UNITED
STATES SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D. C. 20549
 
 FORM
10-KSB
 
 (Mark
One)
 
 x ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
 1934
 
 For the
fiscal year ended December 31, 2007
 
 o TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 OF
1934
 
 For the
transition period from ___________ to ___________
 
 Commission
File Number:   000-26673
 
 ETHOS
ENVIRONMENTAL, INC.
 (Name of
Small Business Issuer in Its Charter)
  Nevada
              
              88-0467241(State
      or Other Jurisdiction
              
              IRS
      Employerof
      Incorporation or Organization)
              
              Identification
      Number
 6800
Gateway Park
 San
Diego, CA 92154
 (619)
575-6800
 (Address
and Telephone Number of Principal Executive Offices)
  Securities
      registered under Section 12(b) of the Exchange Act:Title
      of each class registered:
              Name
      of each exchange on which registered:None
              Over-the-Counter
      Bulletin BoardSecurities
      registered under Section 12(g) of the Exchange Act:Common
      Stock, par value $0.0001
                (Title
      of class)
  Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.    Yes   ̈    No  x
 
 Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.  ̈
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes xNo o
  Index
 1
 Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act.  Yes oNo x
  Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes No 
  Revenues
for year ended December 31, 2007: $10,376,646.
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was approximately $20,541,157 as of March 24, 2008 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 March 24, 2008 was:
37,347,559.
  Transitional
Small Business Disclosure Format: Yes No 
  DOCUMENTS
INCORPORATED BY REFERENCE
  All
reports filed by the Registrant during 2007, and through the date of filing of
this Annual Report.
 
 Index
 2
 ETHOS
ENVIRONMENTAL, INC.
 ANNUAL REPORT ON FORM
10-KSB
  FOR THE YEAR ENDED DECEMBER 31,
2006
  INDEX
  PART
      I
              PageItem 1.
              Description
      of Business
              5The
      CompanyProductsTrademarksSignificant
      EventsItem 2.
              Properties
              33Item 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
              36Item 7.
              Financial
      Statements
              43Item 8.
              Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
              56Item 8A(T).
              Controls
      and Procedures
              56Item 8B.
              Other
      Information
              61PART
      IIIItem 9.
              Directors,
      Executive Officers and Corporate Governance
              62Item 10.
              Executive
      Compensation
              63Item 11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              66Item 12.
              Certain
      Relationships and Related Transactions
              66Item 13.
              Exhibits
              66Item 14.
              Principal
      Accountant Fees and Services
              67
  Index
 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.
 
 Index
 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.
 
 Index
 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
 
 Index
 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.
 
 Index
 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 ofNevada. Concurrently therewith, we completed
the merger transaction with Ethos Environmental, Inc., a privately heldNevadacorporation “Ethos”. The Company was
the surviving entity. To more adequately reflect the new direction of the
Company,thename was changedto Ethos Environmental, Inc. andthe Companyadopted 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 withSan
Diego,CAbased Ethos Environmental, Inc., aNevadacorporation.
 
 At a meeting oftheshareholders of the Company held on
October 30, 2006, a majority of shareholders voted in favor of the merger. On
November 2, 2006, the merger was consummated. As part of the merger, the Company
redomiciled toNevada, and changed its name to Ethos
Environmental, Inc. In addition thereto, and as part of the merger, the Company
set a record date of November 16, 2006 for a reverse stock split of 1 for
1,200.
 
 The merger provides for a business
combination transaction by means of a merger of Ethos with and into the Company,
with the Company as the corporation surviving the merger. Under the terms of the
merger, the Company acquired all issued and outstanding shares of Ethos in
exchange for 17,718,187 shares of common stock of the Company. Shares of Company
common stock, representing an estimated 97% of the total issued and outstanding
shares of Company common stock, was issued to the Ethos stockholders. Ethos
shareholders were able to exchange their shares beginning on or after November
16, 2006, the record date set for the reverse stock split.
  The
shares issued by the registrant (17,718,187) were revalued at the new par value
of $.0001.  Another adjustment to common stock and additional paid in
capital was generated due to the cancellation of pre-merger shares
(17,717,477).  Due to the effect of the reverse merger, the Buyer’s
shares outstanding (479,500) were converted to common stock and the effect of
the net assets acquired was adjusted to additional paid in
capital.  During the year, another 4,910,000 shares of common stock
were issued for services based upon the price at date of
issuance.
  The merger was intended to qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code and no gain or loss will be recognized by the Company as a result of the
merger.
 
 Index
 8
 The merger is accounted for under the
purchase method of accounting as a reverse acquisition in accordance withU.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.
 
 Index
 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 major suppliers.  The mineral oil
used in the Ethos FR® is obtained, primarily, from major suppliers.
 
 Ethos FR®
can be used in any fuel. Ethos BFC is used for Bunker Fuel, which is used in
external combustion engines.
 
 Ethosproducts provide risk-free benefits
with an economic gain to the client. To date, 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.
 
 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.
 
 Index
 10
 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.
 
 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
 
 Index
 11
 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 thatU.S.annual consumption of fuel will
continue to escalate through the year 2030.
 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 2006.
  Sales
      of Distillate Fuel Oil by End Use 2006(Thousands
      of Gallons)Residential
              
              
              4,984,826Commercial
              
              
              2,808,786Industrial
              
              
              2,463,676Oil
      Company
              
              
              636,788Farm
              
              
              3,261,345Electric
      Power
              
              
              656,355Railroad
              
              
              3,552,430Vessel
      Bunkering
              
              
              1,903,138On-Highway
              
              
              39,118,301Military
              
              
              327,827Off-Highway
              
              
              2,478,554All
      Other
              
              
              062,192,026Notes:  Totals
      may not equal sum of components due to independent
      rounding.Sources:  Energy
      Information Administration Form EIA-821, "Annual FuelOil
      and Kerosene Sales Report for 2002-2006.
 Index
 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.
 
 Index
 13
 In
contrast, Ethos FR® products
have cleaning properties that contribute to the lubrication of the engine
instead of destroying it. The ester-based formula dissolves the gums and
residues and adds important lubrication that an engine needs.  The
engine stays clean and lubricated, allowing it to run smoothly and
efficiently.
 
 Marketing
Strategy
 
 Ethos
products are ideally positioned to capitalize on 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.
 
 Index
 14
 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:
 
 Index
 15
 
 MANAGEMENT
REPORT
 
 Testing
of Ethos Fuel Reformulator
 Allied
Waste Services, Southwestern Region
 
 Overview
 
 Ethos FR
has been used, without interruption, at multiple Allied Waste locations in
Southern California since the year 2001.
 
 Based on
the positive results realized at those locations (estimated at a 10 reduction in
fuel consumption plus significant reductions in maintenance/repair costs and
emissions) an initial test was conducted at one location in the Southwestern
Region of Allied Waste during the months of July and August,
2006.  The results of this initial 4 week test showed an estimated
reduction in fuel consumption of 10.35%, as measured by gallons per engine hour,
compared to a baseline period of the previous 12 months (July 2005 through June
2006).
 
