**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      DC 20549





**FORM
      10-QSB**





[X]
            Quarterly
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934For
                the quarterly period ended:March
                31, 2006[ 
                ]
            Transition
                Report pursuant to 13 or 15(d) of the Securities Exchange Act of
                1934For
                the transition period _________ to __________Commission
                file number:000-49698





**Axial
      Vector Engine Corporation**


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





**Nevada**
            **20-3362479**(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification No.)





**One
                World Trade Center**
              **121
                S.W. Salmon Street, Suite 1100**
              **Portland,
                Oregon 97204**(Address
                of principal executive offices)





**(503)
                471-1348**(Issuer’s
                telephone number)__________________________________________________________________(Former
                name, former address and former fiscal year, if changed since last
                report)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
      (or
      for such shorter period that the issuer was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90 days [X] Yes
      [  ] No





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





State
      the
      number of shares outstanding of each of the issuer’s classes of common stock, as
      of the latest practicable date: 34,554,771 common shares as of March 31,
      2006.





Transitional
      Small Business Disclosure Format (check one): [  ] Yes [X] No















**TABLE
                OF CONTENTS**
            Page**PART
                I - FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements
            3Item
                2.
            Plan
                of Operation
            4Item
                3.
            Controls
                and Procedures
            14**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            16Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            18Item
                3.
            Defaults
                Upon Senior Securities
            19Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            19Item
                5.
            Other
                Information
            19Item
                6.
            Exhibits
            20





2




**PART
      I - FINANCIAL INFORMATION**






**Item
      1.Financial Statements**




Our
                unaudited financial statements included in this Form 10-QSB are as
                follows:F-1
            Condensed
                Consolidated Balance Sheet at March 31, 2006
                (Unaudited);F-2
            Condensed
                Consolidated Statements of Operations for the nine and three months
                ended
                March 31, 2006 and 2005 with Cumulative Totals Since Inception
                (Unaudited);F-3
            Condensed
                Consolidated Statements of Cash Flows for the nine months ended March
                31,
                2006 and 2005 with Cumulative Totals Since Inception
                (Unaudited);F-5
            Notes
                to Condensed Consolidated Financial
                Statements




These
      unaudited financial statements have been prepared in accordance with accounting
      principles generally accepted in the United States of America for interim
      financial information and the SEC instructions to Form 10-QSB. In the opinion
      of
      management, all adjustments considered necessary for a fair presentation have
      been included. Operating results for the interim period ended March 31, 2006
      are
      not necessarily indicative of the results that can be expected for the full
      year
      ending June 30, 2005.






3


**AXIAL
      VECTORENGINE CORPORATION AND
      SUBSIDIARY**


**(FORMERLY
      KNOWN AS AERO MARINE ENGINE, INC.)**


**(A
      DEVELOPMENT STAGE COMPANY) CONDENSED**


**CONSOLIDATED
      BALANCE SHEET**


**MARCH
      31, 2006 (UNAUDITED)**


**ASSETS****2005**Current
                  Assets:Cash
                  and cash equivalents
              
              $
              179Deposit
              
              
              22,670Prepaid
                  expenses
              
              
              272,710Total
                  Current Assets
              
              
              295,559Property
                  and equipment, net
              
              
              38,011Other
                  Assets:Deferred
                  financing costs
              
              
              1,725,000Intangible
                  assets, net
              
              
              243,324Total
                  Other Assets
              
              
              1,968,324**TOTAL
                  ASSETS**
              
              $
              2,301,894**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****LIABILITIES**Current
                  Liabilities:Accounts
                  payable and accrued expenses
              
              $
              1,141,259Notes
                  payable
              
              
              3,245,000Due
                  to related company
              
              
              301,339Total
                  Current Liabilities
              
              
              4,687,598Long
                  Term Liabilities:Due
                  to shareholders
              
              
              294,794Total
                  Long Term Liabilities
              
              
              294,794**Total
                  Liabilities**
              
              
              4,982,392**STOCKHOLDERS'
                  DEFICIT**Preferred
                  stock, $.001 Par Value; 100,000,000 shares authorizedno
                  shares issued and outstanding
              
              
              -Common
                  stock, $.001 Par Value; 100,000,000 shares authorized34,554,771
                  shares issued and outstanding
              
              
              34,554Additional
                  paid-in capital
              
              
              20,410,846Deficit
                  accumulated during the development stage
              
              
              (23,125,898
              )**Total
                  Stockholders' Deficit**
              
              
              (2,680,498
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIT**
              
              $
              2,301,894


The
      accompanying notes are an integral part of the condensed consolidated financial
      statements.


F
          -
          1


**AXIALVECTOR
        ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        KNOWN AS AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **CONDENSED****CONSOLIDATED STATEMENTS OF OPERATIONS**
 **FOR
        THE NINE AND THREE MONTHS ENDED MARCH 31, 2006 AND
        2005 (UNAUDITED)**
 **WITH
        CUMULATIVE TOTALS SINCE INCEPTION**


**NINE
                  MONTHS ENDED**
              
              **THREE
                  MONTHS ENDED**
              
              **CUMULATIVE
                  TOTALS****MARCH
                  31**
              
              **MARCH
                  31**
              
              **DECEMBER
                  30, 2002 through****2006**
              
              **2005**
              
              **2006**
              
              **2005**
              
              **MARCH
                  31, 2006****OPERATING
                  REVENUES**Sales
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -**COST
                  OF SALES**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -**GROSS
                  PROFIT**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -**OPERATING
                  EXPENSES**Compensation
                  expense
              
