of time, such pricing may have a material adverse effect on our ability
to grow profitable sales and operations, with a corresponding adverse impact on
our cash flows and financial performance.
  Table of Contents
 25
 We intend
to contract with third parties to help control the costs of raw materials
purchased and reduce short-term exposure to price fluctuations. Currently, we do
not have definitive agreements with third parties for all of our needed
supply.
 
 Ethos has
two products, Ethos FR® and Ethos BFC. Should we be unable to obtain the
necessary raw materials to manufacture these products, this would have a
negative impact on our revenue forecast and financial results. In addition to
being able to obtain the necessary quantity of raw materials, it is important to
carefully select raw material suppliers because there is a wide range of various
quality of such materials in the marketplace. It is critical that the raw
materials we purchase be of a consistently high quality and that they meet
certain other specifications. Should inferior raw materials be used, this could
negatively impact our customers results and our future business with
them.
 
 Our
business could suffer if we are unable to effectively compete with our
competitors’ technologies.
 
 We have
identified as competitors a number of technologies and companies who are
predominantly focusing on the fuel emission reduction market. In addition, other
companies, many of which are likely to have substantially greater financial,
research and development, sales and marketing and personnel resources, may
currently be developing, or may develop in the future, technologies and products
that are equally or more effective and/or economical as any product we may
develop, or which would otherwise render our technologies obsolete.
 
 If
we were to lose the services of our founders or our senior management team, we
may not be able to execute our business strategy.
 
 Our
future success depends in large part upon the continued service of key members
of our senior management team. In particular, Enrique de Vilmorin is critical to
our overall management, as well as to the development of our technology, our
culture and our strategic direction. Thomas Maher, our Chief Financial Officer,
is the only full-time trained financial professional in our organization; he
performs most of the duties that in many other cases would be performed by
several people within a larger and deeper organization. We do not maintain any
key-person life insurance policies. The loss of any of our management or key
personnel could seriously harm our business.
 
 Our
failure to protect our intellectual property could cause an erosion of our
current competitive strengths.
 
 We regard
the protection of our patents, trademarks, copyrights, trade secrets and other
intellectual property as critical to our success.  We rely on a combination
of patent, copyright, trademark, service mark and trade secret laws and
contractual restrictions to protect our proprietary rights.  We have
entered into confidentiality and non-disclosure agreements with our employees
and contractors, and non-disclosure agreements with parties with whom we conduct
business, in order to limit access to and disclosure of our proprietary
information.  These contractual arrangements and the other steps taken by
us to protect our intellectual property may not prevent misappropriation of our
technology or deter independent third-party development of similar technologies.
 We also seek to protect our proprietary position by filing U.S. and
foreign patent applications related to our proprietary technology, inventions
and improvements that are important to the development of our business.
 Proprietary rights relating to our technologies will be protected from
unauthorized use by third parties only to the extent they are covered by valid
and enforceable patents or are effectively maintained as trade secrets.  We
pursue the registration of our trademarks and service marks in the United States
and internationally.  We recognize that there are certain jurisdictions
where we have not applied for patent protection and where no patent protection
may be available.  Our ability to market products or technology in
these jurisdictions may be limited.
 
 Table of Contents
 26
 The
steps we have taken to protect our proprietary rights may be inadequate and
third parties may infringe or misappropriate our trade secrets, trademarks and
similar proprietary rights.
 
 Any
significant failure on our part to protect our intellectual property could make
it easier for our competitors to offer similar services and thereby adversely
affect our market opportunities.  Our products are unique and one of a
kind, and should a comparative product come to market as a result of our
inability to protect our trade secrets, this could have a material adverse
affect on the Company’s business and future. In addition, litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others.  Litigation could result in substantial costs and
diversion of management and technical resources and may not be
successful.
 
 We
may not be able to manufacture and to market our products in commercial
quantities due to facilities or raw material supplies not meeting our
needs.
 
 Our
products must be manufactured in commercial quantities, in compliance with
regulatory requirements and at an acceptable cost. If our existing facilities
and/or raw material supplies cannot meet our needs, we will seek other
manufacturers. The availability, pricing and supply of our products are
currently dependent on arrangements with our raw material suppliers. The cost
and availability of raw materials and esters, the availability of tax and other
incentives for our products and arrangements for the distribution of our
products by others, could change. Also, although we believe there is sufficient
manufacturing capacity to meet our long term objectives, this could change as
well.  Should the situation change with any of these important
components in the manufacture and distribution of our products this could have a
significant negative effect on the company’s business, and outlook.
 
 Our
business may be harmed if we fail to obtain regulatory approvals or comply with
legislative and regulatory requirements.
 
 The
manufacturing, marketing, supply, distribution and use of fuel and fuel
reformulators are subject to extensive legislation and regulation in most
jurisdictions in which we intend to do business. Our reformulator and the
resultant ester blend will be competing with both ordinary diesel fuel and other
fuels and solutions that claim to offer environmental benefits. The business of
Ethos depends, in part, on the availability of environmental legislation which
requires or provides incentives to customers to use products similar to our own.
New or revised legislation and regulations as a result of changes in the
prevailing political climate or for any other reasons, which for example remove
the availability of incentives or which impose additional compliance burdens on
us, or which provide incentives to distributors and customers to adopt
competitive products, could have an adverse effect on our business, prospects,
results of operations and financial position.
 
 The
development and manufacture of our technology may subject us to environmental
compliance or remediation obligations.
 
 Our
technology is and will be subject to many environmental laws and regulations
wherever it is used. Such laws and regulations govern, among other things, fuel
emissions, the use and handling of hazardous substances, waste disposal and the
investigation and remediation of soil and groundwater contamination. As with
other companies engaged in similar activities, a risk of environmental liability
is inherent in our current and historical activities. Future additional
environmental compliance or remediation obligations could adversely affect our
business through increased production costs from implementing environmental
compliance. By restricting or prohibiting the manufacture, distribution and use
of our products, environmental regulations could harm our business.
 
 Our
business is subject to extensive and potentially costly environmental
regulations that could significantly increase our operating costs and our
ability to successfully operate.
 
 We are
subject to a number of environmental regulatory bodies such as the EPA, as well
as other regulatory agencies.
 
 In
accordance with the regulations promulgated under the US Clean Air Act,
manufacturers (including importers) of gasoline, diesel fuel and additives for
gasoline or diesel fuel, are required to have their products registered with the
EPA prior to their introduction into the market place. Currently, Ethos FR® has such
a registration (1910-0001).  However, unforeseen future changes to the
registration requirements may be made, and Ethos FR® may not
be able to qualify for registration under such new requirements. The loss of our
EPA registration or restrictions on its current registration could have an
adverse affect on our business and plan of operation.
 
 Table of Contents
 27
 We have
registered this product with the US Environmental Protection Agency. This
registration permits us to sell Ethos FR® for
domestic on-road use in the United States.  However, there are
provisions in the Environmental Protection Act that could require further
testing. In addition, we currently sell our product outside of the United States
and intend to further expand our sales efforts internationally. Accordingly,
Ethos FR® is
registered in the United States only, and we are considering its registration in
other countries.  Further testing could be needed in these or other
countries. The  failure  of  Ethos FR®  to  maintain  or
obtain  registration  in countries  or
areas  where we would  like to market it
would  have a  materially adverse effect on our business and
plan of operation.
 
 Our
business is favorably affected by stricter air quality regulations and
regulations regarding emission controls.  If these regulations are
withdrawn or determined to be invalid, our prospects would be adversely
affected.
 
 Additionally,
environmental laws and regulations, both at the federal and state level, are
subject to change and changes can be made retroactively. Consequently, even if
we obtain approval, we may be required to invest or spend considerable resources
to comply with future environmental regulations. If any of these events were to
occur, they may have a material adverse impact on our operations, cash flows and
financial performance.
 
 Developing
new products, creating effective commercialization strategies for our technology
and enhancing our products and strategies are subject to inherent risks. These
risks include unanticipated delays, unrecoverable expenses, technical problems
or difficulties, as well as the possibility that funds will be insufficient. Any
one of these could make us abandon or substantially change our technology
commercialization strategy.
 
 Our
success will depend upon, among other things, our products meeting targeted cost
and performance objectives for large-scale production, our ability to adapt
technologies to satisfy industry standards, satisfying consumer expectations and
needs and bringing our products to market before the market is saturated. We may
encounter unanticipated technical or other problems that result in increased
costs or substantial delays in introducing and marketing new products. Current
and future products may not be reliable or durable under actual operating
conditions or otherwise commercially viable. New products may not satisfy price
or other performance objectives when introduced in the marketplace. Any of these
events could adversely affect our realization of revenues from such new
products.
 
 Product
liability claims related to our products could prove to be costly to defend and
could harm our business reputation.
 
 Fuel and
fuel-additive businesses may be adversely affected by litigation and complaints
from distributors, customers and government authorities resulting from fuel
quality, illness, injury or other health concerns or other issues. Adverse
publicity surrounding such allegations could negatively affect our products,
regardless of whether the allegations are true, by discouraging distributors and
customers from buying our products. We could also incur significant costs and
the diversion of management time in defending the Company against claims,
whether or not such claims have any basis.
 
 We
face management, financial and information systems and controls challenges that
must be met to manage our anticipated growth and failure to do so will hurt our
financial situation and the company’s future prospects.
 
 In order
to successfully manage our anticipated growth, we must improve our management,
financial and informational systems and controls, and expand, train and manage
our employee base effectively. There will be additional demands placed on our
technical, sales, marketing and administrative resources as we expand in our
target markets. Our ability to cope with these demands may be impaired as a
result.
 
 Our
business may suffer if we are unable to attract and retain key officers or
employees.
 
 We
believe our future success will depend greatly upon the expertise and continued
service of certain key executives and technical personnel. Furthermore, our
ability to expand operations to accommodate our anticipated growth will also
depend on our ability to attract and retain qualified management, finance,
marketing, sales and technical personnel. However, competition for these types
of employees is intense due to the limited number of qualified professionals. We
have attempted to reduce these personnel risks by (i) entering into
contracts with certain key employees, (ii) providing employment benefits such as
vacations and health coverage, and (iii) adopting an employee stock option
plan that covers most employees. However, these measures do not guarantee that
employees will remain with the Company, or ensure that qualified employees can
be recruited in the future.
 
 Table of Contents
 28
 Our
ability to continue as a going concern is uncertain.
 
 The
report of our independent registered public accounting firm on our consolidated
financial statements for the fiscal year ended December 31, 2006 states
that there is substantial doubt about the Company’s ability to continue as a
going concern. This “going concern” opinion could adversely affect our ability
to sell our products, attract and retain strategic relationships and obtain
additional financing.
 
 Our
ability to use our net operating loss carry forward may be limited.
 
 As of
December 31, 2006, we have approximately $9,866,577 million in federal and state
net operating loss carry forwards which will begin to expire in 2022 if not used
to offset future federal and state taxable income. Our net loss carry forwards
are subject to various limitations and have not been audited by the Internal
Revenue Service. We anticipate the net loss carry forwards will be used to
offset the federal and state taxable income and the related tax payments which
we would otherwise be required to make with respect to income, if any, generated
in future years.
 
 The
growth of our business is dependent upon the availability of adequate
capital.
 
 The
growth of our business will depend on the availability of adequate capital,
which in turn will depend in large part on cash flow generated by our business
and the availability of equity and debt financing. Our cash flow is dependent on
the successful commercialization of our products, principally Ethos FR®. Should
it be insufficient to achieve our financial projections, our ability to obtain
additional funding will determine our ability to continue as a going
concern.
 
 We
face intense competition and may not have the financial and human resources
necessary to keep up with rapid technological changes which may result in our
technology becoming obsolete.
 