 Based on
these positive results, a second phase of testing was initiated in May 2007
encompassing 4 locations in the Southwestern Region.  The period of
testing was generally the months of May, June and July 2007, however, one
location continued Ethos use through August.  The detailed data
obtained from this testing period is content of this report.
 
 Testing Procedures and Data
Compilation & Reporting Methodology
 
 Upon
initiation of the testing period, fuel consumption and engine hour data was
obtained from each location for a baseline period in order to establish a point
of comparison for the test.  The baseline period for each location was
generally the period of January through March, 2007.
 
 The
standard CFA report obtained from each location was the “Fuel Transaction Detail
by Equipment #” report.  This report provides the most comprehensive
daily listing of fuel dispensed and engine hours recorded for each vehicle
during each time period.  It is important to note 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.
  Index
 16
 Verification of Ethos
Use
 
 Equally
important in assuring the validity of the data collected was making best efforts
to verify that all of the fuel being consumed by each location during the
testing period was being treated with Ethos.  The method utilized to
check this compliance was a detailed tracking of fuel deliveries compared the
Ethos inventory at each location during the testing period.  While
almost all locations maintained a consistent treatment schedule throughout the
three month testing period, there were some minor exceptions.
 
 The
spreadsheets detailing the baseline & test period data, for each month at
each location are as follows:
 
  Index
 17







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.




Index
 18








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®.




Index
 19










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.
 
 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.
 Index
 20
 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 was one who accounted
for over 10% of our revenue:  Petroindustrial 81.70%.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, 2007.
 
 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
theUnited
Statesand abroad through
ourSan Diego,Californiaoffice, which at present is our only
operating office.  All of the fixed assets are located in theSan Diego,Californiaoffice.  In February, 2007,
the Company entered into a sale and leaseback arrangement as outlined below
under Loan Facilities.In October 2007, the Company completed the
Commercial Property Purchase Agreement executed in August 2007, and reported on
Form 8-K on August 13, 2007.
 
 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.
  Index
 21
 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 endedDecember 31, 2007 and 2006 amounted
to $71,217 and $112,051, respectively. All of these costs are
borne by the Company.
 
 Following
is the Ethos FR® Material
Safety Data Sheet (MSDS)
  Index
 22







Index
 23







Index
 24


Employees





As ofMarch 25, 2008, 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 $18,352,316 and $6,490,113, respectively for
the fiscal years ended December 31, 2007 and 2006. As a result, at
December 31, 2007 we had an accumulated deficit of $28,218,893. 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.




Index
 25


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.




Index
 26


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 filingU.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 theUnited Statesand 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.





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.





Index
 27


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.





Index
 28


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.





Index
 29


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.





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, 2007 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, 2007, we have approximately $28,218,893 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.





Index
 30


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 anddirectors
control 45% of our outstandingcommon stock, of which Enrique de Vilmorin, our Chairman, controls approximately
44%.  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





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:





Index
 31


·  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.  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.





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.





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.





Index
 32


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 at6800 Gateway Park DriveSan Diego,CA92154.  Welease approximately 70,000 square feet of
industrial space and manufacturing space.  We purchased our current
facility in 2006and sold it with a lease-back agreement in October
2007.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.





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.





During
2007, the company became a defendant in a lawsuit filed by Accutek, Inc. of
Vista, CA for an outstanding balance on equipment purchased in the amount of
$43,000.  The company  has filed a cross-complaint asserting
that the contractual obligations of the supplier, Accutek were not
fulfilled.  The case was still open at December 31, 2007, and the
company is confident that the court will find in our favor.





During
2007, the company became a defendant in a lawsuit filed by Groovie Like A Movie
in the amount of $19,950.  The Preliminary Trial Date is in April
2008.  The company has filed a cross-complaint claiming non-delivery
of goods and services and is confident that the court will find in our
favor.





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




None.




Index
 33


PARTII




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, 2006 through December 31,
2007.




Bid*Low
            
            High2006
      Fiscal YearJan
      - Mar 2006
            
            $
            6.60
            
            $
            13.20Apr
      - June 2006
            
            $
            6.00
            
            $
            11.76July
      - Sept 2006
            
            $
            3.00
            
            $
            7.68Oct
      - Dec 2006
            
            $
            2.00
            
            $
            11.152007
      Fiscal YearJan
      - Mar 2007
            
            $
            3.51
            
            $
            5.50Apr
      - June 2007
            
            $
            1.92
            
            $
            4.35July
      - Sept 2007
            
            $
            0.79
            
            $
            2.00Oct
      - Dec 2007
            
            $
            0.90
            
            $
            2.15




*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.





Index
 34


Holders




As of
December 31, 2007, there were approximately 893 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 three-month periods endedDecember31, 2007 and 2006
and for the years ended December 31, 2007 and 2006, 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.





Index
 35


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, $4.77
million by the end of 2006and $ 10.376 million for the year ending
December 31, 2007. Even more significant growth is anticipated for 2008, with sales in established markets in
theU.S.,Asia, Latin America,
Australia, Africa andEuropeexpected 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 in2008and beyond.





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.





The management of Ethos Environmental is
excited by the enthusiastic acceptance that our productshave 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 theproducts that we sell, in the
relationships 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.





Index
 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 ourproductsis 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 ofIndia,ChinaandBrazil.  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 2007, our revenue base increased by 120% over
2006.  Since 2004, the company has increased its revenue base by
3,019%.





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
2008, the company will continue to direct 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, $4.77 million by the end of 2006 and $ 10,376
million by the end of 2007. Even more significant growth is anticipated for
2008, with sales in established markets in the U.S., Asia, Latin America,
Australia, Africa and Europe expected to top current forecasts. Furthermore,
market implementation plans anticipate growth in 2008 and beyond. 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.





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.




Index
 37


Results
of Operations





The
following financial data compares the balances as relates to Ethos
Environmental, Inc. for the fiscal years ended December 31, 2007 and
2006.




Revenues





We
recognized revenues of $10,376,646 for the year ended December 31, 2007 compared
to revenues of $4,768,013 for the year ended December 31, 2006,an increase of
$5,608,633 or 118%. The primary source of revenue for the years ended December
31, 2007 is from the sale of Ethos FR® and Ethos Bunker Fuel.





We expect
our tremendous growth to continue as sales increase and the sales and marketing
strategies are implemented into the targeted markets and we create an
understanding and awareness of our technology through proof of performance
demonstrations with potential customers.





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® and Ethos Bunker Fuel products 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 $6,971,911 or 67% of
sales for the year ended December 31, 2007, compared to $3,154,647 or 66% of
sales for the year ended December 31, 2006.





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, 2007 was $213,702, versus $
292,096 for the year ended December 31, 2006.  The decrease in
depreciation was primarily due to the sale in October 2007 of the building which
represented approximately $193,509 of the total depreciation of $213,702.
Production and office equipment are depreciated on a 5-year basis, and the
building is depreciated on a 25-year basis.  Only $20,193 and $18,865
of depreciation is shown in general and administrative expenses at December 31,
2007 and 2006, respectively, as the remainder is included in cost of
sales.