              
              258,149
              
              
              -
              
              
              150,129
              
              
              -
              
              
              3,004,615Professional
                  and consulting fees
              
              
              1,465,526
              
              
              259,064
              
              
              806,647
              
              
              85,014
              
              
              7,182,657Advertising
                  and promotions
              
              
              116,438
              
              
              16,584
              
              
              -
              
              
              16,584
              
              
              325,515Rent
              
              
              15,715
              
              
              -
              
              
              7,347
              
              
              -
              
              
              59,891Bad
                  debt - subscriptions receivable
              
              
              888,109
              
              
              -
              
              
              888,109
              
              
              -
              
              
              888,109Impairment
                  of property and equipment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              107,964Impairment
                  of goodwill and intangibles
              
              
              -
              
              
              812,500
              
              
              -
              
              
              -
              
              
              4,563,847Write-off
                  of inventory
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              266,519Research
                  and development
              
              
              3,052,788
              
              
              
              
              
              813,577
              
              
              -
              
              
              5,383,948General
                  and administrative expenses
              
              
              433,361
              
              
              72,734
              
              
              162,847
              
              
              32,222
              
              
              1,241,975Depreciation
                  and amortization
              
              
              5,767
              
              
              885
              
              
              2,133
              
              
              598
              
              
              46,461**Total
                  Operating Expenses**
              
              
              6,235,853
              
              
              1,161,767
              
              
              2,830,789
              
              
              134,418
              
              
              23,071,501**NET
                  LOSS BEFORE OTHER INCOME (EXPENSES)****AND
                  PROVISION FOR INCOME TAXES**
              
              
              (6,235,853
              )
              
              (1,161,767
              )
              
              (2,830,789
              )
              
              (134,418
              )
              
              (23,071,501
              )**OTHER
                  INCOME (EXPENSES)**Interest
                  income
              
              
              71
              
              
              -
              
              
              -
              
              
              -
              
              
              7,749Interest
                  expense
              
              
              (45,016
              )
              
              (5,387
              )
              
              (15,866
              )
              
              (2,036
              )
              
              (62,146
              )**Total
                  Other Income (Expenses)**
              
              
              (44,945
              )
              
              (5,387
              )
              
              (15,866
              )
              
              (2,036
              )
              
              (54,397
              )**NET
                  LOSS BEFORE PROVISION****FOR
                  INCOME TAXES**
              
              
              (6,280,798
              )
              
              (1,167,154
              )
              
              (2,846,655
              )
              
              (136,454
              )
              
              (23,125,898
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -**NET
                  LOSS**
              
              $
              (6,280,798
              )
              $
              (1,167,154
              )
              $
              (2,846,655
              )
              $
              (136,454
              )
              $
              (23,125,898
              )**WEIGHTED
                  AVERAGE COMMON SHARES****OUTSTANDING**
              
              
              22,533,824
              
              
              22,496,919
              
              
              34,113,656
              
              
              28,394,722**NET
                  LOSS PER COMMON SHARE OUTSTANDING**
              
              $
              (0.28
              )
              $
              (0.05
              )
              $
              (0.08
              )
              $
              (0.00
              )




The
      accompanying notes are an integral part of the condensed consolidated financial
      statements.


F
          -
          2


**AXIAL
      VECTORENGINE CORPORATION AND SUBSIDIARY** (FORMERLY
        KNOWN AS AERO MARINE ENGINE, INC.)
 (A
        DEVELOPMENT STAGE COMPANY)
 CONDENSED
        CONSOLIDATED STATEMENTS OF CASH
        FLOWS
 FOR
        THE NINE AND THREE MONTHS ENDED MARCH 31, 2006 AND
        2005 (UNAUDITED)
 (WITH
        CUMULATIVE TOTALS SINCE INCEPTION)
 **NINE
                    MONTHS ENDED**
                
                **THREE
                    MONTHS ENDED****MARCH
                    31**
                
                **MARCH
                    31**
                
                **CUMULATIVE
                    TOTALS****DECEMBER
                    30, 2002 THROUGH****2006**
                
                **2005**
                
                **2006**
                
                **2005**
                
                **March
                    31, 2006****CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    loss
                
                $
                (6,280,798
                )
                $
                (1,167,154
                )
                $
                (2,846,655
                )
                $
                (948,954
                )
                $
                (23,125,898
                )Adjustments
                    to reconcile net loss to net cashused
                    in operating activitiesCommon
                    stock issued for services
                
                
                665,450
                
                
                109,000
                
                
                135,850
                
                
                -
                
                
                4,816,989Warrants
                    issued for services
                
                
                150,000
                
                
                -
                
                
                150,000
                
                
                -
                
                
                150,000Common
                    stock issued as compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,200,000Options
                    issued for services
                
                
                22,750
                
                
                -
                
                
                -
                
                
                -
                
                
                2,069,961Options
                    issued as compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,102,750Depreciation
                    and amortization
                
                
                5,767
                
                
                885
                
                
                2,133
                
                
                598
                
                
                46,461Impairment
                    of property and equipment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                107,964Impairment
                    of goodwill and intangibles
                
                
                -
                
                
                812,500
                
                
                -
                
                
                812,500
                
                
                4,563,847Impairment
                    of inventory
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,351
                )
                