 The fuel
additive  business and
related  anti-pollutant  businesses  are  subject
to
rapid  technological  change,  especially  due
to  environmental protection regulations, and subject to intense
competition. We compete with both established companies and a significant number
of startup enterprises. We face competition  from
producers  and/or  distributors of other diesel fuel
additives (such as Lubrizol  Corporation,
Chevron  Oronite  Company,  Octel
Corp.,  Clean Diesel Technologies, Inc. and Ethyl Corporation), from
producers of alternative mechanical technologies (such as Algae-X
International,  Dieselcraft,  Emission Controls Corp. and
JAMS Turbo, Inc.) and from alternative  fuels (such as bio-diesel fuel
and liquefied natural gas) all targeting the same markets and claiming increased
fuel economy, and/or a decrease in toxic emissions  and/or a reduction
in engine wear.  Most of our competitors have substantially greater
financial and marketing resources than we do and may independently develop
superior technologies which may result in our technology becoming less
competitive or obsolete. We may not be able to keep pace with this change. If we
cannot keep up with these advances in a timely manner, we will be unable to
compete in our chosen markets.
 
 Competition
from the advancement of alternative fuels may lessen the demand for our products
and negatively impact our profitability.
 
 Alternative
fuels, gasoline oxygenates and ethanol production methods are continually under
development. A number of automotive, industrial and power generation
manufacturers are developing more efficient engines, hybrid engines and
alternative clean power systems using fuel cells or clean burning gaseous fuels.
Vehicle manufacturers are working to develop vehicles that are more fuel
efficient and have reduced emissions using conventional gasoline. Vehicle
manufacturers have developed and continue to work to improve hybrid technology,
which powers vehicles by engines that utilize both electric and conventional
gasoline fuel sources. In the future, the emerging fuel cell industry offers a
technological option to address increasing worldwide energy costs, the long-term
availability of petroleum reserves and environmental concerns. Fuel cells have
emerged as a potential alternative to certain existing power sources because of
their higher efficiency, reduced noise and lower emissions. Fuel cell industry
participants are currently targeting the transportation, stationary power and
portable power markets in order to decrease fuel costs, lessen dependence on
crude oil and reduce harmful emissions. If the fuel cell and hydrogen industries
continue to expand and gain broad acceptance, and hydrogen becomes readily
available to consumers for motor vehicle use, we may not be able to compete
effectively. This additional competition could reduce the demand for Ethos
FR®
products, which would negatively impact our profitability, causing a reduction
in the value of your investment.
 
 Table of Contents
 29
 Our
officers and directors have significant voting power and may take actions that
may not be in the best interest of other stockholders.
 
 Our
officers and directors control 46% of our outstanding common stock, of which
Enrique de Vilmorin, our Chairman, controls approximately 45%.  If these
stockholders act together, they may be able to exert significant control over
our management and affairs requiring stockholder approval, including approval of
significant corporate transactions.  This concentration of ownership may
have the effect of delaying or preventing a change in control and might
adversely affect the market price of our common stock.  This concentration
of ownership may not be in the best interests of all our
stockholders.
 
 Risks
Related to Regulation and Governmental Action
 
 A
change in government policies unfavorable to our products may cause demand for
our products to decline.
 
 Growth
and demand for our products may be driven primarily by federal and state
government policies. The continuation of these policies is uncertain, which
means that demand for our products may decline if these policies change or are
discontinued. A decline in the demand for our products may negatively affect our
results of operations, financial condition and cash flows.
 
 A
change in environmental regulations or violations thereof could result in the
devaluation of our common stock and a reduction in the value of your
investment.
 
 Environmental
laws and regulations, both at the federal and state level, are subject to change
and changes can be made retroactively. Consequently, even if we have the proper
permits at the present time, we may be required to invest or spend considerable
resources to comply with future environmental regulations or new or modified
interpretations of those regulations, which may reduce our
profitability.
 
 Volatility
in gasoline selling price and production cost may reduce our gross
margins.
 
 Ethos
FR®
products are used as a fuel reformulator to reduce vehicle emissions. 
Therefore, the supply and demand for gasoline impacts the price of raw materials
and our business and future results of operations may be materially adversely
affected if gasoline demand or price decreases.
 
 Risks
Related to Our Stock Being Publicly Traded
 
 We
have a material weakness in internal controls due to a limited segregation of
duties, and if we fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results or prevent fraud. As
a result, current and potential stockholders could lose confidence in our
financial reporting which could harm the trading price of our
stock.
 
 Table of Contents
 30
 Effective
internal controls are necessary for us to provide reliable financial reports and
prevent fraud. Inferior internal controls could cause investors to lose
confidence in our reported financial information, which could have a negative
effect on the trading price of our stock. With only 25 employees at the Company,
there is very limited segregation of duties, which the Company has identified as
a material weakness in our internal controls.
 
 Our
stock price may be volatile.
 
 Since our
recent name change to Ethos Environmental, our Common Stock has been trading in
the public market since November 16, 2006. We cannot predict the extent to which
a trading market will develop for our Common Stock or how liquid that market
might become. The trading price of our Common Stock has been and is expected to
continue to be highly volatile as well as subject to wide fluctuations in price
in response to various factors. These factors include:
 
 ·
              Quarterly
      variations in our results of operations or those of our
      competitors.
 
 ·
              Announcements
      by us or our competitors of acquisitions, new products, significant
      contracts, commercial relationships or capital
  commitments
 
 ·
              Disruption
      to our operations.
 
 ·
              The
      emergence of new sales channels in which we are unable to compete
      effectively.
 
 ·
              Our
      ability to develop and market new and enhanced products on a timely
      basis.
 
 ·
              Commencement
      of, or our involvement in,
litigation.
 
 ·
              Any
      major change in our board of directors or
  management.
 
 ·
              Changes
      in governmental regulations or in the status of our regulatory
      approvals.
 
 ·
              Changes
      in earnings estimates or recommendations by securities
      analysts.
 
 ·
              General
      economic conditions and slow or negative growth of related
      markets
 
 In
addition, the stock market in general, and the market for technology companies
in particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of those
companies. These broad market and industry factors may seriously harm the market
price of our Common Stock, regardless of our actual operating performance. In
addition, in the past, following periods of volatility in the overall market and
the market price of a company’s securities, securities class action litigation
has often been instituted against these companies. Such litigation, if
instituted against us, could result in substantial costs and a diversion of our
management’s attention and resources.
 
 The
liquidity of our common stock is affected by its limited trading
market.
 
 Shares of
our common stock are quoted on the OTC Bulletin Board under the symbol ETEV.OB.
We expect our shares to continue to be quoted in that market and not to be
de-listed, as we have no intention to stop publicly reporting.  An
“established trading market” may never develop or be maintained. Active trading
markets generally result in lower price volatility and more efficient execution
of buy and sell orders. The absence of an active trading market reduces the
liquidity of an investment in our shares.  The trading volume of our common
stock historically has been limited and sporadic.  Our daily trading volume
has averaged approximately 4,664 shares since November 16, 2006.  As a
result of this trading activity, the quoted price for our common stock on the
OTC Bulletin Board is not necessarily a reliable indicator of its fair market
value, and the low trading volume may expose the price of our common stock to
volatility.  Further, if we cease to be quoted, holders would find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, our common stock and the market value of our common stock would likely
decline.
 
 Table of Contents
 31
 A
significant number of our shares will soon become eligible for sale and their
sale or potential sale may depress the market price of our common
stock.
 
 Some or
all of the shares of common stock may be offered from time to time in the open
market pursuant to Rule 144, and these sales may have a depressive effect on the
market for our shares of common stock. In general, a person who has held
restricted shares for a period of one year may, upon filing with the SEC a
notification on Form 144, sell into the market common stock in an amount equal
to the greater of 1% of the outstanding shares or the average weekly number of
shares sold in the last four weeks prior to such sale. Such sales may be
repeated once each three months, and any of the restricted shares may be sold by
a non-affiliate after they have been held two years.
 
 Investors
should not anticipate receiving cash dividends on our common stock.
 
 We have
never declared or paid any cash dividends or distributions on our capital stock.
 We currently intend to retain any future earnings to support operations
and to finance expansion and, therefore, we do not anticipate paying any cash
dividends on our common stock in the foreseeable future.
 
 Our
Common Stock has a small public float and future sales of our Common Stock, or
sales of shares being registered under this document may negatively affect the
market price of our Common Stock.
 
 We cannot
predict the effect, if any, that future sales of shares of our Common Stock into
the market will have on the market price of our Common Stock. However, sales of
substantial amounts of Common Stock may materially and adversely affect
prevailing market prices for our Common Stock.
 
 Because
the market for and liquidity of our shares is volatile and limited, and because
we are subject to the "Penny Stock" rules, the level of trading activity in our
Common Stock may be reduced.
 
 Our
Common Stock is quoted on the OTCBB. The OTCBB is generally considered to be a
less efficient market than the established exchanges or the NASDAQ markets.
While our Common Stock continues to be quoted on the OTCBB, an investor may find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of our Common Stock, compared to if our securities were traded on NASDAQ
or a national exchange. In addition, our Common Stock is subject to certain
rules and regulations relating to "penny stocks" (generally defined as any
equity security that is not quoted on the NASDAQ Stock Market and that has a
price less than $5.00 per share, subject to certain exemptions). Broker-dealers
who sell penny stocks are subject to certain "sales practice requirements" for
sales in certain nonexempt transactions (i.e., sales to persons other than
established customers and institutional "accredited investors"), including
requiring delivery of a risk disclosure document relating to the penny stock
market and monthly statements disclosing recent bid and offer quotations for the
penny stock held in the account, and certain other restrictions. If the
broker-dealer is the sole market maker, the broker-dealer must disclose this, as
well as the broker-dealer's presumed control over the market. For as long as our
securities are subject to the rules on penny stocks, the liquidity of our Common
Stock could be significantly limited. This lack of liquidity may also make it
more difficult for us to raise capital in the future.
 
 Available
Information
  We file
electronically with the Securities and Exchange Commission our annual reports on
Form 10-KSB, quarterly reports on Form 10-QSB, and current reports on Form 8-K,
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. 
You may obtain a free copy of our reports and amendments to those reports on the
day of filing with the SEC by going to http://www.sec.gov.
  Item 2.    Properties
  We are
located at 6800 Gateway Park Drive San Diego, CA 92154.  We own,
approximately 70,000 square feet of industrial space and manufacturing
space.  We purchased our current facility in 2006.  It is
our belief that the space is more than adequate for our immediate and future
needs.   The company is also still obligated to a long-term lease
at its prior facility.  Please see Note 5. “Operating Leases” in the
consolidated financial statements.
 
 Table of Contents
 32
 Item 3.    Legal Proceedings
 
 From time
to time, we are involved in routine legal matters incidental to our business. In
the opinion of management, the ultimate resolution of such matters will not have
a material adverse effect on our financial position, results of operations or
liquidity.
 
 Item 4.     Submission of Matters to a Vote of
Security Holders
  None.
  Table of Contents
 33
 PART II
  Item
      5.
              Market for the Common Equity
      and Related Stockholder
Matters
  Price
Range of Our Common Stock
  Our
shares of common stock are currently trading on the OTC Bulletin Board
(“OTCBB.  Prior to November 16, 2006, our trading symbol was “VICI.”
On November 16, 2006, to reflect our new name and the 1 for 1,200 stock split,
our trading symbol was changed to “ETEV”. The OTCBB is a regulated quotation
service that displays real-time quotes, last-sale prices, and volume information
in over-the-counter equity securities. An OTCBB equity security generally is any
equity that is not listed or traded on NASDAQ or a national securities exchange.
The reported high and low bid and ask prices for the common stock are shown
below for the period from January 1, 2005 through December 31,
2006.
  Bid*Low
              
              
              High2005
      Fiscal YearJan
      - March 2005
              
              $
              6.00
              
              
              $
              18.00Apr
      - June 2005
              
              $
              7.20
              
              
              $
              12.00July
      - Sept 2005
              
              $
              3.00
              
              
              $
              32.40Oct
      – Dec 2005
              
              $
              6.00
              
              
              $
              22.802006
      Fiscal YearJan
      - Mar 2006
              
              $
              6.60
              
              
              $
              13.20Apr
      - June 2006
              
              $
              6.00
              
              
              $
              11.76July
      - Sept 2006
              
              $
              3.00
              
              
              $
              7.68Oct
      – Dec 2006
              
              $
              2.00
              
              
              $
              11.15
   *All of
the prices indicated in the table above reflect the reverse stock split, which
became effective November 16, 2006.
  Because
our common stock is subject to the SEC's penny stock rules, broker-dealers may
experience difficulty in completing customer transactions, and trading activity
in our securities may be adversely affected.
 