Operating expenses incurred during the
year ended December 31,2007 totaled $25,096,543. These expenses were
incurred primarily in the following accounts:





·  Legal
fees of approximately $ 149,854


·  Accounting,
audit, bookkeeping and director fees totaling $ 253,045


·  Business
consulting fees of approximately $ 10,953,025 - of which $10,909,710
relates to the non-cash issuance of stock


·  Debt
Extinguishment Expense of $ 6,646,171 – a non-cash item relating to warrants
associated with the building purchase


·  Outside
services of $ 218,578


·  Payroll
Expenses of $ 5,341,473 – of which $4,500,000 relates to the non-cash issuance
of stock


·  Selling
Expenses of $ 561,554


·  Rent and
Equipment Lease of $ 551,022 – the majority of which relates to the Mazuma
equipment sale/leaseback transaction


·  Office
expenses of $ 421,821





Index
 38


Similar
expenses incurred for the year ended December 31, 2006 totaled $ 9,696,398 and
were primarily for  services of a similar nature.




For
comparison purposes, the Company issued 13,764,000 new shares of common stock
during the year ended December 31, 2007, compared to 4,910,000 shares issued
during the year ended December 31, 2006.  Of the 13,764,000 shares issued
in 2007, 6,164,000 shares were for services, 2,500,000 shares were issued for
cash, 100,000 shares were issued under contract with the Chief Financial Officer
and 5,000,000 shares were issued as a one-time bonus to the Chief Executive
Officer.  The shares issued were charged against general and
administrative expenses, in accordance with Generally Accepted Accounting
Principles (GAAP).





The
5,000,000 shares of stock issued in 2007 to our CEO were not subject to any
performance and/or service conditions, and there was no pre-existing arrangement
or agreement regarding the such shares.





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 endedDecember 31, 2007 and 2006 amounted to $71,217 and $112,051,
respectively.





Net Loss





The
Company incurred a net loss for the year ended December 31, 2007 of $18,352,510
as compared to a net loss of $6,490,113 for the year ended December 31,
2006.  Even though revenues increased by 118% during 2007, as compared
to December 31, 2006, the net loss increased by approximately
$11,862,397.  The main reason for the increase in net loss is due to
the issuance of stock for services, cash, debt extinguishment and compensation
provided which totaled $24,055,881.   The stock compensation is
included in the consolidated statement of operations under general and
administrative expenses.





NON-OPERATING
INCOME AND EXPENSES





Non-operating
income, net of expenses, remained constant in the year ended December 31, 2007
versus 2006. Interest expense decreased to $618,084 during the 12 months ended
December 31, 2007 from $ 620,244 in 2006. The interest was primarily associated
with the interest-only loan for $4,750,000, related to the purchase of our new
building as well as interest only working capital loans for $500,000 and
$700,000.  All three of these loans were paid off when the company
sold its headquarters building in October 2007. Non-operating Income decreased
to $390,206 in 2007 versus $730,813 in 2006.  Non-operating Income was
primarily associated with Gains on Sales of Assets.




Liquidity
and Capital Resources





On
December 31, 2007, we had working capital of $6,471,769 and stockholders’ equity
of $7,399,640 compared to a working capital deficit of $4,700,199 and
stockholders’ equity of $1,696,269 on December 31, 2006.





On
December 31, 2007, the Company had $74,176 in cash, total assets of $8,329,352
and total liabilities of $929,712, compared to $64,867 in cash and $300,000 in
restricted cash, total assets of $7,519,474 and total liabilities of $5,823,205
on December 31, 2006.





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 12 months. Our contemplated cash
requirements for 2008 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 net loss incurred for the
twelve months ended December 31, 2007 increased significantly due to issuance of
stock and warrants for services, cash, debt extinguishment and compensation in
the amount of $22,005,881, as reflected within the Stockholder's Equity
Statement.  These were non-cash transactions that increased
expenses  and  increased equity.  In addition,
depreciation expense decreased to $213,702 during the twelve months ended
December 31, 2007 from $292,096 for the same period 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.  The introduction and sale of the Company's
new bunker fuel product caused the increase in Accounts Receivable in 2007.
Inventory has increased each year, due to the need for keeping larger quantities
of inventory on hand as sales have increased over 100% annually from 2003 to
2007.  Accounts payable and accrued expenses decreased due to more
efficient handling of vendor bills and quicker payment
turnaround.





Index
 39


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.





Loan
Facilities




On
February 7, 2007, we 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.




Inflation
has not significantly impacted the Company’s operations.





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 collectability is reasonably
assured.




Index
 40


MOORE
& ASSOCIATES, CHARTERED
 ACCOUNTANTS AND
ADVISORS
 PCAOB REGISTERED
 
 
 REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
the Board of Directors
 Ethos
Environmental Inc.
 
 
 We have
audited the accompanying consolidated balance sheet of Ethos Environmental Inc.
as of December 31, 2007, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the year ended December 31, 2007. These
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ethos Environmental Inc. as
of December 31, 2007, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the year ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 10 to the
financial statements, the Company has incurred a net loss due to non-cash
transactions, which raises substantial doubt about its ability to continue as a
going concern.  Management’s plans concerning these matters are also
described in Note 10.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
 
 
 
 /s/
Moore & Associates, Chartered
 
 Moore
& Associates Chartered
 Las
Vegas, Nevada
 April 14,
2008
 
 2675 S. Jones Blvd. Suite
109, Las Vegas, NV 89146 (702) 253-7499 Fax (702)
253-7501




Index
 41










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 year
ended.  These consolidated financial statements are the responsibility
of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  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 audit provides 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 year ended, 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 the notes
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 the notes to the consolidated
financial statements.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.





As
discussed in Note 9, 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 9 for which
the date is November 16, 2007


Index
 42


Item7.    Financial Statements


ETHOS
ENVIRONMENTAL, INC.


CONSOLIDATED
BALANCE SHEET





ASSETS
            
            December
      31,
              2007CURRENT
      ASSETS:Cash
            
            $
            74,176Accounts
      Receivable, net
            
            
            5,951,275Inventory
            
            
            1,376,030Total
      Current Assets
            
            $
            7,401,481Property
      and Equipment, net
            
            
            228,452Other
      Assets
            
            
            699,419Total
      Assets
            
            $
            8,329,352





LIABILITIES
AND SHAREHOLDERS’ EQUITY





LIABILITIES:





CURRENT
      LIABILITIES:Accounts
      Payable
            
            $
            223,891Accrued
      Expenses
            
            
            109,300Demand
      Note Payable
            
            
            350,000Note
      Payable Related Party
            
            
            246,521Total
      Current Liabilities
            
            
            929,712SHAREHOLDERS’
      EQUITY:Common
      Stock, $.0001 par value; 100,000,000
              shares
      authorized; 36,871,687issued
      and
              outstanding
            
            
            3,687Additional
      Paid-in Capital
            
            
            35,615,040Accumulated
      Deficit
            
            
            (28,219,087
            )Total
      Shareholders’ Equity
            
            
            7,399,640Total
      Liabilities and Shareholders’ Equity
            
            $
            8,329,352





See notes
to consolidated financial statements.