                266,519Bad
                    debt - subscription receivable
                
                
                888,109
                
                
                -
                
                
                888,109
                
                
                -
                
                
                888,109**Changes
                    in assets and liabilities**Increase
                    in prepaid expenses and othercurrent
                    assets
                
                
                (250,379
                )
                
                -
                
                
                183,162
                
                
                -
                
                
                (272,110
                )Increase
                    in accounts payable and accrued expenses
                
                
                1,009,840
                
                
                5,387
                
                
                431,845
                
                
                (2,992,964
                )
                
                1,197,565Increase
                    in payroll liabilities
                
                
                -
                
                
                -
                
                
                (11,823
                )
                
                -
                
                
                -Total
                    adjustments
                
                
                2,491,537
                
                
                927,772
                
                
                1,779,276
                
                
                (2,183,217
                )
                
                16,138,055**Net
                    cash (used in) operating activities**
                
                
                (3,789,261
                )
                
                (239,382
                )
                
                (1,067,379
                )
                
                (3,132,171
                )
                
                (6,987,843
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Acquisition
                    of business
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,018,814
                )Acquisitions
                    of intangible assets
                
                
                (179,574
                )
                
                -
                
                
                -
                
                
                -
                
                
                (243,324
                )Acquisitions
                    of fixed assets
                
                
                (22,637
                )
                
                (3,021,465
                )
                
                (3,065
                )
                
                (9,722
                )
                
                (72,400
                )**Net
                    cash (used in) investing activities**
                
                
                (202,211
                )
                
                (3,021,465
                )
                
                (3,065
                )
                
                (9,722
                )
                
                (1,334,538
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Issuance
                    of stock through the excersise of options
                
                
                114,390
                
                
                -
                
                
                64,311
                
                
                -
                
                
                114,390Proceeds
                    from the sale of stock
                
                
                365,993
                
                
                300
                
                
                365,993
                
                
                300
                
                
                2,014,041Proceeds
                    from notes payable, net
                
                
                250,000
                
                
                2,995,000
                
                
                250,000
                
                
                2,995,000
                
                
                250,000Proceeds
                    from Standby Equity Distribution Agreement
                
                
                3,600,000
                
                
                -
                
                
                250,000
                
                
                -
                
                
                4,000,000Liability
                    for stock to be issued
                
                
                (400,000
                )
                
                -
                
                
                -
                
                
                -
                
                
                337,095Repayment
                    of loan
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (5,000
                )Advances
                    from shareholders
                
                
                250,000
                
                
                301,941
                
                
                250,000
                
                
                177,218
                
                
                1,950,711Payments
                    to shareholders
                
                
                (186,092
                )
                
                -
                
                
                (153,527
                )
                
                -
                
                
                (640,016
                )Payments
                    to related company
                
                
                (10,000
                )
                
                -
                
                
                -
                
                
                -
                
                
                (13,000
                )Advances
                    from (payments to) related company
                
                
                -
                
                
                (3,000
                )
                
                -
                
                
                (3,000
                )
                
                314,339**Net
                    cash provided by financing activities**
                
                
                3,984,291
                
                
                3,294,241
                
                
                1,026,777
                
                
                3,169,518
                
                
                8,322,560**NET
                    INCREASE (DECREASE) IN****CASH
                    AND CASH EQUIVALENTS**
                
                
                (7,181
                )
                
                33,394
                
                
                (43,667
                )
                
                27,625
                
                
                179**CASH
                    AND CASH EQUIVALENTS -****BEGINNING
                    OF PERIOD**
                
                
                7,360
                
                
                -
                
                
                43,846
                
                
                5,769
                
                
                -**CASH
                    AND CASH EQUIVALENTS -****END
                    OF PERIOD**
                
                $
                179
                
                $
                33,394
                
                $
                179
                
                $
                33,394
                
                $
                179**SUPPLEMENTAL
                    CASH FLOW INFORMATION**Cash
                    paid during the period for interest
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                190**SUPPLEMENTAL
                    DISCLOSURE OF NONCASH INFORMATION**Common
                    stock issued for services
                
                $
                665,450
                
                $
                109,000
                
                $
                97,850
                
                $
                109,000
                
                $
                4,816,989Common
                    stock issued as compensation
                
                $
                -
                
                $
                -
                
                $
                38,000
                
                $
                -
                
                $
                -Common
                    stock issued for related-partydebt
                    repayment
                
                $
                1,015,890
                
                $
                -
                
                $
                1,015,890
                
                $
                -
                
                $
                1,015,890Common
                    stock issued for bad debt -subscription
                    receivable
                
                $
                888,109
                
                $
                -
                
                $
                888,109
                
                $
                -
                
                $
                888,109Warrants
                    issued for services
                
                $
                150,000
                
                $
                -
                
                $
                150,000
                
                $
                -
                
                $
                150,000Impairment
                    of property and equipment
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                107,964Impairment
                    of goodwill and intangibles
                
                $
                -
                
                $
                812,500
                
                $
                -
                
                $
                812,500
                
                $
                1,513,847Impairment
                    of inventory
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                266,519Conversion
                    of payables to equity
                
                $
                53,250
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                170,285




The
      accompanying notes are an integral part of the condensed consolidated
 financial statements.