 Transactions
in our common stock are currently subject to the "penny stock" rules promulgated
under the Securities Exchange Act of 1934. Under these rules, broker-dealers who
recommend our securities to persons other than institutional accredited
investors must:
  ·
              make
      a special written suitability determination for the
    purchaser;
  ·
              receive
      the purchaser's written agreement to a transaction prior to
      sale;
  ·
              provide
      the purchaser with risk disclosure documents which identify certain risks
      associated with investing in "penny stocks" and which describe the market
      for these "penny stocks" as well as a purchaser's legal remedies;
      and
  ·
              obtain
      a signed and dated acknowledgment from the purchaser demonstrating that
      the purchaser has actually received the required risk disclosure document
      before a transaction in a "penny stock" can be
  completed.
 
 As a
result of these rules, broker-dealers may find it difficult to effectuate
customer transactions and trading activity in our securities may be adversely
affected. As a result, the market price of our securities may be depressed, and
you may find it more difficult to sell our securities.
 
 Table of Contents
 34
 Holders
  As of
December 31, 2006, there were approximately 855 holders of record of our common
stock.
  Dividends
  We have
not paid any cash dividends on our common stock or preferred stock since
inception and presently anticipate that all earnings, if any, will be retained
for development of our business and that no dividends on our common stock or
preferred will be declared in the foreseeable future. Any future dividends will
be subject to the discretion of our Board of Directors and will depend upon,
among other things, future earnings, operating and financial condition, capital
requirements, general business conditions and other pertinent facts. Therefore,
there can be no assurance that any dividends on our common stock or preferred
stock will be paid in the future.
  Securities
Authorized for Issuance Under Equity Compensation Plans
  On
November 20, 2006, the board of directors adopted the 2006 Stock Incentive Plan
or the 2006 Plan. The 2006 Plan reserves 3,500,000 shares of our common stock
for issuance in connection with stock options, stock awards and other
equity-based awards to be granted under the 2006 Plan.
  Recent
Sales of Unregistered Securities
  None
(other than in connection with the merger described herein).
 
 Item 6.   Management's Discussion and Analysis or Plan of
Operation.
 
 The
following discussion should be read in conjunction with our audited financial
statements and notes thereto included herein. In connection with, and because we
desire to take advantage of, the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995, we caution readers regarding certain
forward looking statements in the following discussion and elsewhere in this
report and in any other statement made by, or on our behalf, whether or not in
future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or our behalf. We disclaim any obligation to update
forward-looking statements.
 
 General Discussion on
Results of Operations and Analysis of Financial Condition
  We
begin our General Discussion and Analysis with a discussion of the Critical
Accounting Policies and the Use of Estimates, which we believe are important for
an understanding of the assumptions and judgments underlying our financial
statements. We continue with a discussion of the Results of Operations for the
years ended December 31, 2006 and 2005, followed by a discussion of
Liquidity and Capital Resources available to finance our
operations.
 
 Since
inception in 2000, Ethos has been used by over 10,000 corporations and/or
consumers in over 40 countries worldwide, which extends to six of the seven
continents.  Each and every such end-user has reported to us, either
in writing or verbally, that after using the Ethos FR product, they experienced
cost savings of anywhere from 7% to 19% and emissions reductions of at least 30%
as mentioned in this report. In addition to an effective and desirable product,
the company’s success also derives from the careful development and tenacious
implementation of a structured “proof-of-concept” marketing
strategy.
 
 Throughout
this “proof-of-concept” sales and marketing phase, gross sales for Ethos
Environmental have consistently exceeded forecasts, reaching more than $1.78
million by the end of 2005, and $4.77 million by the end of 2006. Even more
significant growth is anticipated for 2007, with sales in established markets in
the U.S., China, Ecuador, Africa and Europe expected to top current forecasts.
Based on our growth to date, the 100% satisfaction rate and testimonials we are
receiving from our satisfied customers, on the product’s proven ability to
improve fuel efficiency while reducing emissions, the Company’s proven ability
to penetrate new markets and build a solid base of loyal customers, and the
world’s increasing costs in the petro-economic markets, we project that top line
revenue will grow to the tens of millions in 2008 and beyond.
 
 Table of Contents
 35
 Looking
forward, marketing will constitute a significant portion of company expenditures
as Ethos Environmental continues to develop sales of new ester-based fuel and
engine enhancing products. We are in the process of developing new products
covering areas of synthetic oils, sulfur substitutes, and varied formulations of
the original Ethos FR® and its
enhancements.
 
 In
addition, we will begin to initiate patents to cover ongoing development of a
new engine design that combines past, present and state-of-the-art technologies.
This new system generates rotary shaft power using only a fraction of the fuel
consumed by today’s internal combustion engines, and testing has yielded power
output that rivals current technologies with just a fraction of the emissions.
We have great hope that this project will revolutionize power generation as we
know it, significantly easing pollution from the usage of fossil
fuels.
 
 The
management of Ethos Environmental is excited by the enthusiastic acceptance that
our products, primarily Ethos
FR®,have received – domestically and all around the world. We are proud
to provide a product that is part of the solution to the high cost of fuel and
the health costs of environmental pollutants.  Since inception,
management has been focused on the development of a solid infrastructure,
building relationships and establishing the foundation of a business that will
continue to grow – non-stop – into the future.
 
 The
Company and Our Business
  Ethos
Environmental, Inc. (“Ethos”or the “Company”) manufactures and
distributes fuel reformulating products designed to enable fuels to burn
cleaner. The products developed by the Company are proprietary and, as such,
protected by the Uniform Trade Secrets Act.  Our products, distributed
using our registered trademark, Ethos FR®,are comprised of a unique
line of fuel reformulators that consist of a blend of high quality, non-toxic,
non-petroleum based esters.
 
 Ethos
products are non-toxic, non-hazardous and work with any fuel and in both
internal and external combustion engines, which includes cars, trucks, buses,
RV’s, ships, trains and generators. Ethos products reduce fuel costs by
producing a net gain in mileage above cost. Our products contain two families of
esters, a group of cleaning esters and a group of lubricating esters, both of
which are combined with a mineral oil base. Our products serve to clean and
lubricate the internal parts of an engine without the use of petroleum-derived
products commonly found in fuel additives. The main objective is to make fuels
self-cleaning and self-lubricating without increasing toxic
emissions.  Importantly, since moving parts function more smoothly
with reduced heat and friction, less engine maintenance is required and
horsepower returns closer to the manufacturer specifications. Ethos products
remove carbon deposits, one of the culprits that cause fuel to combust
incompletely, resulting in wasted fuel that creates toxic emissions. The
combination of cleaning and lubricating esters in Ethos products serve to
stabilize fuel without changing its formula or specifications.
 
 Overall,
our products make engines combust fuel more completely. When an engine uses each
measure of fuel to the maximum degree possible, it has two very important
benefits. First, it reduces fuel consumption and reduces non-combusted residues
that an engine expels in the form of exhaust emissions, such as hydrocarbons,
nitrogen oxides, carbon monoxide, particulate matter and other harmful products
of combustion. Next, unused fuel is saved in the fuel tank, waiting to be used
efficiently by the engine, instead of exhausted in the form of toxic emissions.
Ethos products reduce emissions without adding any of its own components to the
exhaust.  EPA Laboratory tests confirm that Ethos FR®is 99.99976% clean upon ignition and ashless upon
combustion.
 
 Ethos
seeks both a cleaner environment and economic success. As the name Ethos
suggests, we are committed to the highest ethical standards - in the product
that we sell, in the relationship with our clients, and in the conduct of our
business. The Company’s approach is to sales is “one gallon at a time,” earning
the trust and loyalty of each customer by providing products that perform as
promised and make a positive difference in the world.
 
 Table of Contents
 36
 Overview
  The
mission of Ethos Environmental is to be recognized as the industry standard for
high quality, non-toxic cleaning and lubricating products that increase fuel
mileage and reduce emissions.
 
 Ethos’
customers exist everywhere that budgets are affected by the rising cost of fuel
and where solutions are sought for the pervasive ills of air pollution. Our
customers are motivated both by cost savings and environmental concerns, and it
is our mission to provide products to meet their needs, risk free, and at an
economic gain to every client.
 
 The
management of Ethos Environmental firmly believes that the market for our
product is aggressively expanding.  Worldwide fuel consumption is
approximately 85 million barrels per day and projected by the Energy Information
Administration to continue to grow to 97 million barrels per day by 2015, and
118 million barrels per day by 2030.  Much of the dramatic growth over
the past decade has been fueled by the dramatic expansion of India, China and
Brazil.  As additional undeveloped countries begin to expand, so too
will fuel consumption and the Company’s market base.  In addition,
consumers are becoming more sensitive to increased fuel economy as oil prices
have increased eight times since the late 1990s.
 
 It is our
goal to continue to aggressively build on our success in the domestic and
international markets, offering the benefits of our products to companies and
countries around the world.  During 2006, our revenue base increased
by 168% over 2005.  Since 2004, the company has increased its revenue
base by 450%, and by 573% since 2003.
 
 The
company’s management is directed to continued growth with its attention focused
on comparative savings in marketing and production costs.  Our
attention going forward is to increase market awareness of our name and the
benefits provided by our product line.
 
 During
2007, the company will be directing concerted focus to full compliance with
Sarbanes-Oxley requirements, as revised in Audit Standard No. 5 for small
businesses, in implementing Section 404(a) of the Act.
 
 PLAN
OF OPERATIONS FOR THE NEXT TWELVE MONTHS
 
 Since
inception in 2000, Ethos Environmental has grown its customer base to thousands
of diverse clients in over 15 countries worldwide, using the most effective
sales tool possible - a product that works! In addition to an effective and
desirable product, the company’s success also derives from the careful
development and tenacious implementation of a structured “proof-of-concept”
marketing strategy.
 
 Throughout
this “proof-of-concept” sales and marketing phase, gross sales for Ethos
Environmental have consistently exceeded forecasts, reaching more than $1.78
million by the end of 2005, and $4.77 million by the end of 2006. Even more
significant growth is anticipated for 2007, with sales in established markets in
the U.S., China, Ecuador and Europe expected to top current forecasts.
Furthermore, market implementation plans anticipate growth in 2007 and beyond,
leading to gross multi million sales in 2008. These projections are based on the
product’s proven ability to improve fuel efficiency while reducing emissions,
the Company’s proven ability to penetrate new markets and build a solid base of
loyal customers, and the world’s increasing costs in the petro-economic
markets.
 
 Looking
forward, marketing will constitute a significant portion of company expenditures
as Ethos Environmental continues to develop sales of new ester-based fuel and
engine enhancing products. We are in the process of developing new products
covering areas of synthetic oils, sulfur substitutes, and varied formulations of
the original Ethos FR®
and its enhancements.
 
 In
addition, we will continue to initiate patents to cover ongoing development of a
new engine design that combines past, present and state-of-the-art technologies.
This new system generates rotary shaft power using only a fraction of the fuel
consumed by today’s internal combustion engines, and testing has yielded power
output that rivals current technologies with just a fraction of the emissions.
We have great hope that this project will revolutionize power generation as we
know it, significantly easing pollution from the usage of fossil
fuels.
 
 Table of Contents
 37
 The
management of Ethos Environmental is excited by the enthusiastic acceptance that
Ethos FR®products have
received – domestically and all around the world. We are proud to provide a
product that is part of the solution to the high cost of fuel and the health
costs of environmental pollutants.  Since inception management has
been focused on the development of a solid infrastructure, building
relationships and establishing the foundation of a business that will continue
to grow – non-stop – into the future.
 