Index
 43


ETHOS
ENVIRONMENTAL, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the Years Ended December 31, 2007 and 2006





2007
            
            
            2006Revenues
            
            $
            10,376,646
            
            
            $
            4,768,013Cost
      of Sales
            
            
            3,404,735
            
            
            
            1,613,366Gross
      Profit
            
            
            6,971,911
            
            
            
            3,154,647Operating
      Expenses:Depreciation
      (Other than Cost of Sales)
            
            
            20,193
            
            
            
            18,865Selling
      Expenses
            
            
            2,361,554
            
            
            
            4,689,910General
      and Administrative
            
            
            18,214,796
            
            
            
            4,987,623Investor
      Relations
            
            
            1,800,000
            
            
            
            -Business
      Development
            
            
            2,700,000
            
            
            
            -Total
      Operating Expenses
            
            
            25,096,543
            
            
            
            9,696,398Operating
      Loss
            
            
            (18,124,632
            )
            
            
            (6,541,751
            )Provision
      for Income Taxes
            
            
            0
            
            
            
            0Other
      Income
            
            
            390,206
            
            
            
            730,813Interest
      Expense
            
            
            (618,084
            )
            
            
            (620,244
            )Other
      Expense
            
            
            -
            
            
            
            (58,931
            )Net
      Loss
            
            $
            (18,352,510
            )
            
            $
            (6,490,113
            )Net
      Loss per Common Share
            
            $
            (0.66
            )
            
            $
            (6.76
            )Weighted
      average shares used in per share calculation (basic and fully
      diluted)
            
            
            27,933,228
            
            
            
            960,685





See notes
to consolidated financial statements.


Index
 44


ETHOS
ENVIRONMENTAL, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDER’S EQUITY


For
the Years Ended December 31, 2007 and 2006





Common
Stock
            
            
            Additional Paid-in
      Capital
            
            
            AccumulatedNumber of
      Shares
            
            
            Amount
            
            
            Deficit
            
            
            TotalBalance 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
            
            
            
            -
            
            
            
            3,131-Common Stock issued for
      services
            
            
            4,910,000
            
            
            
            491
            
            
            
            7,580,499
            
            
            
            -
            
            
            
            7,580,990Net Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,490,113
            )
            
            
            (6,490,113
            )Balance
      at December 31, 2006 as restated
            
            
            23,107,687
            
            
            
            2,311
            
            
            
            11,560,535
            
            
            
            (9,866,577
            )
            
            
            1,696,269Common
      Stock Issued for cash
            
            
            2,500,000
            
            
            
            250
            
            
            
            2,049,750
            
            
            
            -
            
            
            
            2,050,000Common
      Stock Canceled
            
            
            (50,000
            )
            
            
            (5
            )
            
            
            5
            
            
            
            -
            
            
            
            -Warrants
      issued for extinguishment of debt
            
            
            
            
            
            
            
            
            
            
            6,646,171
            
            
            
            
            
            
            
            6,646,171Common
      stock issued for services
            
            
            11,314,000
            
            
            
            1,131
            
            
            
            15,358,579
            
            
            
            -
            
            
            
            15,359,710Net
      Loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (18,352,510
            )
            
            
            (18,352,510
            )Balance
      at December 31, 2007
            
            
            36,871,687
            
            
            $
            3,687
            
            
            $
            35,615,040
            
            
            $
            (28,219,087
            )
            
            $
            7,399,640





See notes
to consolidated financial statements.




Index
 45


ETHOS
ENVIRONMENTAL, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2007
and 2006


2007
            
            
            2006Cash
      Flows from Operating ActivitiesNet
      Loss
            
            $
            (18,352,510
            )
            
            $
            (6,490,113
            )Adjustments
      to Reconcile net Loss to netCash
      provided by (used in) operating activities:Common
      Stock Issued for Services
            
            
            15,359,710
            
            
            
            7,580,990Warrants
      issued for debt extinguishment
            
            
            6,646,171
            
            
            
            -Depreciation
            
            
            213,702
            
            
            
            292,096Changes
      in allowance for bad debts
            
            
            (15,123
            )
            
            
            (450,297
            )Changes
      in Operating Assets and LiabilitiesAccounts
      Receivable
            
            
            (5,608,828
            )
            
            
            413,030Inventory
            
            
            (965,115
            )
            
            
            (151,351
            )Other
      assets
            
            
            (674,519
            )
            
            
            67,209Accounts
      Payable
            
            
            (280,007
            )
            
            
            (246,658
            )Accrued
      Expenses
            
            
            7,812
            
            
            
            10,929Net
      Cash Provided by (Used in) Operating Activities
            
            
            (3,668,707
            )
            
            
            1,025,835Cash
      Flows from Investing ActivitiesSale
      (Purchase) of Property and Equipment, net
            
            
            1,199,314
            
            
            
            (6,359,874
            )Cash
      Received from Acquisition
            
            
            -
            
            
            
            589Net
      Cash Provided by (Used in) Investing Activities
            
            
            1,199,314
            
            
            
            (6,359,285
            )Cash
      Flows from Financing ActivitiesProceeds
      from Note Payable
            
            
            1,055,334
            
            
            
            5,167,819Net
      Proceeds from Related Party Note Payable
            
            
            196,521
            
            
            
            50,000Repayment
      of Note Payable
            
            
            (1,123,153
            )
            
            
            (13,000
            )Repurchase
      of Common Stock
            
            
            -
            
            
            
            (50,000
            )Proceeds
      from Common Stock sales
            
            
            2,050,000
            
            
            
            -Proceeds
      from Capital Contributions
            
            
            -
            
            
            
            45,000Net
      Cash Provided by (Used in) Financing Activities
            
            
            2,178,702
            
            
            
            5,199,819Net
      Change in Cash and Cash Equivalents
            
            
            (290,691
            )
            
            
            (133,631
            )Cash
      at Beginning of Period
            
            
            364,867
            
            
            
            498,498Cash
      at End of Period
            
            $
            74,176
            
            
            $
            364,867Reconciliation
      to Balance Sheet Presentation:Cash
            
            $
            74,176
            
            
            $
            64,867Restricted
      Cash
            
            
            -
            
            
            
            300,000$
            74,176
            
            
            $
            364,867Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for Interest
            
            $
            618,084
            
            
            $
            619,950Cash
      paid for Income Taxes
            
            $
            0
            
            
            $
            0Non
      Cash Transactions:Repayment
      of debt through sale leaseback
            
            $
            4,750,000
            
            
            $
            -Increase
      in other assets due to reclassification
            
            $
            300,000
            
            
            $
            -





See notes
to consolidated financial statements.




Index
 46


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 theUnited States, Latin America, Europe, Africa,AustraliaandAsia.





Acquisition





On April 20, 2006, Victor Industries,
Inc. (“Victor”), with the approval of its Board of Directors, executed an
Agreement and Plan of Merger withSan Diego,CAbased Ethos Environmental, Inc., aNevadacorporation.





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 toNevada, 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 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, were 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 was 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 withU.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. 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








Theaccounting effectof the reverse acquisition is reflected
in the consolidated statementsof 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.





Index
 47


As part of the reverse acquisition, the
prior activities of the Company were discontinued. No discontinued operations
are presented in these financial statements sincethere wereno 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.