F
          -
          3


**AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        1-** **ORGANIZATION
        AND BASIS OF PRESENTATION**
 
 The
        condensed consolidated unaudited interim financial statements included herein
        have been prepared, without audit, pursuant to the rules and regulations
        of the
        Securities and Exchange Commission (“SEC”). The condensed consolidated financial
        statements and notes are presented as permitted on Form 10-QSB and do not
        contain information included in the Company’s annual statements and notes.
        Certain information and footnote disclosures normally included in financial
        statements prepared in accordance with accounting principles generally accepted
        in the United States of America have been condensed or omitted pursuant to
        such
        rules and regulations, although the Company believes that the disclosures
        are
        adequate to make the information presented not misleading. It is suggested
        that
        these condensed financial statements be read in conjunction with the June
        30,
        2005 audited financial statements and the accompanying notes thereto. While
        management believes the procedures followed in preparing these condensed
        financial statements are reasonable, the accuracy of the amounts are in some
        respects dependent upon the facts that will exist, and procedures that will
        be
        accomplished by the Company later in the year.
 
 These
        condensed consolidated unaudited financial statements reflect all adjustments,
        including normal recurring adjustments which, in the opinion of management,
        are
        necessary to present fairly the operations and cash flows for the periods
        presented.
 
 Princeton
        Ventures, Inc. (the "Company") was incorporated in the State of Nevada on
        May
        10, 2001. The Company had not commenced operations. On May 30, 2003, the
        Company
        exchanged 37,994,923 shares of its common stock for all of the issued and
        outstanding shares of Aero Marine Engine Corp. ("Aero"). Aero was formed
        on
        March 30, 2002. Aero had no operations and was formed to acquire the assets
        of
        Dyna-Cam Engine Corporation. The Company changed its name from Princeton
        Ventures, Inc. to Aero Marine Engine, Inc.
 
 At
        the
        time that the transaction was agreed to, the Company had 20,337,860 common
        shares issued and outstanding. In contemplation of the transaction with Aero,
        the Company's two primary shareholders cancelled 9,337,860 shares of the
        Company's common stock held by them, leaving 11,000,000 shares issued and
        outstanding. As a result of the acquisition of Aero, there were 48,994,923
        common shares outstanding, and the former Aero stockholders held approximately
        78% of the
  F
            -
            4
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        1-** **ORGANIZATION
        AND BASIS OF PRESENTATION** **(CONTINUED)**
 
 Company's
        voting stock. For financial accounting purposes, the acquisition was a reverse
        acquisition of the Company by Aero, under the purchase method of accounting,
        and
        was treated as a recapitalization with Aero as the acquirer. Accordingly,
        the
        historical financial statements have been restated after giving effect to
        the
        May 30, 2003, acquisition of the Company. The financial statements have been
        prepared to give retroactive effect to December 30, 2002, the date of inception
        of Aero, of the reverse acquisition completed on May 30, 2003, and represent
        the
        operations of Aero. Consistent with reverse acquisition accounting: (i) all
        of
        Aero's assets, liabilities, and accumulated deficit, are reflected at their
        combined historical cost (as the accounting acquirer) and (ii) the preexisting
        outstanding shares of the Company (the accounting acquiree) are reflected
        at
        their net asset value as if issued on May 30, 2003.
 
 Additionally,
        on June 30, 2003, the Company acquired the operating assets of Dyna-Cam Engine
        Corp. ("Dyna-Cam"). Dyna-Cam was a development stage enterprise developing
        a
        unique, axial cam-drive, free piston, internal combustion engine. Dyna-Cam
        intended to produce and sell the engine primarily for aircraft and marine
        applications. Dyna-Cam had not generated significant revenues at the time
        of the
        Company's acquisition.
 
 The
        Company, under its new management, has raised over $1,200,000 in cash to
        affect
        the development of the Axial Vector Engine “E” (Electronic). Management believes
        that significant capital is required to adequately develop the Axial Vector
        Engine “E” engine and begin operations. For the nine months ended March 31,
        2006, shareholders of the Company have advanced a net of $493,404 to assist
        in
        funding the operations.
 
 The
        Company will require additional capital. Although the current majority
        stockholders of the Company, as well as an affiliate, have made verbal
        commitments with no guarantees to continue to fund the development and sales
        and
        marketing efforts of the Company, if alternate financing cannot be obtained.
        There can be no assurance that any new capital would be available to the
        Company
        or that adequate funds for the Company's operations, whether from the Company's
        revenues, financial markets, or other arrangements will be available when
        needed
        or on terms
  F
            -
            5
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        1-** **ORGANIZATION
        AND BASIS OF PRESENTATION** **(CONTINUED**
 
 satisfactory
        to the Company. The failure of the Company to obtain adequate additional
        financing will require the Company to delay, curtail or scale back some or
        all
        of its research and development programs, sales, marketing efforts and
        manufacturing operations. On
        May
        19, 2005, the Company announced that it had changed its name to Axial Vector
        Engine Corporation (“Axial”). Management believes the new name will more
        accurately describe the Company’s mission. The Company’s stock symbol changed to
        AXVC.
 
 **Use
        of Estimates**
 
 The
        preparation of condensed consolidated financial statements in conformity
        with
        accounting principles generally accepted in the United States of America
        requires management to make estimates and assumptions that affect the amounts
        reported in the financial statements and accompanying notes. Actual results
        could differ from those estimates.
 
 **Cash
        and Cash Equivalents**
 
 Cash
        and
        cash equivalents consists principally of currency on hand, demand deposits
        at
        commercial banks, and liquid investment funds having an original maturity
        of
        three months or less at the time of purchase.
 
 **Concentration
        of Credit Risk**
 
 Financial
        instruments that potentially subject the Company to credit risk consist of
        cash
        equivalents and accounts receivable.
 