 Results
of Operations
 
 The
following financial data compares the balances as relates to Ethos
Environmental, Inc. for the fiscal years ended December 2006 and
2005.  The following discussion has been updated using the restated
financial statement balances.
  Revenues
 
 The
Company recognized revenues of $4,768,013 for the year ended December 31, 2006
compared to $1,780,825 for the year ended December 31, 2005, an increase of
$2,987,188 or 168%. The primary source of revenue for the years ended December
31, 2006 and 2005 is from the sale of Ethos FR®.Other
components of revenue include freight and service.  Freight is billed
to the customer and compared to the amount of freight recorded in cost of sales,
so that the Company is adequately capturing the cost of freight and billing to
the client appropriately.
 
 During
2006 the Company added a major new distributor in the United States, 4E Corp.,
and experienced a dramatic growth in sales to Latin America.  In
addition, the Company has contracted sales scheduled in 2007 to new markets in
Africa and Australia.
 
 Our main
priorities relating to revenue are to: (1) increase market awareness of Ethos FR® product through our
sales and marketing plan, (2) increase growth in the number of customers and
vehicles per customer, and (3) provide extensive customer service and
support.
 
 Our
future growth is significantly dependent upon our ability to generate sales. Our
main priorities relating to revenue are: (1) increase market awareness of Ethos
FR®
product through our sales and marketing plan, (2) growth in the number of
customers and vehicles per customer, and (3) providing extensive customer
service and support.
 
 Gross
Profit
 
 Gross
profit, defined as revenues less cost of goods sold, was $3,154,647 or 66% of
sales for the year ended December 31, 2006, compared to $1,254,366 or 70% of
sales for the year ended December 31, 2005. The reason for the decrease in gross
profit and increase in cost of sales in 2006 is due to the addition of
depreciation of the building beginning in 2006, of which substantially most of
this depreciation is included within cost of sales.
 
 Management
continues to direct attention to increasing production efficiency and thereby
reducing cost of sales as a percentage of sales.  Cost of sales
includes the following components:  Material, labor, depreciation, and
freight.
  Operating
Expenses
  The
Company’s current operating expenses are comprised of costs associated with
administration; including salaries, consulting, marketing, legal and business
development. We will incur additional operating expenses for new staff
members as they are hired.
 
 Depreciation
expense incurred for the year ended December 31, 2006 was $292,096, versus
$83,209 for the year ended December 31, 2005.  The increase in
depreciation was due to the purchase in 2006 of the new building which
represented approximately $200,000 of the total depreciation of $292,096.
Production and office equipment are depreciated on a 5-year basis, and the
building is depreciated on a 25-year basis.  Only $18,865 of
depreciation is shown in general and administrative expenses, as the remainder
is included in cost of sales.
 
 Table of Contents
 38
 General
and Administrative expenses incurred during the year ended December 31, 2006
totaled $4,987,623. These expenses were incurred primarily in the following
accounts:
 
 Legal
fees of approximately $ 136,598 - of which the majority relates to fees
generated by the merger
 Accounting,
audit, bookkeeping and director fees totaling $ 57,676
 Business
consulting fees of approximately $ 4,500,000 - of which the majority
relates to the non-cash issuance of stock
 Outside
services of $ 159,749
 Office
expenses of $ 129,410
 
 Similar
expenses incurred for the year ended December 31, 2005 totaled $1,821,160 and
were primarily for consulting services of a similar nature.
  For
comparison purposes, the Company issued 4,910,000 new shares of common stock for
the payment of services during the year ended December 31, 2006, compared to
5,108,190 shares issued for cash during the year ended December 31, 2005. 
Of the 4,910,000 shares issued in 2006, 3,600,000 shares represented a
pre-merger commitment by the entity then known as Ethos Environmental, Inc. The
entity then known as Ethos Environmental, Inc. committed to issue the shares on
October 15, 2006, and the shares were to be issued regardless of the outcome of
the then pending merger as such shares were not for services in any way
associated with the then pending merger. As such, the shares were valued at fair
value as determined by the pre-merger Ethos Board of
Directors.
 
 On
the date that the pre-merger Ethos Environmental, Inc. committed to issue the
shares, there was not a public market for Ethos’ common stock, and the most
readily determinable value of the stock was fair value. Of the 3,600,000 shares,
100,000 were issued for services rendered by an outside consultant prior to, and
unrelated to, the merger. As this was the number of shares that said consultant
was willing to accept as payment for services rendered valued at $25,000, we
believe that the value of $0.25 approximated the fair value of the shares on the
date of the commitment and therefore was the appropriate value to be
used.
 
 The
remaining 3,500,000 shares (the “Bonus Shares”) were issued to our Chief
Executive Officer as a one-time bonus by the pre-merger entity known as Ethos
Environmental, Inc.  The Bonus Shares were not subject to any
performance and/or service conditions, and there was no pre-existing arrangement
or agreement regarding the Bonus Shares.
 
 Since the
3,600,000 shares were due and payable in the 4thquarter of 2006 by the
pre merger Ethos, these shares have been recorded on the year end financial
statements of the post-merger entity.  All 3,600,000 shares were
deemed fully paid and non-assessable as of the date authorized by the pre-merger
Ethos Board of Directors, October 15, 2006.
 
 The
3,600,000 shares were accounted for at the fair value of $0.25 and charged
against general and administrative expenses in accordance with Generally
Accepted Accounting Principles (GAAP).  The remaining 1,310,000 shares
were issued in compliance with prior consulting agreements and valued at the
market price at the date of issue, $5.10.  The value of these shares
was charged against selling expenses and general and administrative expenses.
There was no cash involved in these transactions.
 
 The CEO’s
salary at December 31, 2006 consisted of shareholder loans which had been on the
books of the Company prior to the merger.  These loans totaled
approximately $344,325 and were converted to compensation for the CEO during the
year ended December 31, 2006.
 
 Research
and Development Costs
 
 Research
and development costs are charged to operations when incurred and are included
in general and administrative expenses. The amounts expensed for the years ended
December 31, 2006 and 2005 amounted to $112,051 and $132,404, respectively.
Research and development (R&D) costs will continue to decrease in the future
due to the completion of much of the R&D of the Ethos FR®product.
 
 Table of Contents
 39
 Net
Loss
 
 The
Company incurred a net loss for the year ended December 31, 2006 of $6,490,113
as compared to a net loss of $1,051,637 for the year ended December 31,
2005.  Even though revenues increased by 168% during 2006, as compared
to December 31, 2005, the net loss increased by approximately
$5,400,000.  The main reason for the increase in net loss is due to
the issuance of stock associated with the merger, and for services provided
which totaled $7,580,990.    No cash was transferred in this
transaction.  The stock compensation is included in the consolidated
statement of operations under both selling expenses and general and
administrative expenses.
 
 In
addition, during 2006, the Company purchased a new building for its corporate
headquarters at a cost of $5,300,000, as well as, an additional $1,235,000 spent
on building improvements and production equipment.  The total value of
fixed assets at December 31, 2006 totaled $6,783,145.  These purchases
were funded partially with interest-bearing notes valued at
$5,141,800.  Due to this increase in fixed assets, depreciation
increased accordingly, and totaled $292,096 in 2006, versus $83,209 in
2005.
 
 NON-OPERATING
INCOME AND EXPENSES
 
 Non-operating
income, net of expenses, increased in the year ended December 31, 2006 versus
2005, due to the settlement of a substantial amount due to one of our vendors. A
substantial order placed with one of our suppliers in previous years, and
carried on the books of Ethos Environmental, Inc., was canceled with the vendor
in early 2006, and full credit given by the vendor.  A liability is
considered extinguished for financial reporting purposes if either of the
following is met:  The debtor pays the creditor and is relieved of its
obligation or the debtor is legally released from the primary obligation under
the liability.  In this case, the creditor relieved the Company
(debtor) for materials that were found to be faulty and invoiced and expensed in
a prior year.  Extinguishment of debt is shown as a gain or loss in
the period occurred and should only be classified as extraordinary if certain
criterion is met for being unusual and infrequent. This is not an extraordinary
event. The amount of $670,200 is presented correctly as other
income.
 
 Interest
expense totaled $620,244 during the year ended December 31, 2006 as compared to
$8,907 in 2005. The interest was primarily associated with the interest-only
loan for $4,750,000, related to the purchase of the new building. Other expenses
totaled and $58,931 in 2006 versus $0 in 2005.
 
 Liquidity
and Capital Resources
 
 On
December 31, 2006, we had working capital of $49,801 and stockholders’ equity of
$1,696,269 compared to a working capital deficit of $(405,752) and stockholders’
equity of $610,392 on December 31, 2005.
 
 On
December 31, 2006, the Company had $64,867 in cash and $300,000 in restricted
cash, total assets of $7,519,474 and total liabilities of $5,823,205, compared
to $198,498 in cash and $300,000 in restricted cash, total assets of $1,446,212
and total liabilities of $793,395 on December 31, 2005.
 
 The
Company purchased a building in 2006.  The initial term of the
building loan was for a period of one year with a maturity date of January,
2007.  To further increase cash flow and working capital, the Company
proposed new terms to the note holders.  Effective, December, 2006 the
note was assigned to a new note holder with reduced interest of 14% compared to
the original 17%.  The decrease in the interest rate on the note adds
to the future of the Company’s overall liquidity and functional capital
resources.
 
 Subsequent
to year end (May 23, 2007), an agreement to modify the promissory note was
negotiated.  Terms of the modified note include an extension to March
31, 2009, and a reduction of interest to 12%.  The conversion feature
was replaced with a three-year warrant to purchase up to 1.9 million shares of
common stock at an exercise price of $2.50.  The warrant expires March
31, 2010. This transaction is reflected in the 8K which was filed May 24,
2007.
 
 During
2006, the company re-evaluated its reserve for doubtful accounts and reduced its
reserve to $126,500 from the $576,800 level maintained in 2005.  This
change is believed by management to more closely reflect the corporate risk for
accounts receivable delinquent for more than 90 days.
 
 Table of Contents
 40
 In
January 2006, the Company received a credit from a supplier for $670,200 of
materials purchased and booked in 2005, and found to be faulty. This has no
effect on cash; however, the corresponding accounts payable account was reduced
accordingly increasing working capital for the year.
 
 We
anticipate, based on currently proposed plans and assumptions relating to our
operations, that our current cash and cash equivalents together with projected
cash flows from operations and projected revenues will be sufficient to satisfy
our contemplated cash requirements for the next twelve months. Our contemplated
cash requirements for 2007 and beyond will depend primarily upon the level of
sales of our products, inventory levels, product development, sales and
marketing expenditures and capital expenditures.
 
 The
Company has incurred significant losses from operations in the last two years.
The Company's ability to continue as a going concern is in doubt and is
dependent upon obtaining additional financing and/or achieving a sustainable
profitable level of operations.
 
 The net
loss incurred at December 31, 2006 increased significantly due to issuance of
stock for services in the amount of $7,580,990, as reflected within the cash
flow.  This was a non-cash transaction that increased expenses and
increased equity.  In addition, depreciation expense increased
significantly due to the purchase of a building in 2006.  The Company
decreased its allowance for doubtful accounts based upon a more in depth
analysis of the client base and realization of receivables, and an overall
increase in collections reflected the decrease in receivables for 2006.
Inventory has increased each year, due to the need for keeping larger quantities
of inventory on hand as sales have increased over 100% from 2005 to
2006.  Accounts payable and accrued expenses decreased due to more
efficient handling of vendor bills and quicker payment turnaround, as well as,
the change due to the other income relayed above in non-operating income and
expenses.  A significant increase in both purchases of fixed assets
and notes payable are due to the building purchase and the note
thereon.  In conclusion, cash decreased by approximately $134K for the
year ended December 31, 2006.
 
 Management
of the Company has undertaken steps as part of a plan with the goal of
sustaining Company operations for the next twelve months and beyond. These steps
include: (a) attempting to raise additional capital and/or other forms of
financing, some of which was consummated during the first quarter 2007 (please
see ‘Loan Facilities’, below); (b) controlling overhead and operating expenses;
and (c) continuing to increase the sales of its fuel reformulating product.
During the first quarter 2007 the company increased its presence in Africa,
Australia and Latin America and has made strong progress in the Caribbean.There can be no
assurance that any of these efforts will be successful.
 