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.




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 exceed federally insured limits from
time to time.





At
December 31, 2006 Restricted cash consisted 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.  Since this
deposit was not readily-accessible, the Company reclassified this asset in 2007
to Other Assets.





Index
 48


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 collectability 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 determined that an allowance of $111,362 at
December 31, 2007 was necessary. At December 31, 2007, 84%
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.





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.







Fair Value of Financial
Instruments





The
Carrying value of the Company's accounts receivable, accounts payable, accrued
expenses, note payable, and note payable related party 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 87% of our revenues for the fiscal year ended December
31, 2007. One Ecuadorean customer accounted for 79% and the second customer
accounted for 8%.





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%.





Stock Based
Compensation





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, 2007 or 2006, 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.





Index
 49


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,
2007 or 2006. 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. 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, 2007 and 2006, was $283,470 and $132,955,respectively
and are included in selling expenses in the consolidated financial
statements.





Shipping and
Handling





Expenses
related to shipping and handling are expenses as incurred and are included in
"cost of sales" in the statement of operations.





Research and
Development





Research
and development costs are expensed to operations when incurred and are included
in general and administrative expenses in these consolidated financial
statements. The amounts expensed for the years ended December 31, 2007 and 2006
amounted to $71,217 and $112,051, respectively.





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. The deferred taxes represent the future tax return
consequences of those differences, which will either be taxable when the assets
and liabilities are recovered or settled.





Financial
Accounting Standards Board Interpretation 48 (FIN 48) was issued in July
2006.   FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in the Company’s financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes(SFAS 109). This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006.  The adoption of this interpretation did not have a material
impact on the Company’s results of operations or financial
position.  As such, the Company has not recorded any liabilities for
uncertain tax positions or any related interest and penalties.  The
Company will, however, remain open to audit for any related items hereunder
through 2006.




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, 2007 and 2006.   Currently, the company
requires all sales, receipts, purchases and disbursements to be calculated in
U.S. Dollars.





Index
 50


Recent Accounting
Pronouncements





The FASB
issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106,
and 132(R)”. 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. 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.





In
December 2007, the FASB issued SFAS No. 141R, “Business
Combinations”.This statement is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  The Company has not determined the impact this standard will
have on its consolidated operating results or financial position upon
adoption.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”.This statement
addresses the ownership interests
in subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity.The statement is
effective as of the beginning of an entity’s first fiscal year that begins after
December 15, 2008.  The Company has not determined the impact this
standard will have on its consolidated operating results or financial position
upon adoption.





In
June 2007, the EITF issued Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services To Be Used in Future
Research and Development Activities (“EITF 07-3”), which concluded that
nonrefundable advance payments for goods or services to be received in the
future for use in research and development activities should be deferred and
capitalized. The capitalized amounts should be expensed as the related goods are
delivered or services are performed. Such capitalized amounts should be charged
to expense if expectations change such that the goods will not be delivered or
services will not be delivered. The provisions of EITF 07-3 are effective for
new contracts entered into during fiscal years beginning after December 15,
2007. The consensus may not be applied to earlier periods and early adoption is
not permitted. The Company does not expect that the adoption of EITF 07-3 will
have a material impact on its financial position and results of
operations.





Note
2. Concentrations





The
Company uses eight vendors for most of its fuel reformulating products although
there are other companies that can provide equivalent products. These vendors
accounted for 96% of product purchases in 2007. During 2006, the company
primarily used five vendors for most of its fuel reformulating products. Those
vendors accounted for 90% of products purchased in 2006.





Index
 51


Note
3. Income Taxes





As of
December 31, 2007, the deferred tax assets consist of the
following:





Federal loss
      carryforwards
            
            $
            9,594,138State operating loss
      carryforwards
            
            
            2,731,862Accumulated
      depreciation
            
            
            49,000Allowance for doubtful
      accounts
            
            
            150,00012,525,000Less: valuation
      allowance
            
            
            (12,525,000
            )$
            -





The
Company has established a valuation allowance equal to the full amount of the
deferred tax asset primarily due to uncertainty in the utilization of the net
operating loss carry forwards.





As a
result of stock ownership changes, the Company’s ability to utilize net
operating losses in the future could be limited, in whole or part, under
Internal Revenue Code Section 382.





During
the year ended December 31, 2007, the valuation allowance increased by
$6,480,000 and $2,210,000.





As of
December 31, 2007, the effective tax rate is lower than the statutory rate
due to net operating losses.





The use
of any loss carry forwards may be limited under the Internal Revenue Code due to
the change in control of the Company in 2006 with the merger with Victor
Industries, Inc.





Note
4. Notes Payable





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.





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 holder to extend the maturity date, the Company offered to
rescind the conversion feature and issue 1.9 million detachable warrants. This
Note was paid off in October 2007.  The Warrants associated with this
Note continue to exist.





In
December 2007, the company entered into a Demand Loan Agreement in the amount of
$350,000.  This Note was increased to $500,000 in January 2008 and
paid off on January 25, 2008.





Note
5. Note Payable - Related Party





During
2007, there was one Loan Payable to the Chief Executive Officer of the Company
in the amount of $246,521. The loan has no stated repayment terms, is due on
demand, is unsecured and does not bear interest. The Note was issued for accrued
salary payable by the Company.





Note
6.  Sale and Leaseback





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 August 20, 2007, the company had placed
property valued at $737,968 under this lease arrangement with Mazuma Capital
Corp.





Index
 52


The
contract for this sale and leaseback of equipment was accounted for as an
operating lease per SFAS 13 and 28.  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 or
the equipment retained by the lessor. The Company feels the appropriate stance
is to show this as an operating lease in 2007; thereby recording the reduction
of equipment, the corresponding gain, and treating the payments as lease
expense.





Note
7. Operating Leases





The
Company leases an office building under a lease agreement that expires in July
2012. The rent expense for the years ended December 31, 2007 and 2006,
totaled  $61,083 and $66,844, respectively.





The
Company leases its manufacturing equipment on a lease expiring March
2009.  The rent expense for 2007 was $246,554.  For 2006,
this expense was $4,996.  The increase is directly attributable to the
sale/leaseback agreement noted above.





Beginning
November 2007, the Company leases its building at 6800 Gateway Park Drive for
$63,000 per month.  The lease expires in October 2017.  The
lease expense during 2007 was $126,000.





The
Company’s future annual minimum lease payments are as follows for years ending
December 31:





2008
            
            $
            1,174,8602009
            
            
            900,8912010
            
            
            809,5682011
            
            
            809,5682012
            
            
            782,784Thereafter
            
            
            3,654,000Total
            
            $
            8,131,671








Note
8. Stockholders’ Equity





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 or 2007 under this Plan.





Warrants





During
the year ended December 31, 2007, the Company issued to the lender as
consideration for the modified loan terms a warrant for purchase of 1,900,000
shares of its common stock with an exercise price of $2.50 per share. This
warrant expires on March 31, 2010.  The fair value of the warrant was
determined using the Black-Scholes valuation model.  The assumptions
included an estimated term of three years, volatility of 383%, discount rate of
8.25% and a dividend rate of 0%.  The resulting fair value of the
warrant totaled $6,646,171, which has been included in the general and
administrative expenses for the year ended December 31, 2007.