 The
        Company’s policy is to review the amount of credit exposure to any one financial
        institution and place investments with financial institutions evaluated as
        being
        creditworthy. In the ordinary course of business, the Company has bank deposits
        that may exceed federally insured limits. As of March 31, 2006, the Company
        was
        not in excess of the $100,000 insured limit.
  F
            -
            6
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        2-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** ****
 **(CONTINUED)**
 
 **Principles
        of Consolidation**
 
 The
        condensed consolidated financial statements include the accounts of the Company
        and its wholly owned subsidiary Dyna-Cam, Aero Marine Engine Corp. All
        significant inter-company accounts and transactions are eliminated.
 
 **Property
        and Equipment**
 
 Property
        and equipment is stated at cost. Depreciation is computed using the
        straight-line method over the estimated useful lives of the assets, three
        to
        seven years. Reviews are regularly performed to determine whether facts and
        circumstances exist that indicate the carrying amount of assets may not be
        recoverable or the useful life is shorter than originally estimated. The
        Company
        assesses the recoverability of its property and equipment by comparing the
        projected undiscounted net cash flows associated with the related asset or
        group
        of assets over their remaining lives against their respective carrying amounts.
        Impairment, if any, is based on the excess of the carrying amount over the
        fair
        value of those assets.
 
 If
        assets
        are determined to be recoverable, but the useful lives are shorter than
        originally estimated, the net book value of the assets is depreciated over
        the
        newly determined remaining useful lives. When equipment is retired or otherwise
        disposed of, the cost and related accumulated depreciation are removed from
        the
        accounts and the resulting gain or loss is included in
        operations.
  F
            -
            7
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        2-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** ****
 **(CONTINUED)**
 
 **Reclassifications**
 
 Certain
        amounts for the nine months ended March 31, 2005 have been reclassified to
        conform to the presentation of the March 31, 2006 amounts. The reclassifications
        have no effect on net loss for the nine months ended March 31,
        2005.
 
 **Income
        Taxes**
 
 The
        Company has adopted the provisions of Statement of Financial Accounting
        Standards (“SFAS”) No. 109, Accounting for Income Taxes. The Statement requires
        an asset and liability approach for financial accounting and reporting of
        income
        taxes, and the recognition of deferred tax assets and liabilities for the
        temporary differences between the financial reporting bases and tax bases
        of the
        Company’s assets and liabilities at enacted tax rates expected to be in effect
        when such amounts are realized or settled.
 
 **Advertising**
 
 The
        Company’s policy is to expense the costs of advertising and marketing as they
        are incurred. Advertising expense for the nine months ended March 31, 2006
        and
        2005 was $116,438 and $16,584, respectively.
 
 **Research
        and Development**
 
 Research
        and development costs are expensed as incurred.
 
 **Intangible
        Assets**
 
 During
        the nine months ended March 31, 2006, the Company incurred costs of $243,324
        in
        applying and registering of patents. These patents are currently pending.
        Due to
        the nature of the patents, the Company anticipates receiving confirmation
        on
        their applications in an expedited fashion.
 
  F
            -
            8
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        2-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** ****
 **(CONTINUED)**
 
 **Start-up
        Costs**
 
 In
        accordance with the American Institute of Certified Public Accountants Statement
        of Position 98-5, *“Reporting
        on the costs of Start-up Activities”* ,
        the
        Company expenses all costs incurred in connection with the start-up and
        organization of the Company.
 
 **Stock-Based
        Compensation**
 
 Employee
        stock awards under the Company’s compensation plans are accounted for in
        accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), *“Accounting
        for Stock Issued to Employees”* ,
        and
        related interpretations. The Company provides the disclosure requirements
        of
        Statement of Financial Accounting Standards No. 123, “ *Accounting
        for Stock-Based Compensation”* (“SFAS
        123”), and related interpretations. Stock-based awards to non-employees are
        accounted for under the provisions of SFAS 123 and has adopted the enhanced
        disclosure provisions of SFAS No. 148 “Accounting for Stock-Based Compensation -
        Transition and Disclosure, an amendment of SFAS No. 123”.
 
 The
        Company measures compensation expense for its employee stock-based compensation
        using the intrinsic-value method. Under the intrinsic-
  F
            -
            9
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        2-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** **(CONTINUED)**
 
 **Stock-Based
        Compensation** **(Continued)**
 
 value
        method of accounting for stock-based compensation, when the exercise price
        of
        options granted to employees is less than the estimated fair value of the
        underlying stock on the date of grant, deferred compensation is recognized
        and
        is amortized to compensation expense over the applicable vesting period.
        In each
        of the periods presented, the vesting period was the period in which the
        options
        were granted.
 
 The
        Company measures compensation expense for its non-employee stock-based
        compensation under the Financial Accounting Standards Board (FASB) Emerging
        Issues Task Force (EITF) Issue No. 96-18, “ *Accounting
        for Equity Instruments that are Issued to Other Than Employees for Acquiring
        or
        in Conjunction with Selling* , *Goods
        or Services”* .
        The
        fair value of the option issued is used to measure the transaction, as this
        is
        more reliable than the fair value of the services received. The fair value
        is
        measured at the value of the Company’s common stock on the date that the
        commitment for performance by the counterparty has been reached or the
        counterparty’s performance is complete. The fair value of the equity instrument
        is charged directly to compensation expense and additional paid-in
        capital.
 