 Loan
Facilities
  On
February 7, 2007, the Company entered into an equipment lease agreement with
Mazuma Capital Corp. wherein the Company agreed to a 24-month sale and leaseback
arrangement for up to $800,000 of its manufacturing equipment. The lease calls
for a monthly payment based on a factor of .04125 times the average outstanding
loan balance during the month. Through March 29, 2007, the company has placed
property valued at $737,968 under this lease arrangement with Mazuma Capital
Corp.
 
 The
contract for this sale and leaseback of equipment should be accounted for as an
operating lease per SFAS 13 and 28, and will be shown as such in
2007.  There is no bargain purchase option at the end of the lease,
and neither the 75% nor the 90% test has been met.  The title may pass
back to the Company at the end of the lease; however, the lease may also be
continued at the end of the 24 month period. The Company feels the appropriate
stance is to show this as an operating lease in 2007; thereby recording the
reduction of equipment, the corresponding loss, and treating the payments as
lease expense.
 
 The
Company is in negotiations to extend the term of the mortgage on the building,
and reduce the interest rate accordingly.
  Inflation
has not significantly impacted the Company’s operations.
 
 Table of Contents
 41
 Off-Balance
Sheet Arrangements
  We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our
investors.
  Critical
Accounting Policies
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make a wide variety of estimates
and assumptions that affect (i) the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the
financial statements, and (ii) the reported amounts of revenues and expenses
during the reporting periods covered by the financial statements. Our management
routinely makes judgments and estimates about the effect of matters that are
inherently uncertain. As the number of variables and assumptions affecting the
future resolution of the uncertainties increases, these judgments become even
more subjective and complex. The most significant accounting policies that are
most important to the portrayal of our current financial condition and results
of operations are as follows:
  Revenue
Recognition
  The
Company recognizes revenue in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial
Statements”. Revenue consists of the sale of products and is recognized only
when the price is fixed or determinable, persuasive evidence of an arrangement
exists, the product is shipped, and collectibility is reasonably
assured.
 Table of Contents
 42
  REPORTOF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors
 Ethos
Environmental, Inc.
 San
Diego, CA
 
 
 We have
audited the accompanying consolidated balance sheet of Ethos Environmental,
Inc., ("the Company") as of December 31, 2006, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 2006 and 2005.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting.  Our audit 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 includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ethos Environmental, Inc.,
as of December 31, 2006, and the results of its operations and its cash
flows for the years ended December 31, 2006 and 2005, in conformity with
accounting principles generally accepted in the United States.
 
 The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern.  As discussed in Note 1
to the consolidated financial statements, the Company has experienced recurring
losses from operations.  This raises substantial doubt about the
Company's ability to continue as a going concern.  Management's plans
regarding this matter are also described in Note 1.  The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
 
 As
discussed in Note 2, the accompanying 2006 consolidated financial statements
have been restated.
 
 /S/
PETERSON SULLIVAN PLLC
 
 Seattle,
Washington
 April 15,
2007, except for the effects of the restatement described in Note 2 for which
the date is November 16, 2007
  Table of Contents
 43
 Item
7.   Financial Statements
 ETHOS
ENVIRONMENTAL, INC.
 CONSOLIDATED
BALANCE SHEET
 
 ASSETS
              
              December
      31,
                2006CURRENT
      ASSETS:Cash
              
              $
              64,867Restricted
      Cash
              
              
              300,000Accounts
      Receivable, net of allowance for doubtful accounts
              
              
              327,324Inventory
              
              
              410,915Other
      Current Assets
              
              
              19,900Total
      Current Assets
              
              $
              1,123,006Property
      and Equipment, net (Restated)
              
              
              6,391,468Other
      Assets
              
              
              5,000Total
      Assets (Restated)
              
              $
              7,519,474
 
 LIABILITIES
AND SHAREHOLDERS’ EQUITY
 
 LIABILITIES:
 
 CURRENT
      LIABILITIES:Accounts
      Payable
              
              $
              503,898Accrued
      Expenses
              
              
              101,488Notes
      Payable
              
              
              5,167,819Note
      Payable Related Party
              
              
              50,000Total
      Current Liabilities
              
              
              5,823,205SHAREHOLDERS’
      EQUITY:Common
      Stock, $.0001 par value; 100,000,000
                shares
      authorized; 23,107,687 issued and
                outstanding
              
              
              2,311Additional
      Paid-in Capital (Restated)
              
              
              11,560,535Accumulated
      Deficit (Restated)
              
              
              (9,866,577
              )Total
      Shareholders’ Equity (Restated)
              
              
              1,696,269Total
      Liabilities and Shareholders’ Equity (Restated)
              
              $
              7,519,474
 
 See notes
to consolidated financial statements.
  Table of Contents
 44
 ETHOS
ENVIRONMENTAL, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 For
the Years Ended December 31, 2006 and 2005
 
 2006
              
              
              
              2005Revenue
              
              $
              4,768,013
              
              
              $
              1,780,825Cost
      of Sales (Restated) (exclusive of depreciation shown
below)
              
              
              1,613,366
              
              
              
              526,459Gross
      Profit (Restated)
              
              
              3,154,647
              
              
              
              1,254,366Operating
      Expenses:Depreciation
      (Restated) (other than in cost of sales above)
              
              
              18,865
              
              
              
              83,209Selling
      Expenses
              
              
              4,689,910
              
              
              
              483,953General
      and Administrative (Restated)
              
              
              4,987,623
              
              
              
              1,737,951Total
      Operating Expenses (Restated)
              
              
              9,696,398
              
              
              
              2,305,113Operating
      Loss (Restated)
              
              
              (6,541,751
              )
              
              
              (1,050,747
              )Other
      Income
              
              
              730,813
              
              
              
              0Interest
      Expense
              
              
              (620,244
              )
              
              
              (890
              )Other
      Expense
              
              
              (58,931
              )
              
              
              0Net
      Loss (Restated)
              
              $
              (6,490,113
              )
              
              $
              (1,051,637
              )Net
      Loss per Common Share
              
              $
              (6.76
              )
              
              $
              (5.38
              )Weighted
      average shares used in per share calculation (basic and fully
      diluted)
              
              
              960,685
              
              
              
              195,504
  See notes
to consolidated financial statements.
 
 Table of Contents
 45
 
 ETHOS
      ENVIRONMENTAL INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYFor
      the Years Ended December 31, 2006 and 2005(Restated)AdditionalCommon
      Stock
              
              
              Paid-In
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalances
      at December 31, 2004
              
              
              17,609,992
              
              
              
              1,761
              
              
              
              3,805,764
              
              
              
              (2,324,827
              )
              
              
              1,482,698Common
      stock issued for cash
              
              
              5,108,395
              
              
              
              511
              
              
              
              175,689
              
              
              
              
              
              
              
              176,200Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,051,637
              )
              
              
              (1,051,637
              )Balances
      at December 31, 2005
              
              
              22,718,387
              
              
              
              2,272
              
              
              
              3,981,453
              
              
              
              (3,376,464
              )
              
              
              607,261Common
      stock repurchased for cash
              
              
              (5,000,200
              )
              
              
              (500
              )
              
              
              (49,500
              )
              
              
              
              
              
              
              (50,000
              )Capital
      Contribution
              
              
              
              
              
              
              
              
              
              
              45,000
              
              
              
              
              
              
              
              45,000Recapitalization
      of Victor Industries Inc.
              
              
              479,500
              
              
              
              48
              
              
              
              3,083
              
              
              
              
              
              
              
              3,131Common
      stock issued for services
              
              
              4,910,000
              
              
              
              491
              
              
              
              7,580,499
              
              
              
              
              
              
              
              7,580,990Net
      Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,490,113
              )
              
              
              (6,490,113
              )Balances
      at December 31, 2006
              
              
              23,107,687
              
              
              
              2,311
              
              
              
              11,560,535
              
              
              
              (9,866,577
              )
              
              
              1,696,269
 
 See notes
to consolidated financial statements.
 Table of Contents
 46
 ETHOS
ENVIRONMENTAL, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Years Ended December 31, 2006 and 2005
 2006
              
              
              
              2005Cash
      Flows from Operating ActivitiesNet
      Loss  (Restated)
              
              $
              (6,490,113
              )
              
              $
              (1,051,637
              )Adjustments
      to Reconcile Net Loss to Net Cash provided by (used by) operating
      activitiesCommon
      Stock Issued for Expenses
              
              
              7,580,990
              
              
              
              0Depreciation
              
              
              292,096
              
              
              
              83,209Changes
      in allowance for doubtful accounts
              
              
              (450,297
              )
              
              
              527,847Changes
      in Operating Assest and LiabilitiesAssets:Accounts
      receivable
              
              
              413,030
              
              
              
              (451,030
              )Inventory
              
              
              (151,351
              )
              
              
              (200,816
              )Other
      assets
              
              
              67,209
              
              
              
              (10,000
              )Liabilities:Accounts
      payable
              
              
              (246,658
              )
              
              
              567,575Accrued
      expenses
              
              
              10,929
              
              
              
              90,559Net
      Cash Provided (Used) by Operating Activities
              
              
              1,025,835
              
              
              
              (444,293
              )Cash
      Flows from Investing ActivitiesBuilding
      Deposit
              
              
              0
              
              
              
              (200,000
              )Purchase
      of Property and Equipment
              
              
              (6,359,874
              )
              
              
              (101,549
              )Cash
      Received from Acquisition
              
              
              589Net
      Cash Used by Investing Activities
              
              
              (6,359,285
              )
              
              
              (301,549
              )Cash
      Flows from Financing ActivitiesProceeds
      from Note Payable
              
              
              5,167,819
              
              
              
              11,003Proceeds
      from Related Party Note Payable
              
              
              50,000
              
              
              
              0Repayment
      of Note Payable
              
              
              (13,000
              )
              
              
              0Repurchase
      of Common Stock
              
              
              (50,000
              )
              
              
              0Proceeds
      from Common Stock sales
              
              
              0
              
              
              
              176,200Proceeds
      from Capital Contribution
              
              
              45,000
              
              
              
              0Net
      Cash Provided by Financing Activities
              
              
              5,199,819
              
              
              
              187,203Net
      Change in Cash and Cash Equivalents
              
              
              (133,631
              )
              
              
              (558,639
              )Cash
      at Beginning of Period
              
              
              498,498
              
              
              
              1,057,137Cash
      at End of Period
              
              $
              364,867
              
              
              $
              498,498Reconciliation
      to Balance Sheet Presentation:Cash
              
              $
              64,527
              
              
              $
              198,498Restricted
      Cash
              
              
              300,000
              
              
              
              300,000$
              364,527
              
              
              $
              498,498
 
 See notes
to consolidated financial statements.
 Table of Contents
 47
  NOTES
TO FINANCIAL STATEMENTS
  Note
1. Organization and Significant Accounting Policies
 
 Organization
 
 Ethos
Environmental, Inc. ("the Company") manufactures and distributes fuel
reformulating products that increase fuel mileage, reduce emissions, and
maintain lower fuel costs. The Company is based in Southern California and sells
its product, primarily in the United States, Latin America, Europe, Africa,
Australia and Asia.
 
 On April
20, 2006, Victor Industries, Inc. (“Victor”), with the approval of its Board of
Directors, executed an Agreement and Plan of Merger with San Diego, CA based
Ethos Environmental, Inc., a Nevada corporation.
 
 At a
meeting of shareholders of the Company held on October 30, 2006, a majority of
shareholders voted in favor of the merger. On November 2, 2006, the merger was
consummated. As part of the merger, Victor redomiciled to Nevada, and changed
its name to Ethos Environmental, Inc. In addition thereto, and as part of the
merger, Victor set a record date of November 16, 2006 for a reverse stock split
of 1 for 1,200 of the issued and outstanding shares of Victor. Prior to the
reverse stock split and subsequent merger, Victor issued 47,685,805 shares to
reduce its liabilities by $257,503 based on the pre-merger stock price of
$0.0054 per share. All of the per share data in these consolidated financial
statements are presented on a post-split basis.
 