Index
 53


Note
9.  Financial Restatement





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 Operations 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 restatement 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





Index
 54


Note 10. 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, 2007 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.





Note
11. Subsequent Events





On
January 18, 2008, The Company issued a Promissory Note in exchange for an
aggregate principal amount of $150,000.  This Note is due on January
18, 2009 and bears no interest.





On
January 30, 2008, the Company paid off (2) Promissory Notes totaling
$500,000.





On March
26, 2008, the Company issued a Secured Promissory Note, with the Note having an
effective date of January 30, 2008.  The Note has a principal amount
of $1,000,000 and carries a 12% per annum interest rate.  The Note is
due and payable in full on July 30, 2008.  Corporate assets were
pledged as collateral along with 2 million shares of common stock currently
owned by the Company's Chief Executive Officer.





Subsequent
to December 31, 2007, the Company has issued 106,550 shares of its common stock
for services and 742,798 shares of its common stock pursuant to a provision in
the Registration Rights Agreement with GreenBridge Capital Partners, IV,
LLC.





On March
31, 2008, the Company issued a Promissory Note in the amount of $300,000 with a
rate of interest of 12%,  payable monthly in arrears.The Note is due and payable
on March 28, 2009.





Index
 55


Item
8.   Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure





Other
than as may have been previously disclosed in our filings with the SEC, we have
had no changes in and disagreements with our independent public accountants on
accounting and financial disclosure.




Item
8A(T).Controls and Procedures




Evaluation
of Disclosure Controls and Procedures





As
required by Rule 13a-15 under the Exchange Act, our management, including
Enrique de Vilmorin, our Chief Executive Officer, and Thomas W. Maher, our Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of December 31, 2007.





Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures.





Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based on that evaluation, Mssrs. Vilmorin and Maher concluded that because of
the significant deficiencies and material weaknesses in internal control over
financial reporting described below, our disclosure controls and procedures were
not effective as of December 31, 2007.




Management’s
Annual Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act.  Our management is also required to
assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
(“Section 404”).   Management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2007.  In
making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework.  During our assessment of the effectiveness
of internal control over financial reporting as of December 31, 2007,
management identified significant deficiencies related to (i) the U.S. GAAP
expertise of our internal accounting staff and (ii) our internal audit
functions, and material weaknesses related to (i) the absence of an Audit
Committee as of December 31, 2007 and (ii) a lack of segregation of duties
within accounting functions.





The
Company completed a merger in November 2006, following which new management was
appointed.  We began preparing to be in compliance with the internal
control obligations, including Section 404, for our fiscal year ending December
31, 2007 as of January 1, 2007. During most of 2007 our internal accounting
staff was primarily engaged in ensuring compliance with reporting requirements.
 As a result, with the exception of certain additional persons hired at the
end of 2007 to address the material weaknesses described in our Form 10-KSB, as
amended, for the year ended 2006, including the hiring of our chief financial
officer, our current internal accounting department responsible for financial
reporting of the Company, on a consolidated basis, is relatively new to U.S.
GAAP and the related internal control procedures required of U.S. public
companies.  Although our accounting staff is professional and experienced
in accounting requirements, management has determined that they require
additional training and assistance in U.S. GAAP matters.  Management has
determined that our internal audit function is also significantly deficient due
to insufficient qualified resources to perform internal audit functions.
 Finally, management determined that the lack of an Audit Committee of the
board of directors of the Company and a lack of segregation of duties also
contributed to insufficient oversight of our accounting and audit functions,
which have led to the material weaknesses being reported for the year ended
December 31, 2007.





Index
 56


In order
to correct the material weaknesses set forth in our Annual Report for the year
ended December 31, 2006, and those significant deficiencies and material
weaknesses being reported in this Form 10-KSB for the year ended December 31,
2007, we have taken the following remediation measures:




·
            In
      late 2007, we engaged an outside accounting firm with extensive experience
      in internal control and U.S. GAAP reporting
      compliance.  Together with management, this firm will oversee
      and manage the financial reporting process and required training of the
      accounting staff.


·
            We
      have committed to the establishment of effective internal audit functions,
      however, due to the scarcity of qualified candidates with extensive
      experience in U.S. GAAP reporting and accounting in the region, coupled
      with our limited resources, we were not able to hire sufficient internal
      audit resources before end of 2007. However, we will increase our search
      for qualified candidates with assistance from recruiters and through
      referrals, subject to our available resources.·
            In
      February 2008, we hired a bookkeeper with extensive experience in public
      company accounting and U.S. GAAP reporting
requirements.·
            In
      late 2007, we commenced our search for qualified members to nominate to
      the Audit Committee of our Board of Directors.  We are still
      engaged in this process and an Audit Committee still has not been
      appointed.


·
            Due
      to our size and nature, segregation of all conflicting duties may not
      always be possible and may not be economically
      feasible.  However, to the extent possible, we will implement
      procedures to assure that the initiation of transactions, the custody of
      assets and the recording of transactions will be performed by separate
      individuals.




We
believe that the foregoing steps will remediate the significant deficiencies and
material weaknesses identified above, and we will continue to monitor the
effectiveness of these steps and make any changes that our management deems
appropriate.





A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. A significant deficiency is a deficiency, or a
combination of deficiencies, in internal control over financial reporting that
is less severe than a material weakness, yet important enough to merit attention
by those responsible for oversight of the company's financial
reporting.





For the
year ended December 31, 2007, our management concluded that because of the
significant deficiencies in internal control over financial reporting described
below, our disclosure controls and procedures were not effective as of December
31, 2007.  However, though two material weaknesses remain, we believe
that we have significantly remediated most of the material weaknesses in our
internal control over financial reporting as they existed at December 31, 2006
as described below, and nothing has come to the attention of management that
causes them to believe that any material inaccuracies or errors exist in our
financial statements as of December 31, 2007.  The reportable conditions
and other areas of our internal control over financial reporting identified by
us as needing improvement have not resulted in a material restatement of our
financial statements for any fiscal quarter of 2007, except as set forth below.
Nor are we aware of any instance where such reportable conditions or other
identified areas of weakness have resulted in a material misstatement of
omission in any report we have filed with or submitted to the Commission.





During
the year ended 2006, and in the
course of responding to comments from the SEC, our auditor discovered numerous
errors in our financial statements for the year ended December 31, 2006. As a
result of these errors, we restated our Form 10-KSB for the year ended 2006, and
our Form 10-QSBs for the quarter ended March 30, 2007 and for the quarter ended
June 30, 2007. Our conclusion to restate these Form 10-QSBs was related only to
errors from 2006.  Additional information pertaining to such
restatements is set forth in the Form 8-K filed by the Registrant on November 8,
2007, which is incorporated by reference herein.





Index
 57


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.





Auditor
Attestation





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
 Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report.




Changes in Internal Controls.
    As
disclosed in our 2006 Annual Report on Form 10-KSB, as amended, we reported
material weaknesses in our internal controls over financial reporting as
discussed in more detail below.