 **Common
        Stock Issued for Other Than Cash**
 
 Services
        purchased and other transactions settled in the Company’s common stock are
        recorded at the estimated fair value of the stock issued if that value is
        more
        readily determinable than the fair value of the consideration
        received.
 
 **(Loss)
        Per Share of Common Stock**
 
 ,Historical
        net income (loss) per common share is computed using the weighted average
        number
        of common shares outstanding. Diluted earnings per share (EPS) include
        additional dilution from common stock equivalents, such as stock issuable
        pursuant to the exercise of stock options and warrants. Common stock equivalents
        are not included in the computation of diluted earnings per share when the
        Company reports a loss because to do so would be antidilutive for the periods
        presented.
  F
            -
            10
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        2-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** **(CONTINUED** **(Loss)
        Per Share of Common Stock** **(Continued)**
 
 The
        following is a reconciliation of the computation for basic and diluted
        EPS:
 **March
                    31,****2006**
                
                **2005**Net
                    Income (Loss)
                
                $
                (6,280,798
                )
                $
                (1,167,154
                )Weighted-average
                    common sharesoutstanding
                    (Basic)
                
                
                22,533,824
                
                
                22,496,919Weighted-average
                    common stockequivalents:Stock
                    options and warrants
                
                
                -
                
                
                -Weighted-average
                    common sharesoutstanding
                    (Diluted)
                
                
                22,533,824
                
                
                22,496,919
  Options
        and warrants outstanding to purchase stock were not included in the computation
        of diluted EPS because inclusion would have been antidilutive. As of March
        31,
        2006 there were 196,986 options and 200,005 warrants available. The warrants
        include options to purchase 2,805,000 shares. As of March 31, 2005, there
        were
        no outstanding options or warrants available.
 
 **Fair
        Value of Financial Instruments**
  The
        carrying amount reported in the balance sheets for cash and cash equivalents
        and
        liability for stock to be issued approximate fair value because of the immediate
        or short-term maturity of these financial instruments.
 
 **Recently
        Issued Accounting Pronouncements**
 
 In
        December 2004, the Financial Accounting Standards Board ("FASB") published
        Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based
        Payment ("SFAS 123R"). SFAS 123R requires that compensation cost related
        to
        share-based payment transactions be recognized in the financial statements.
        Share-based payment transactions
  F
            -
            11
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        2-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** **(CONTINUED)**
 
 **Recently
        Issued Accounting Pronouncements** **(Continued)**
 
 within
        the scope of SFAS 123R include stock options, restricted stock plans,
        performance-based awards, stock appreciation rights, and employee share purchase
        plans. The provisions of SFAS 123R are effective for small business issuers
        as
        of the first interim period that begins after December 15, 2005. Accordingly,
        the Company will implement the revised standard January 1, 2006. Currently,
        the
        Company accounts for its share-based payment transactions under the provisions
        of APB 25, which does not necessarily require the recognition of compensation
        cost in the financial statements (note 3(d)). Management is assessing the
        implications of this revised standard, which may materially impact the Company's
        results of operations commencing January 1, 2006 and thereafter.
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory
        Costs.” SFAS No. 151 requires abnormal amounts of inventory costs related
        to idle facility, freight handling and wasted material expenses to be recognized
        as current period charges. Additionally, SFAS No. 151 requires that
        allocation of fixed production overheads to the costs of conversion be based
        on
        the normal capacity of the production facilities. The standard is effective
        for
        fiscal years beginning after June 15, 2005. The adoption of SFAS
        No. 151 did not have a material impact on the Company’s financial position
        or results of operations.
 
 In
        December 2004, FASB issued Statement of Financial Accounting Standards No.
        153,
        Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting
        for Non-monetary Transactions (" SFAS 153"). This statement amends APB Opinion
        29 to eliminate the exception for non-monetary exchanges of similar productive
        assets and replaces it with a general exception for exchanges of non-monetary
        assets that do not have commercial substance. Under SFAS 153, if a non-monetary
        exchange of similar productive assets meets a commercial-substance criterion
        and
        fair value is determinable, the transaction must be accounted for at fair
        value
        resulting in recognition of any gain or loss. SFAS 153 is effective for
        non-monetary transactions in fiscal periods that begin after June 15, 2005.
        The
        Company does not anticipate that the implementation of this standard will
        have a
        material impact on its financial position, results of operations or cash
        flows.
  F
            -
            12
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        2-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** **(CONTINUED)**
 
 **Recently
        Issued Accounting Pronouncements** **(Continued)**
 
 In
        May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
        Corrections.” SFAS No. 154 replaces Accounting Principles Board (“APB”)
        Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
        Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires
        retrospective application to prior periods’ financial statements of a voluntary
        change in accounting principle unless it is impracticable. APB No. 20
        previously required that most voluntary changes in accounting principle be
        recognized by including the cumulative effect of changing to the new accounting
        principle in net income in the period of the change. SFAS No. 154 is
        effective for accounting changes and corrections of errors made in fiscal
        years
        beginning after December 15, 2005. The adoption of SFAS No. 154 did
        not have a material impact on the Company’s financial position or results of
        operations.
 