 The
merger provides for a business combination transaction by means of a merger of
Ethos with and into the Victor, with Victor as the corporation surviving the
merger. Under the terms of the merger, Victor acquired all issued and
outstanding shares of Ethos in exchange for 17,718,187 shares of common stock of
Victor. Shares of Victor common stock, representing an estimated 97% of the
total issued and outstanding shares of Victor common stock, was issued to the
Ethos stockholders. Ethos shareholders were able to exchange their shares
beginning on or after November 16, 2006, the record date set for the reverse
stock split.
 
 The
merger was intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code and no gain or loss will be
recognized by Victor as a result of the merger.
 
 The
merger is accounted for under the purchase method of accounting as a reverse
acquisition in accordance with U.S. generally accepted accounting principles for
accounting and financial reporting purposes. Under this method of accounting,
Ethos is treated as the “accounting acquirer” company for financial reporting
purposes. Accordingly the operations of the company are included in these
financial statements as of November 2, 2006. In accordance with guidance
applicable to these circumstances, the merger was considered to be a capital
transaction in substance. Accordingly, for accounting purposes, the merger was
treated as a recapitalization of Victor.  The assets and liabilities
of Victor have been included in these consolidated financial statements at their
net book value.
 
 The
assets acquired and liabilities assumed of Victor were as follows:
 
 Assets
                
                $
                66,062Liabilities
                
                
                62,931Net
      Recapitalization
                
                $
                3,131
 
 The
accounting effect of the reverse acquisition is reflected in the consolidated
statements of stockholders’ equity.
 
 The
historical financial statements prior to the reverse merger transaction have
been restated to be those of the accounting acquirer and historical
stockholders' equity prior to the reverse merger has been retroactively restated
for the equivalent number of shares received in the merger after giving effect
to the difference in par value of the issuer's and acquirer's stock with an
offset to additional paid-in capital.
 
 Table of Contents
 48
 As part
of the reverse acquisition, the prior activities of the Company were
discontinued. No discontinued operations are presented in these financial
statements since there were no expenses or revenues incurred after November 2,
2006 related to these operations.
 
 The
Company agreed to acquire Ethos Environmental, Inc. because of its anticipated
future growth in a marketplace that is in strong demand for its product, and it
was believed that the acquisition would benefit the existing shareholders of
both companies.
 
 Of the
4,910,000 shares issued in 2006, 3,600,000 shares represented a pre-merger
commitment by the entity then known as Ethos Environmental, Inc. The entity then
known as Ethos Environmental, Inc. committed to issue the shares on October 15,
2006, and the shares were to be issued regardless of the outcome of the then
pending merger as such shares were not for services in any way associated with
the then pending merger. As such, the shares were valued at fair value as
determined by the pre-merger Ethos Board of Directors.
 
 On the
date that the pre-merger Ethos Environmental, Inc. committed to issue the
shares, there was not a public market for Ethos’ common stock, and the most
readily determinable value of the stock was fair value. Of the 3,600,000 shares,
100,000 were issued for services rendered by an outside consultant prior to, and
unrelated to, the merger. As this was the number of shares that said consultant
was willing to accept as payment for services rendered valued at $25,000, we
believe that the value of $0.25 approximated the fair value of the shares on the
date of the commitment and therefore was the appropriate value to be
used.
 
 The
remaining 3,500,000 shares (the “Bonus Shares”) were issued to our Chief
Executive Officer as a one-time bonus by the pre-merger entity known as Ethos
Environmental, Inc.  The Bonus Shares were not subject to any
performance and/or service conditions, and there was no pre-existing arrangement
or agreement regarding the Bonus Shares.
 
 Since the
3,600,000 shares were due and payable in the 4th quarter
of 2006 by the pre merger Ethos, these shares have been recorded on the year end
financial statements of the post-merger entity.  All 3,600,000 shares
were deemed fully paid and non-assessable as of the date authorized by the
pre-merger Ethos Board of Directors, October 15, 2006.
 
 The
3,600,000 shares were accounted for at the fair value of $0.25 and charged
against general and administrative expenses in accordance with Generally
Accepted Accounting Principles (GAAP).  The remaining 1,310,000 shares
were issued in compliance with prior consulting agreements and valued at the
market price at the date of issue, $5.10.  The value of these shares
was charged against selling expenses and general and administrative expenses.
There was no cash involved in these transactions.
  Going
Concern
 
 The
Company has incurred significant losses from operations in the last two
years. The Company's ability to continue as a going concern is in doubt and
is dependent upon obtaining additional financing and/or achieving a sustainable
profitable level of operations. The net loss incurred at December 31, 2006 is
mainly due to non-cash transactions for issuance of stock for
services.
 
 Management
of the Company has undertaken steps as part of a plan with the goal of
sustaining the Company operations for the next twelve months and beyond. These
steps include: (a) attempting to raise additional capital and/or other forms of
financing; (b) controlling overhead and operating expenses; and (c) continuing
to increase the sales of its fuel reformulating product. There can be no
assurance that any of these efforts will be successful.
  Principles
of Consolidation
 
 These
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary. All material inter-company accounts have been
eliminated in consolidation.
 
 Table of Contents
 49
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual
results could differ from the estimated amounts.
 
 Cash
 
 Cash
includes a payroll account and an operating checking account held at a financial
institution. The Company's cash balances have exceeded federally insured limits
from time to time during the year ended December 31, 2006.
 
 Restricted
cash consists of a deposit made in August 2005 that is being held in a bank in
Beijing, China. This deposit is required by the government of China and must be
held in the account a minimum of eighteen months in order for the Company to
conduct business in China.
 
 Accounts
Receivable
 
 Accounts
receivable are stated at their principal balances, do not bear interest and are
generally unsecured. Management considers all balances over 30 days old to be
past due. However, if credit is extended management conducts a periodic review
of the collectibility of its accounts receivable. If an account is determined to
be uncollectible based on historical experience and the current economic
climate, an allowance is established and the account is written off against the
allowance. The Company recorded an allowance of $126,485 and $576,782 at
December 31, 2006 and 2005, respectively. At December 31, 2006, 62% of
accounts receivable is due from one customer.
 
 Inventory
 
 Inventory
consists primarily of the Company's fuel reformulating product and is stated at
the lower of cost or market. In production, the company accounts for its
inventory on a first-in-first-out basis (FIFO).
 
 Property
and Equipment
  Property
and equipment are recorded at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the anticipated lease term or the
estimated useful life. The Company's policy is to capitalize items with a cost
greater than $4,000 and an estimated useful life greater than one year. The
Company reviews all property and equipment for impairment at least annually.
Typically, the company depreciates its assets over a 5 year period except for
the building which is depreciated on a 25 year basis.
 
 Notes
Payable
 
 On
December 26, 2006, the company entered into a Demand Loan Agreement with a third
party for $500,000 with an annual interest rate of 12%. At December 31, 2006,
$417,819 had been funded. The remainder of the Demand Note was funded on January
2, 2007.
 
 On
January 26, 2006 the Company secured a loan for its building in the amount of
$4,750,000 with a convertible Promissory Note. The Note was convertible at $2.50
per common share up to 1.9 million shares. The Note carried an annual
interest rate of 17% with interest-only payments   and a term of
one year. On December 6, 2006, the Note was assigned to another third party, and
interest was renegotiated at 14%.
 
 Prior to
maturity, the Company approached the current note holders and requested that
they extend the maturity of the Note to March 31, 2009. As part of its offer to
induce the note holders to extend the maturity date, the Company offered to
rescind the conversion feature and issue 1.9 million detachable
warrants.  The Company is still currently negotiating the terms of a
mutually acceptable extension.
 
 Table of Contents
 50
 Note
Payable - Related Party
 
 During
2006, there was one Loan Payable to the President of the Company in the amount
of $50,000. The loan has no stated repayment terms, is due on demand, is
unsecured and does not bear interest. The Note was issued for a deposit to the
Company account for short-term working capital needs.
 
 Fair
Value of Financial Instruments
 
 The
carrying value of the Company's accounts receivable, accounts payable, accrued
expenses, note payable, note payable related party and building loan approximate
their estimated fair value due to the relatively short maturities of those
instruments.
 
 Revenue
Recognition
 
 Revenue
from the sale of fuel reformulating products is recorded when the product is
shipped, the price is fixed and determinable, collection is reasonably assured,
and no further obligations of the Company remain.
 
 Two
customers accounted for 88% of the Company’s revenues for the fiscal year ended
December 31, 2006. One Mexican customer accounted for 40% and one U.S. customer
accounted for 48%.
 
 There was
one U.S. customer that accounted for 40% of 2005 sales and one Hong Kong
customer that accounted for 30% of 2005 sales.
 
 Stock
Based Compensation
 
 Prior to
January 1, 2006, the Company accounted for stock-based awards under the
intrinsic value method, which followed the recognition and measurement
principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”,
and related Interpretations. The intrinsic value method of accounting resulted
in compensation expense for stock options to the extent that the exercise prices
were set below the fair market price of the Company’s stock at the date of
grant.
 
 As of
January 1, 2006, the Company adopted SFAS No. 123(R) “share-based payment” using
the modified prospective method, which requires measurement of compensation cost
for all stock-based awards at fair value on the date of grant and recognition of
compensation over the service period for awards expected to vest. The fair value
of stock options is determined using the Black-Scholes valuation model, which is
consistent with the Company’s valuation techniques previously utilized for
options in footnote disclosures required under SFAS No. 123, “Accounting for
Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock
Based Compensation Transition and Disclosure”.
 
 Since the
Company did not issue stock options to employees during the year ended December
31, 2006 or 2005, there is no effect on net loss or earnings per share had the
Company applied the fair value recognition provisions of SFAS No. 123(R) to
stock-based employee compensation. When the Company issues shares of common
stock to employees and others, the shares of common stock are valued based on
the market price at the date the shares of common stock are approved for
issuance.
 
 Loss
Per Share
 
 Basic
loss per share is computed by dividing the net loss available to common
shareholders by the weighted average number of common shares outstanding in the
period. Diluted loss per share takes into consideration common shares
outstanding (computed under basic earnings per share) and potentially dilutive
common shares. There were no dilutive securities outstanding at December 31,
2006 or 2005. The convertible feature of the Notes Payable is not included in
the calculation of diluted earnings per share since the effect is anti-dilutive
due to the Company’s net loss.
 
 Advertising
Costs
 
 Advertising
costs are expensed as incurred. Advertising expense for the years ended
December 31, 2006 and 2005 was $132,955 and $231,380, respectively and are
included in selling expenses in the consolidated financial
statements.
 
 Shipping
and Handling
 
 Expenses
related to shipping and handling is expensed as incurred and is included in
"cost of sales" in the statement of operations.
 
 Table of Contents
 51
 Research
and Development
 
 Research
and development costs are expensed to operations when incurred and are included
in general and administrative expenses.  The amounts expensed for the
years ended December 31, 2006 and 2005 amounted to $112,051 and $132,404,
respectively.
 
 Concentrations
 
 The
Company uses five vendors for most of its fuel reformulating products although
there are other companies that can provide equivalent products. These vendors
accounted for 90% of product purchases in 2006. During 2005, the company
primarily used one vendor for most of its fuel reformulating products. That
vendor accounted for 90% of products purchased in 2005.
 
 Income
Taxes
 
 The
Company accounts for its income taxes under the provisions of Statements of
Financial Accounting Standards No. 109 (SFAS No. 109). Income taxes are provided
for the tax effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related primarily to
differences between the bases of certain assets and liabilities for financial
and tax reporting. Deferred taxes represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. No provision for deferred taxes is
reflected in the financial statements as the valuation allowance offsets any
deferred tax benefit.  See Note 4.
 
 Foreign
Operations
 
 Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the local functional currency (the U.S.
Dollar) are included in "general and administrative" expenses in the statements
of operations, which amounts were not material for the years ended
December 31, 2006 and 2005. Currently, the company requires all sales,
receipts, purchases and disbursements to be calculated in U.S.
Dollars.
 
 Reclassification
 
 Certain
items from the 2005 financial statements have been reclassified to conform to
the 2006 presentation.
 