As of December 31, 2007, we have
remediated the previously reported material weaknesses in internal controls over
financial reporting only to the extent set forth herein. A summary of the
material weaknesses and remediation results are as
follows:





Lack
of Control Environment that sufficiently promotes effective internal control
over financial reporting throughout the management
structure.





In 2006, our control environment did not
sufficiently promote effective internal control over financial reporting
throughout our management structure, and this material weakness was a
contributing factor in the development of other material weaknesses described
below. Principal contributing factors included the lack of permanent employees
in key financial reporting positions, resistance to change of long-held
practices developed in an entrepreneurial and trust culture, the lack of a
formal program for training members of our finance and accounting group and a
lack of a full evaluation of our financial system applications due to incomplete
documentation and testing of key controls. Our control environment also
contributed to our inability to fully evaluate our general computer controls and
financial system application controls, as described more fully
below.





Remediation:





We have hired permanent employees and
retained special outside consultants in key financial reporting positions, all
of whom have worked to promote effective internal control over financial
reporting and improve our overall Company culture. We have instituted a training
program for the accounting personnel and have completed a full evaluation of our
control environment which included our general computer controls and financial
system application controls.





Insufficient
Segregation of Duties.





In 2006, we did not segregate duties in
several important functions, including: permitting one person the ability to
receive inventory, perform cycle counts and process adjustments, and another
individual to initiate and authorize the scrapping of obsolete and excess
inventory; permitting changes to inventory quantity information within the
financial application system without appropriate review; providing users access
within our financial application system to areas outside of their
responsibilities; and permitting the creation, modification and updating of
customer or vendor data without a secondary level of review or
approval.





Material Weakness
still Existed as of December 31, 2007:





We implemented changes to the various
roles and responsibilities within the accounting department. These changes,
however, have not addressed the above issues to ensure that adequate segregation
was achieved or that enhanced mitigating controls were in place and operating
effectively.


Index
 58


Insufficient
personnel in our finance/accounting functions and Lack of Controls over the
Invoice Posting Process.





In 2006, we had a lack of resources and
inadequate training within our finance and accounting
departments.  Training for our accounting staff with respect to
generally accepted accounting principles (“GAAP”) had been ad hoc rather than
systematic. As a result of these factors, certain transactions were not recorded
initially in accordance with GAAP, such as a limited number of third-party
vendor contracts, leases and licenses; the capitalization of sales and use taxes
on fixed assets and the internal labor component of a financial application
system implementation; and appropriate period-end cut-off for “FOB Origin”
inventory received shortly after the end of the period. These deficiencies
represented a material deficiency in internal controls at December 31, 2006, and
a significant deficiency at December 31, 2007.





Remediation –
Significant Deficiency Remains as to theUSGAAP Expertise of
our Internal Accounting Staff:





We have added staffing in a number of
critical areas over the last year. Those positions include a permanent Chief
Financial Officer and retention of an outside accounting firm. Also, we have
added independent inventory counts and levels of independent review of inventory
cycle counts, inventory adjustments, adjustments for scrapping excess and
obsolete inventory, and creation or modification of customer and vendor
data.





However, though we have implemented
steps which we believe have helped, we believe that there remains a significant
deficiency related to the US GAAP Expertise of our internal accounting staff as
at December 31, 2007.





Insufficient
policies and procedures over various financial statement
areas.





In 2006, we had insufficient processes
and personnel to provide adequate oversight of financially significant
transactions and determinations by our finance and accounting personnel in our
offices outside of headquarters. These deficiencies represented a design
deficiency in internal controls which resulted in more than a remote likelihood
that a material error would not have been prevented or detected, and constituted
a material weakness at December 31, 2006.





Remediation –
Significant Deficiency Remains as to our Internal Audit
Functions:





In addition to the staffing added that
provided additional levels of review, we have added additional documentation of
review of accounting entries and balance sheet reconciliation accounts. This
review and analysis has resulted in management’s ability to identify errors and
additional required disclosures through the closing process rather than through
external examinations. In addition, management has maintained a schedule for the
year-end closing process which has enhanced our review
process.





However, though we have implemented
steps which we believe have helped, we believe that there remains a significant
deficiency related to our Internal Audit Functions as at December 31,
2007.





Lack
of control process for recording and approving journal
entries.





In 2006, we did not have appropriate
controls around the process for recording and approving journal entries. We also
noted instances where material journal entries were recorded before subsequently
provided supporting documentation was prepared or reviewed by the accounting
department. Instances also occurred in which journal entries were not adequately
documented and reviewed. These deficiencies represented an operating
effectiveness deficiency in internal controls which resulted in more than a
remote likelihood that a material error would not have been prevented or
detected, and constituted a material weakness.





Remediation:





We have implemented procedures requiring
completed supporting documentation for all journal entries. The entries and the
supporting documentation are reviewed by someone other than the preparer and
checked for accuracy, completeness, disclosure requirements and
appropriateness.


Index
 59


Lack
of controls over the sales transaction process.





In 2006, we did not have a consistent
process in place to document the significant terms of all important product
sales contracts and our accounting for these contracts. We enter into a small
number of high dollar amount contracts for our product sales. These contracts
often contain complex terms that impact our recognition and determination of
revenue (including customer rights of return, multiple elements and
contingencies that can have a material impact on the recognition or deferral of
revenue) and balance sheet classification of deferred revenue. These
deficiencies represented a design deficiency in internal controls which resulted
in more than a remote likelihood that a material error would not have been
prevented or detected, and constituted a material
weakness.





Remediation:





We performed a fair market analysis for
all significant sales contracts for 2007 which have been reviewed by the Chief
Financial Officer and by our outside accounting firm. In addition, all sales
contracts are now reviewed by the Chief Financial Officer and our outside
accounting firm.





Lack
of Independent Directors for our audit committee & lack of an audit
committee financial expert.





In 2006, we did not have an audit
committee with a designated financial expert.  An audit committee is
engaged primarily in an oversight function and ultimately is responsible for the
company's financial reporting processes and the quality of its financial
reporting.  As a basis for carrying out its responsibilities, an audit
committee must have a working knowledge of a company's goals and strategies as
well as the issues it faces in achieving its objectives. During 2006, we had
numerous material weaknesses which would have likely made the role of an audit
committee obsolete. These deficiencies represented a design deficiency in
internal controls, and constituted a material weakness at December 31, 2006, and
again at December 31, 2007.





Material Weakness
still Existed as of December 31, 2007:





Though we are actively working towards
formalizing an audit committee, we have not as of the date of this report,
appointed an audit committee.  However, we did engage key financial
consultants and lawyers during 2007 to assist in the preparation, timeliness,
thoroughness and quality of our financial reporting.





Lack
of Training in Public Company Reporting Obligations.





In 2006, our Chief Executive Officer had
only held his position for approximately two (2) months, and our Chief Financial
Officer had held his position for less than one (1) month. This represented a
design deficiency in internal controls which resulted in more than a remote
likelihood that a material error would not have been prevented or detected, and
constituted a material weakness.