 In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
        Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and
        140.” SFAS No. 155 resolves issues addressed in SFAS No. 133
        Implementation Issue No. D1, “Application of Statement 133 to Beneficial
        Interests in Securitized Financial Assets,” and permits fair value remeasurement
        for any hybrid financial instrument that contains an embedded derivative
        that
        otherwise would require bifurcation, clarifies which interest-only strips
        and
        principal-only strips are not subject to the requirements of SFAS No. 133,
        establishes a requirement to evaluate interests in securitized financial
        assets
        to identify interests that are freestanding derivatives or that are hybrid
        financial instruments that contain an embedded derivative requiring bifurcation,
        clarifies that concentrations of credit risk in the form of subordination
        are
        not embedded derivatives and amends SFAS No. 140 to eliminate the
        prohibition on a qualifying special-purpose entity from holding a derivative
        financial instrument that pertains to a beneficial interest other than another
        derivative financial instrument. SFAS No. 155 is effective for all
        financial instruments acquired or issued after the beginning of the first
        fiscal
        year that begins after September 15, 2006. The Company is currently
        evaluating the effect the adoption of SFAS No. 155 will have on its
        financial position or results of operations.
  F
            -
            13
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        2-** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES** **(CONTINUED)**
 
 **Recently
        Issued Accounting Pronouncements** **(Continued)**
  
 In
        March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
        Financial Assets, an amendment of FASB Statement No. 140.” SFAS
        No. 156 requires an entity to recognize a servicing asset or liability each
        time it undertakes an obligation to service a financial asset by entering
        into a
        servicing contract under a transfer of the servicer’s financial assets that
        meets the requirements for sale accounting, a transfer of the servicer’s
        financial assets to a qualified special-purpose entity in a guaranteed mortgage
        securitization in which the transferor retains all of the resulting securities
        and classifies them as either available-for-sale or trading securities in
        accordance with SFAS No. 115, “Accounting for Certain Investments in Debt
        and Equity Securities” and an acquisition or assumption of an obligation to
        service a financial asset that does not relate to financial assets of the
        servicer or its consolidated affiliates. Additionally, SFAS No. 156
        requires all separately recognized servicing assets and servicing liabilities
        to
        be initially measured at fair value, permits an entity to choose either the
        use
        of an amortization or fair value method for subsequent measurements, permits
        at
        initial adoption a one-time reclassification of available-for-sale securities
        to
        trading securities by entities with recognized servicing rights and requires
        separate presentation of servicing assets and liabilities subsequently measured
        at fair value and additional disclosures for all separately recognized servicing
        assets and liabilities. SFAS No. 156 is effective for transactions entered
        into after the beginning of the first fiscal year that begins after
        September 15, 2006. The Company is currently evaluating the effect the
        adoption of SFAS No. 156 will have on its financial position or results of
        operations.
  F
            -
            14
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        3-** **PROPERTY
        AND EQUIPMENT**
 
 Property
        and equipment consist of the following at March 31, 2006.
 Computer
                
                $
                26,572Equipment
                    and machinery
                
                
                13,274Office
                    equipment
                
                
                5,78645,632Less:
                    accumulated depreciation
                
                
                (7,621
                )$
                38,011
  Depreciation
        expense for the nine months ended March 31, 2006 was $5,767.
 
 **NOTE
        4-** **DEFERRED
        FINANCING COSTS**
 
 In
        March
        2006, the Company entered into a bond finance agreement with Wiser Financial
        Services (see note 6). Deferred financing costs in the amount of $1,725,000
        comprise of a warrant issued for 500,000 shares, which will be amortized
        over
        two years.
 
 **NOTE
        5-** **RELATED
        PARTY TRANSACTIONS**
 
 A
        related
        party, whose ownership is also a director and officer of the Company, provided
        office space to the Company at no charge, and funded payroll, moving and
        other
        general expenses. As of March 31, 2006, the Company incurred and accrued
        $301,339, in liabilities to this entity. The advances and funding are based
        on
        verbal commitments with no guarantees of future advances or funding. No advances
        or payments were made during the three months ended March 31, 2006 and the
        Company made payments of $3,000 during the three months ended March 31,
        2005.
 
 **NOTE
        6-** **DUE
        TO SHAREHOLDERS**
 
 Certain
        shareholders of the Company have advanced funds to the Company to cover cash
        flow deficiencies. These advances have no stated repayment terms and bear
        interest at 5% with interest payable annually.
 
 **NOTE
        7-** **NOTES
        PAYABLE**
 
 Note
        payable to Transporter Inc. commencing August 2004 for the purchase of exclusive
        rights to certain video-conferencing technology. The Company is currently
        in
        litigation with Transporter Inc. regarding the technology for which the note
        was
        issued. The Company has defaulted on this note and this note is due in full.
        See
        Note 11 regarding the litigation of this matter.
  F
            -
            15
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        7-** **NOTES
        PAYABLE** **(CONTINUED)**
 
 Note
        payable to Twilight Bay, LLC commencing January 2006 for working capital
        needs.
        The note is due in one year and carries a stated interest rate of two
        percent.
 
 On
        March
        26, 2006, the Company entered into a bond finance agreement with Wiser Financial
        Services. The Company can borrow up to $5,000,000 anytime during a two-year
        period at a stated interest rate of 10.25%. All amounts are due at the end
        of
        the two-year period. The Company granted Wiser Financial Services a
        non-cancelable warrant to purchase 500,000 shares of the Company’s common
        restricted stock at $5.00 with the added condition that the warrant is
        non-dilutible during the two-year term of the agreement. As of March 31,
        2006
        the Company has drawn down no funds from this note.
 