 Recent
Accounting Pronouncements
 
 During
October 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). This statement does not require any new fair value measurements
but provides guidance on how to measure fair value and clarifies the definition
of fair value under accounting principles generally accepted in the United
States of America. The statement also requires new disclosures about the extent
to which fair value measurements in financial statements are based on quoted
market prices, market-corroborated inputs, or unobservable inputs that are based
on management’s judgments and estimates. The statement is effective for fiscal
years beginning after November 15, 2007. The statement will be applied
prospectively by the Company for any fair value measurements that arise after
the date of adoption.
 
 Table of Contents
 52
 The FASB
has also issued SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”. As the Company has no plans covered by this
standard, it will have no effect on the consolidated financial
statements.
 
 The SEC
has issued Staff Accounting Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements” (“SAB 108”), in September 2006. SAB 108 requires entities
to quantify misstatements based on their impact on each of their financial
statements and related disclosures. SAB 108 is effective as of December 31,
2006. The adoption of this standard is not expected have an impact on the
Company’s consolidated results of operations, cash flows or financial
position.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115.”  This statement permits entities to choose to measure
eligible items at fair value at specified election dates.  The statement is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007 although early adoption is permitted provided that an entity
also adopts SFAS 157. The Company has not determined the impact this standard
will have on its consolidated operating results or financial position upon
adoption.
 
 Note
2. Restatement of Previously Issued Financial Statements
 
 The
Company has restated its consolidated balance sheet as of December 31, 2006, and
the related consolidated statements of operations, stockholders’ equity, and
cash flows for the years ended December 31, 2006.  The Company has
reassessed certain accounting policies and concluded certain items had been
accounted for incorrectly in the past and has restated them
accordingly.
 
 The
restated items are as follows:
 ·
              The
      Company corrected the accounting for the reverse acquisition of Victor
      Industries, Inc. (former name of Registrant).  Since Victor
      Industries, Inc. was determined to meet the definition of a public shell,
      the transaction should be accounted for as a
      recapitalization.  Accordingly, no goodwill or other intangible
      assets are recognized in conjunction with this transaction.  The
      net effect on the statement of operation resulted in a reduction of the
      net loss of $66,690 for the amortization which had previously been
      recorded on the intangibles.  There was also a reduction of
      goodwill, customer list, accumulated amortization, accumulated
      depreciation and additional paid in capital resulting from this
      correction, in the amount of $2,411,103, $2,000,726, $66,690, 11,160 and
      $4,400,669, respectively.
 ·
              The
      Company corrected the classification of depreciation between cost of sales
      and general and administrative
expenses.
 
 The
following table presents the effects of the restatement adjustments on net loss
for the periods ended December 31, 2006:
  Net
      loss, as previously reported
              
              $
              (6,556,803
              )Restatement
      adjustments:Amortization of
      intangibles
              
              
              66,690Net
      loss, as restated
              
              $
              (6,490,113
              )
 The
following table presents the effects of the restatements adjustments on the
Company’s previously reported financial position and results of operations as of
and for the year ended December 31, 2006:
  As
      Previously
                Reported
              
              
              As
      RestatedRevenue
              
              $
              4,768,013
              
              
              $
              4,768,013Cost
      of sales
              
              
              1,340,135
              
              
              
              1,613,366Operating
      expenses
              
              
              10,036,319
              
              
              
              9,696,398Other
      income/expense
              
              
              51,638
              
              
              
              51,638Net
      loss
              
              $
              (6,556,803
              )
              
              $
              (6,490,113
              )Net
      Loss per Common Share
              
              $
              (6.83
              )
              
              $
              (6.76
              )Total
      current assets
              
              $
              1,123,006
              
              
              $
              1,123,006Property
      and intangibles, net
              
              
              10,725,447
              
              
              
              6,391,568Other
      assets
              
              
              5,000
              
              
              
              5,000Total
      assets
              
              $
              11,853,453
              
              
              $
              7,519,474Total
      current liabilities
              
              $
              5,823,205
              
              
              $
              5,823,205Stockholders’
      equity
              
              
              6,030,248
              
              
              
              1,696,269Total
      liabilities and stockholders’ equity
              
              $
              11,853,453
              
              
              $
              7,519,474
  Table of Contents
 53
 Note
3. Prior Period Adjustments
 
 The
December 31, 2004 balances have been restated to correct for an error related to
vehicles that were incorrectly recorded as assets in 2003 and 2004. The value of
the assets removed was $282,366, less $25,440 of accumulated
depreciation.
 
 In
addition, the December 31, 2004 balances have been restated to reduce accrued
expenses by $38,917 due to a settlement that was reached with a vendor in
2004.
 
 The net
effect of the combined adjustments was to increase the accumulated deficit and
decrease total stockholders’ equity by $218,009. There was no effect on earnings
per share.
 
 Note
4. Property and Equipment
 
 The
Company’s property and equipment consisted of the following at
December 31:
 
 2006
              
              
              2005Building
              
              $
              5,845,417
              
              
              $
              0Equipment
              
              
              886,353
              
              
              
              167,591Furniture
      and fixtures
              
              
              14,727
              
              
              
              14,727Computers
              
              
              36,648
              
              
              
              35,7906,783,145
              
              
              
              218,108Less:
      accumulated depreciation
              
              
              (391,677
              )
              
              
              (63,153
              )$
              6,391,468
              
              
              $
              154,955
 
 Note
5. Income Taxes
 
 The
Company is liable for taxes in the United States. As of December 31, 2006,
the Company does not expect to have any income for tax purposes and therefore,
no tax liability or expense has been recorded in these financial
statements.
 
 The
Company estimates that it has tax losses of approximately $9,900,000which may be available
to reduce future taxable income. Any tax loss carry forwards available expire
between the years 2020 and 2026.
 
 The
deferred tax asset associated with the estimated tax loss carry forward is
approximately $3,366,000. The Company has provided for a valuation allowance as
an offset against the deferred tax asset as it is unknown at this time if the
asset will be utilized.  The valuation allowance increased by
approximately $2,210,000 and $358,000 for the years ended 2006 and 2005,
respectively.
  Table of Contents
 54
 Note
6. Operating Leases
 
 The
Company leases an office building under a lease agreement that expires in July
2012. The rent expense for the year ended December 31, 2006 and 2005, totaled to
$66,844 and $48,634, respectively.
 
 The
Company’s future annual minimum lease payments are as follows for years ending
December 31:
 
 2007
              
              $
              52,6572008
              
              
              54,2362009
              
              
              55,8632010
              
              
              57,5392011
              
              
              59,265Thereafter
              
              
              35,170Total
              
              $
              314,730
 
 
 Note
7. Stock Option Plan
 
 In 2006,
the Company adopted the 2006 Stock Incentive Plan which reserves a total of
3,500,000 common shares to provide the Company with a means of compensating
selected key employees (including officers), directors and consultants. No
options were granted in 2006 under this Plan.
  Note
8. Subsequent Events
 
 On
February 7, 2007, the Company entered into an equipment lease agreement with
Mazuma Capital Corp. wherein the Company agreed to a 24-month sale and
lease-back arrangement for up to $800,000 of its manufacturing equipment. The
lease calls for a monthly payment based on a factor of .04125 times the average
outstanding loan balance during the month. Through March 29, 2007, the Company
has placed property valued at $737,968 under this lease arrangement with Mazuma
Capital Corp.
  Between
January 1, 2007 and April 14, 2007, the Company issued 574,000 shares of our
common stock for services rendered by key consultants, officers, and
directors.
 
 On March
9, 2007, the Company closed on a private placement of 50,000 shares of common
stock for a total of $50,000.
 
 On April
4, 2007, the Company cancelled and returned to treasury 50,000 shares of our
common stock.
 Table of Contents
 55
 Item 8.     Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
  The
Registrant’s Board of Directors approved the engagement of Peterson Sullivan,
PLLC (“PS”) as the Registrant’s independent registered public accounting firm to
audit the Company’s financial statements for the year ended December 31,
2006.
 
 The
report issued by PS in connection with the audit for the year ended December 31,
2006 did not contain an adverse opinion or a disclaimer of opinion, nor was such
report qualified or modified as to audit scope or accounting
principles.
  Item 8A.  Controls and Procedures
 
 (a)           Evaluation of Disclosure Controls
and Procedures:
 
 Our
Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our “disclosure controls and procedures” (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)), have concluded that, as of
December 31, 2006 due to the material weaknesses in our internal control over
financial reporting identified in this Report, our disclosure controls and
procedures were not effective in providing reasonable assurance that information
we are required to disclose in reports we file is recorded, processed,
summarized and reported within the periods specified.
 
 (b)           Management’s
Annual Report on Internal Control Over Financial Reporting:
 
 In
connection with the preparation of our financial statements for the year ended
December 31, 2006, certain significant internal control deficiencies became
evident to management that, in the aggregate, represent material weaknesses,
including,
 
 (i)
              Lack
      of a control environment that sufficiently promotes effective internal
      control over financial reporting throughout the management
      structure;(ii)
              Lack
      of independent directors for our audit
  committee;
 (iii)
              Lack
      of training in public company reporting requirements;(iv)
              Lack
      of control processes for recording and approving journal
      entries;
 (v)
              Lack
      of controls over the sales transaction process;(vi)
              Lack
      of controls over invoice posting
process;
 (vii)
              Insufficient
      policies and procedures over various financial statement
      areas;(viii)
              Insufficient
      documentations for accounting or business
  transactions;
 (ix)
              Lack
      of policies and procedures over records retention;(x)
              Lack
      of an audit committee financial
expert;
 (xi)
              Insufficient
      personnel in our finance/accounting functions;(xii)
              Insufficient
      segregation of duties; and
 (xiii)
              Insufficient
      corporate governance policies.
 
 As part
of the communications by Peterson Sullivan, PLLC, or Peterson Sullivan, with our
management with respect to Peterson Sullivan’s audit procedures for fiscal 2006,
Peterson Sullivan informed management that these deficiencies constituted
material weaknesses, as defined by Auditing Standard No. 2, “An Audit of
Internal Control Over Financial Reporting Performed in Conjunction with an Audit
of Financial Statements,” established by the Public Company Accounting Oversight
Board, or PCAOB.
 
 In
accordance with Section 404 of the Sarbanes-Oxley Act of 2002, we intend to
take appropriate and reasonable steps to make the necessary improvements to
remediate these deficiencies during 2007. We intend to consider the results of
our remediation efforts and related testing as part of our year-end 2007
assessment of the effectiveness of our internal control over financial
reporting.
  Table of Contents
 56
 (c)           Changes
in Internal Control Over Financial Reporting:
  There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2006 that have materially affected, or are reasonably
likely to materially affect our internal controls over financial
reporting.
  Item 8B.Other Information
  None.
  PART III
 
 Item9. Directors, Executive Officers, Promoters, Control Persons
and Corporate Governance; Compliance With Section 16(a) of the Exchange
Act
  The
following sets forth the names and ages, as of March 31, 2007, of the
members of the Board of Directors, their respective positions and offices with
the Company, the period during which each has served as a director of the
Company and their principal occupations or employment during the past five
years.
 
 Directors
  Name
              
              Age
              
              Position
              
              Director/Officer
      SinceEnrique
      de Vilmorin
              
              55
              
              Chief
      Executive Officer, President and Director
              
              2006Jose
      Manuel Escobedo
              
              66
              
              Director
              
              2006Luis
      Willars
              
              65
              
              Director
              
              2006
  All
directors serve until their successors have been duly elected and qualified,
unless they earlier resign.
  Enrique de
Vilmorin
  Since
2000, Mr. de Vilmorin has served and President, CEO and Director of Ethos
Environmental, Inc.  Mr. de Vilmorin has more than 25 years experience
in multi-national corporations. His areas of expertise include finance,
management and manufacturing. His hands-on approach makes him as comfortable
with clients as he is in the warehouse or in the boardroom. His background
includes work with Intel, IBM, First Union Bank, and the World Bank Group and a
Masters Degree in Economics from the University of Southern
California.
 
 Jose
Manuel Escobedo
 
 Since
2000, Mr. Escobedo has served as Treasurer and Director of Ethos Environmental,
Inc.  Mr. Escobedo brings to the Company more than 30 years of
entrepreneurial experience and an MBA from IPADE. Mr. Escobedo has owned and
managed businesses within the oil and fuels industry. He is a director of the
Company.
 