Remediation:





During 2007, our Chief Executive Officer
and our Chief Financial Officer obtained a working knowledge of public company
reporting requirements, in addition to attending lectures and obtaining
literature regarding the obligations associated with our reporting
obligations.





During 2007,we adopted Standard
Operating Procedures, which were successfully tested for every
function.  In addition, we had an Employee Manual prepared and we
implemented a system of full compliance checks and balances.





Insufficient documentation for
accounting or business transactions and Lack of Policies and procedures over
records retention.





In November 2006, new officers and
directors were appointed and the process of obtaining and producing certain
corporate documentation proved to be a difficult and lengthy
task.  These deficiencies represented a design deficiency in internal
controls which resulted in more than a remote likelihood that a material error
would not have been prevented or detected, and constituted a material
weakness.


Index
 60


Remediation:





During 2007, we designation an internal
employee to be responsible for all documentation related to accounting and
business transactions.  Additionally, we also designated our corporate
secretary as the person responsible for maintaining our board minutes and copies
of all records related to accounting and/or business
transactions.





Insufficient
Corporate Governance Policies.





In 2006, following the transaction
involving Victor Industries, Inc. and Ethos Environmental, Inc., our officers
and directors had only been in place for less than two (2) months. This
represented a design deficiency in internal controls which resulted in more than
a remote likelihood that a material error would not have been prevented or
detected, and constituted a material weakness.





Remediation:





During 2007,we adopted Standard
Operating Procedures, which were successfully tested for every
function.  In addition, we had an Employee Manual prepared and we
implemented a system of full compliance checks and balances.





Conclusion:





In the third and fourth quarters of
2007, we undertook testing to validate compliance with the newly implemented
policies, procedures and controls. We have undertaken this testing over these
two quarters in order to be able to demonstrate operating effectiveness over a
period of time that is sufficient to support our conclusions. In reviewing the
result from this testing, management has concluded that the internal controls
over financial reporting have been significantly improved and that the material
weaknesses described above have been remediated to the extent described above as
of December 31, 2007.





Except for the corrective action
discussed above, there have been no changes in our internal controls over
financial reporting during the most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect our internal
controls over financial reporting.





Item
8B.   Other Information


None.





Index
 61


PART
III





Item 9.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 25, 2008, 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
            
            56
            
            Chief Executive Officer, President
      and Director
            
            2006Jose Manuel
      Escobedo
            
            67
            
            Director
            
            2006Luis
Willars
            
            66
            
            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).





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.





Index
 62


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, 2007 by (1) each person who served as the principal executive
officer of the Company during fiscal year 2007; (2) the Company’s most highly
compensated executive officers as of December 31, 2007 with compensation during
fiscal year 2007 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,
2007.





Index
 63


The
following executive compensation was paid during 2006 or 2007,





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
            
            
            —
            
            —
            
            —
            
            —
            
            $
            1,219,3252007
            
            $
            360,000
            
            $
            78,610
            
            4,500,000
            
            —
            
            —
            
            —
            
            —
            
            $
            4,934,410Thomas
      W. Maher -
              CFO
            
            2006
            
            $
            --
            
            
            --
            
            --
            
            
            --
            
            --
            
            --
            
            --
            
            $2007
            
            $
            84,000
            
            $
            1,250
            
            195,000
            
            
            
            
            
            
            
            
            
            
            280,250





There
were no stock options granted or exercised by the named executive directors in
2007.





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 2007 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,
2007.





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
            
            
            —
            
            
            —
            
            
            —
            
            $
            —
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —




Index
 64


OPTION
EXERCISES AND STOCK VESTED





There
were no options exercised or stock vested during the year ended December 31,
2007.





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, 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 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.





On
December 12, 2007, the Company entered into an employment agreement with Enrique
de Vilmorin defining the terms of his employment with the Company as Chief
Executive Officer, effective January 1, 2007.  The initial term of Mr.
De Vilmorin’s employment under the Employee Agreement is through December 31,
2011 (unless earlier terminated in accordance with the terms of the Employee
Agreement), with automatic one-year renewals for each of the successive ten
years following the Effective Date.





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, 2007, 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 36,871,687shares
outstanding as of December 31, 2007. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes voting or investment
power with respect to securities.





Index
 65


Beneficial
      Owner
            
            Shares of Common Stock Number
            
            
            Beneficially Owned PercentEnrique
      de Vilmorin
            
            15,500,000
            
            
            44.44
            %Jose
      Manuel Escobedo
            
            250,000
            
            
            0.72
            %Thomas
      W. Maher
            
            100,000
            
            
            0.28
            %GreenBridge
      Capital Partners, IV, LLC
            
            2,500,000
            
            
            0.07
            %All such directorsand
      executiveOfficers as a group
            
            15,850,000
            
            
            45.44
            %Total
            
            18,350,000
            
            
            49.77
            %








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
2007, there was one Loan Payable to the President of the Company in the amount
of $246,521. 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.
            Previously
      filed.10.4
            Amendment
      No.1 to Agreement with Mazuma Capital Corp.
            Previously
      filed.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





Index
 66


Item
14.  Principal Accounting Fees and
Services




During
the year ended December 31, 2007, we engaged Peterson Sullivan PLLC, J.H. Cohn
LLP and Moore & Associated, Charteredas our
independent auditors.  For the year ended December 31, 2007, we incurred
fees to these firms as discussed below.




·
            Audit Fees:Peterson Sullivan
      PLLC fees for audit and quarterly review services totaled $29,273
      and $117,457 for 2007 and 2006, respectively, including fees associated
      with consents and the review of this
report.




·
            Tax Fees:We paid PETERSON
      SULLIVAN PLLC, $1,728 for tax related services associated with our 2006
      corporate tax return extensions.




·
            All Other Fees:J. H. Cohn LLP fees totaled $43,411 for 2007, although they were
      not associated with any audit or review, and NIL for 2006.  In
      addition, the Company contracted for the services of Blum and Clark, CPAs,
      for assistance in preparing the Registrant’s financial
      statements.  The fees associated with Blum and Clark in 2007
      were $68,076 and NIL in 2006.  Moore & Associates,
      Chartered, fees totaled $26,000 for 2007 and NIL for
  2006.




Index
 67


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 14th day of
April,  2008.




Ethos
      Environmental, Inc.
              a
      Nevada CorporationBy:
            /s/
      Enrique de VilmorinEnrique
      de Vilmorin
              Chief
      Executive Officer




Pursuant to the
requirements of the Securities Exchange Act of 1934, the following persons on
behalf of the Registrant and in the capacities and on the dates indicated have
signed this report below.







Signature
            
            Position
            
            Date/s/
      Enrique de Vilmorin
            
            Chief
      Executive Officer and Director
            
            April
      14, 2008Enrique
      de Vilmorin/s/
      Jose Manuel Escobedo
            
            Director
            
            April
      14, 2008Jose
      Manuel Escobedo/s/
      Luis Willars
            
            Director
            
            April
      14, 2008Luis
      Willars/s/Thomas W. Maher
            
            Principal
      Accounting OfficerThomas
      W. Maher
            
            Chief
      Financial Officer
            
            April
      14, 2008






Index
 68