 Luis
Willars
 
 Since
2000, Mr. Willars has served as Secretary and Director of Ethos Environmental,
Inc.  Mr. Willars, an Economist with more than 30 years experience in
government and private sector corporations, adds a strong knowledge in corporate
finance and administration.  Mr. Willars holds a Masters Degree in
Economics from IETSM.  He is responsible for Ethos Environmental’s
worldwide Strategic Planning and Finance.
 
 Executive
officers of the company are as follows:
 
 Enrique de Vilmorin-
President and Chief Executive Officer (see above).
 
 Table of Contents
 57
 Thomas W. Maher–Chief Financial
Officer
 
 Mr. Maher
brings to the company over 20 years of senior financial management experience.
Over this period, he has served as Chief Financial Officer for both privately
held and publicly reporting corporations. Over the past 10 years he has served
as a Chief Financial Officer of a publicly traded international sign
manufacturing company, Luminart Corp., and as a Chief Financial Officer of a
commercial construction general contracting firm RC Vannatta Inc. Mr. Maher has
a MBA degree in Finance and Economics from the University of
Detroit.
 
 Involvement
in Certain Legal Proceedings
 
 We are
not currently involved in any legal proceedings.
 
 During
the last five (5) years none of our directors or officers has:
  (1)
              any
      bankruptcy petition filed by or against any business of which such person
      was a general partner or executive officer either at the time of the
      bankruptcy or within two years prior to that time;(2)
              been
      convicted in a criminal proceeding or subject to a pending criminal
      proceeding;(3)
              been
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities or banking activities;
      or(4)
              been
      found by a court of competent jurisdiction in a civil action, the
      Commission or the Commodity Futures Trading Commission to have violated a
      federal or state securities or commodities law, and the judgment has not
      been reversed, suspended, or
vacated.
  Section
16(a) Beneficial Ownership Reporting Compliance
  Section
16 of the Securities Exchange Act of 1934 requires the Company’s directors and
certain executive officers and certain other beneficial owners of the Company’s
common stock to periodically file notices of changes in beneficial ownership of
common stock with the Securities and Exchange Commission.  To the best of
the Company’s knowledge, based solely on copies of such reports received by it,
and the written representations of its officers and directors, the Company
believes that for 2006 all required filings were timely filed by each of its
directors and executive officers.
  Code
of Ethics
  We have
adopted a Code of Ethics and Business Conduct for Officers, Directors and
Employees that applies to all of our officers, directors and
employees.
 
 Item
10.   Executive
Compensation
  Summary
Compensation Table
  The
following table sets forth the overall compensation earned over each of the past
two fiscal years ending December 31, 2006 by (1) each person who served as the
principal executive officer of the Company during fiscal year 2006; (2) the
Company’s most highly compensated executive officers as of December 31, 2006
with compensation during fiscal year 2006 of $100,000 or more; and (3) those
individuals, if any, who would have otherwise been in included in section (2)
above but for the fact that they were not serving as an executive of the Company
as of December 31, 2006.
 
 Table of Contents
 58
 The
following executive compensation was paid during 2005 or 2006, if
any.
 
 Salary
      CompensationName and
                Principal
                Position
              
              Fiscal
                Year
              
              Salary ($)
              
              Bonus
                ($)
              
              Stock
                Awards
      ($)
              
              Options
                Awards
                ($)(1)
              
              Non-Equity
                Incentive Plan
                Compensation
                ($)
              
              Nonqualified
                Deferred
                Compensation
                Earnings ($)
              
              All Other
                Compensation
                Compensation
                ($) (2)(3)
              
              Total ($)Enrique
      de Vilmorin –
                CEO
      & President
              
              2006
              
              $
              344,325
              
              $
              —
              
              875,000
              
              
              —
              
              —
              
              —
              
              —
              
              $
              1,219,3252005
              
              $
              --
              
              $
              —
              
              —
              
              —
              
              —
              
              —
              
              —
              
              $Thomas
      W. Maher –
                CFO
              
              2006
              
              $
              --
              
              
              --
              
              --
              
              
              --
              
              --
              
              --
              
              --
              
              $
  
 There
were no stock options granted or exercised by the named executive directors in
2006.
  GRANTS
OF PLAN BASED AWARDS
 Estimated Future Payouts Under
                Non-Equity
      Incentive Plan Awards
              
              Estimated
      Payouts Under
                Equity
      Incentive Plan AwardsName
              
              Grant
      Date
              
              Threshold
                ($)
              
              Target
                ($)
              
              Maximum
                ($)
              
              Threshold
                (#)
              
              Target
                (#)
              
              Maximum
                (#)
              
              All
      Other Stock Awards; Number of Shares of Stock or Units
                (#)
              
              All
      Other Option Awards; Number of Securities Underlying Options
                (#)
              
              Exercise
      or Base Price of Option Awards
                ($/Sh)
              
              Grant
      Date Fair Value of Stock and Option Awards-
              -
              -
              -
              -
              -
              -
              -
              -
              -
              -
              -
              -
              -
              -
              -
              --
              -
              -
              -
              -
              -
              -
  There
were no other stock based awards under the Stock Incentive Plan in 2006 to the
Named Executive Officers.
 
 Executive
Officer Outstanding Equity Awards at Fiscal Year-End
 
 The
following table provides certain information concerning any common share
purchase options, stock awards or equity incentive plan awards held by each of
our named executive officers that were outstanding as of December 31,
2006.
 
 Option Awards
              
              Stock AwardsName
              
              Number of
                Securities
                Underlying
                Unexercised
                Options(#)
                Exercisable
              
              Number of
                Securities
                Underlying
                Unexercised
                Options(#)
                Unexercisable
              
              Equity
                Incentive Plan
                Awards:
                Number of
                Securities
                Underlying
                Unexercised
                Unearned
                Options (#)
              
              Option
                Exercise
                Price ($)
              
              Option
                Expiration
                Date
              
              Number of
                Shares or
                Units of
                Stock That
                Have Not
                Vested (#)
              
              Market
                Value of
                Shares or
                Units of
                Stock That
                Have Not
                Vested
              
              Equity
                Incentive
                Plan
                Awards:
                Number
                of
                Unearned
                Shares,
                Units or
                Other
                Rights
                That Have
                Not
                Vested
              
              Equity
                Incentive Plan
                Awards:
                Market or
                Payout Value of
                Unearned
                Shares, Units or
                Other Rights
                That Have Not
                VestedEnrique
      de Vilmorin
                CEO
      & President
              
              
              —
              
              
              —
              
              
              —
              
              $
              —
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Thomas
      Maher
                CFO
              
              
              —
              
              
              —
              
              
              —
              
              $
              —
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
  Table of Contents
 59
 OPTION
EXERCISES AND STOCK VESTED
 
 There
were no options exercised and there was no unvested stock outstanding during the
year ended December 31, 2006.
 
 PENSION
BENEFITS AND NONQUALIFIED DEFERRED COMPENSATION
 
 The
Company does not maintain any qualified retirement plans or non-nonqualified
deferred compensation plans for its employees or directors.
  EMPLOYMENT
AGREEMENTS
 
 On
December 4, 2006, Ethos Environmental, Inc. (the “Company”) entered into an
employment agreement (the “Maher Agreement”) with Thomas W. Maher defining the
terms of his employment with the Company as Chief Financial Officer, effective
December 1, 2006 (the “Effective Date”). The initial term of Mr. Maher’s
employment under the Maher Agreement is through December 1, 2007 (unless earlier
terminated in accordance with the terms of the Maher Agreement), with automatic
one-year renewals for each of the successive two years following the Effective
Date.
 
 The
Company has no other written employment agreements with any of its named
executive officers or directors.
  DIRECTOR
COMPENSATION
 
 Stock
Options
 
 The
Company does not currently have a fixed stock option plan that provides for the
issuance of incentive and non-qualified stock options to officers, directors,
employees and non-employees.
  Cash
Compensation
  Directors
receive no cash compensation for services rendered.
  Item11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
 
 The
following table sets forth certain information regarding beneficial ownership of
common stock as of December 31, 2006, by:
 
 ·
              Each
      person known to us to own beneficially more than 5%, in the aggregate, of
      the outstanding shares of our common
stock;
 ·
              Each
      director;
 ·
              Each
      of our chief executive officer and our other two most highly compensated
      executive officers; and
 ·
              All
      executive officers and directors as a
group.
 
 The
number of shares beneficially owned and the percent of shares outstanding are
based on 23,107,669 shares outstanding as of December 31, 2006. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities.
 
 Table of Contents
 60
 Beneficial
      Owner
              
              Shares of Common Stock Number
              
              Beneficially Owned PercentEnrique
      de Vilmorin
              
              10,500,000
              
              45.44
              %Jose
      Manuel Escobedo
              
              250,000
              
              1.08
              %%All such directorsand
      executiveOfficers as a group
              
              10,750,000
              
              46.52
              %Total
              
              10,750,000
              
              46.52
              %
 
 
 Changes
in Control
 
 We know
of no plans or arrangements that will result in a change of control at our
company.
 
 Item 12.Certain Relationships and Related
Transactions
 
 During
2006, there was one Loan Payable to the President of the Company in the amount
of $50,000.  The loan has no stated repayment terms, is due on demand,
is unsecured and does not bear interest.
 
 Item
13.Exhibits
  EXHIBIT
      NUMBER
              DESCRIPTION
              LOCATION3.1
      - 3.2
              Articles
      of Incorporation and Bylaws
              Incorporated
      by reference as Exhibits to the Form 8-K filed on December 12, 2004 as
      amended on February 3, 2005.10.1
              Agreement
      and Plan of Merger by and between the Company and Ethos Environmental,
      Inc.
              Incorporated
      by reference as an Exhibit to the Form 8-K filed on April 24,
      2006.10.2
              2006
      Definitive Proxy Statement.
              As
      filed with the Commission on October 4, 2006.10.3
              Sale/Leaseback
      Agreement with Mazuma Capital Corp.
              Filed
      herewith.10.4
              Amendment
      No.1 to Agreement with Mazuma Capital Corp.
              Filed
      herewith.31.1
              Rule
      13a-14(a)/15d-14(a) Certification (CEO)
              Filed
      herewith31.2
              Rule
      13a-14(a)/15d-14(a) Certification (CFO)
              Filed
      herewith32.1
              Section
      1350 Certification (CEO)
              Filed
      herewith32.2
              Section
      1350 Certification (CFO)
              Filed
      herewith
  Table of Contents
 61
 Item 14.   Principal Accounting Fees and
Services
  During
the year ended December 31, 2006, we engaged Peterson Sullivan PLLC as our
independent auditor.  For the year ended December 31, 2006, we incurred
fees to Peterson Sullivan PLLC as discussed below.
  ·
              Audit Fees:Fees
      for audit and quarterly review services totaled $81,868 and $20,076 for
      2006 and 2005, respectively, including fees associated with consents and
      the review of this report.
  ·
              Tax Fees:  We did
      not engage PETERSON SULLIVAN PLLC, for any tax related services during
      2006 or 2005.
  ·
              All Other Fees:Fees for other services not included in the above were $0in both
      2006 and 2005.
  Table of Contents
 62
 SIGNATURES
  In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 3 day of April, 2008.
  Ethos Environmental, Inc. a Nevada CorporationBy:
                /s/ Enrique
      de VilmorinEnrique
      de VilmorinChief
      Executive Officer
  Pursuant to the requirements of the
Securities Exchange Act of 1934, the following persons on behalf of the
Registrant and in the capacities and on the dates indicated have signed this
report below.
  Signature
              
              Position
              
              Date/s/
      Enrique de Vilmorin
              
              Chief
      Executive Officer and Director
              
              April
      3, 2008Enrique
      de Vilmorin/s/
      Jose Manuel Escobedo
              
              Director
              
              April
      3, 2008Jose
      Manuel Escobedo/s/
      Luis Willars
              
              Director
              
              April
      3, 2008Luis
      Willars/s/Thomas W.
      Maher
              
              Principal
      Accounting OfficerThomas
      W. Maher
              
              Chief
      Financial Officer
              
              April
      3, 2008
    63