 **NOTE
        8-** **PROVISION
        FOR INCOME TAXES**
 
 Deferred
        income taxes will be determined using the liability method for the temporary
        differences between the financial reporting basis and income tax basis of
        the
        Company’s assets and liabilities. Deferred income taxes will be measured based
        on the tax rates expected to be in effect when the temporary differences
        are
        included in the Company’s tax return. Deferred tax assets and liabilities are
        recognized based on anticipated future tax consequences attributable to
        differences between financial statement carrying amounts of assets and
        liabilities and their respective tax bases.
 
 At
        March
        31, 2006, deferred tax assets consist of the following:
  2006Deferred
                  tax assets
              
              $
              7,863,000Less:
                  valuation allowance
              
              
              (7,863,000
              )Net
                  deferred assets
              
              $
              -0-
  At
        March
        31, 2006, the Company had federal net operating loss carry forwards in the
        approximate amounts of $23,126,000 available to offset future taxable income
        through 2026. The Company established valuation allowances equal to the full
        amount of the deferred tax assets due to the uncertainty of the utilization
        of
        the operating losses in future periods.
 
  F
            -
            16
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        9-** **STANDBY
        EQUITY DISTRIBUTION AGREEMENT**
 
 On
        April
        25, 2005, the Company entered into a Standby Equity Distribution Agreement
        (“Agreement”) with Alliance Capital Management. Under the agreement, the Company
        may issue and sell to Alliance Capital Management common stock for a total
        purchase price of up to $4.0 million. The purchase price for the first payment
        is 200,000 shares. The remaining purchase price for the shares is equal to
        75%
        of the market price, which is determined as the lowest volume weighted average
        price of the common stock during the ten trading days following the notice
        date.
        This calculation is mandated by the Agreement. As of March 31, 2006, the
        Company
        has sold stock and received a total of $4,000,000 under this agreement. Related
        to this agreement, Alliance Capital Management received, as additional
        consideration, one (1) warrant to purchase two million shares of common stock
        at
        a fixed rate of $4.00 per share for a period of two years.
 
 **NOTE
        10-** **STOCKHOLDERS'
        EQUITY (DEFICIT)**
 
 The
        Company has 100,000,000 shares of common stock authorized, par value $.001.
        As
        of March 31, 2006, the Company has 33,713,166 shares of common stock issued
        and
        outstanding.
 
 The
        Company issued 37,994,923 shares of its common stock in connection with the
        acquisition of Aero Marine Engine Corp. Under reverse acquisition accounting,
        these shares are reflected as issued on the date of inception and valued
        at the
        book value of the net assets of as of the date of the transaction.
 
 Aero
        was
        incorporated in contemplation of the reverse acquisition of the Company as
        well
        as the Dyna-Cam acquisition. A total of 38,994,923 common shares were issued
        in
        the reverse merger transaction. However, 1,000,000 of those shares were
        designated for the Dyna-Cam acquisition. (See Subsequent Event Footnote.)
        The
        Company raised $1,218,598 as part of its initial capitalization. This capital
        was raised among four individuals in contemplation of their receiving the
        37,994,923 shares of the Company's common stock in connection with the
        acquisition of Aero Marine Engine Corp. The value of the 1,000,000 shares
        issued
        in connection with the Dyna-Cam purchase was determined to be $0.032 per
 
  F
            -
            17
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        10-** **STOCKHOLDERS'
        EQUITY (DEFICIT)** **(CONTINUED)**
 
 share,
        which is the price per share paid by the investors that acquired the 37,994,923
        shares for cash.
 
 In
        connection with the reverse acquisition transaction with Aero, the Company's
        two
        controlling shareholders at that time cancelled 9,337,860 shares of common
        stock
        held by them. Upon completion of this cancellation, the Company had 11,000,000
        shares of common stock remaining outstanding prior to the reverse acquisition
        transaction.
 
 In
        January 22, 2004, the Company issued 5,000,000 shares of its common stock
        in
        exchange for consulting services rendered to the Company pursuant to an S-8
        registration statement. These shares were valued at $3,350,000 ($.67 per
        share),
        the fair value of the stock at the date of issuance.
 
 On
        July
        30, 2004 with an effective date of August 9, 2004 the Board of Directors
        adopted
        a resolution authorizing and approving a 100 to 1 reverse stock split and
        the
        new trading symbol of the company is AOME.
 
 On
        August
        24, 2004 International Equity Partners, SA purchased Transporter, Inc., a
        company developing video conferencing software allowing the creation of virtual
        private networks that are PC based, have no need to use servers or special
        equipment, and operate on any broadband connection. The purchase price was
        $3,000,000, $100,000 of which is payable within 60 days of the date of the
        Exclusive Purchase Agreement with the balance payable in intervals over 24
        months. In addition, the former stockholders of Transporter, Inc. are to
        be
        issued 1,000,000 shares of the common stock of the Company.
 
 At
        the
        end of a two-year period the shares are guaranteed to be worth at least $2.00
        per share, and, if worth less, additional shares of stock will then be issued
        to
        make up the difference. The value of the shares is $50,000 ($.05 per
        share).
 
 On
        August
        24, 2004 the Company acquired through an assignment by International Equity
        Partners, SA all rights, title, and interest in the aforesaid Exclusive Purchase
        Agreement in exchange for 25,000,000 shares of common stock of the Registrant.
        All certificates issued will bear the appropriate 2-year restrictive legend.
        The
        value of the issuance is $812,500, which was the fair value of the stock
        at the
        date the transaction was negotiated.
  F
            -
            18
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        10-** **STOCKHOLDERS'
        EQUITY (DEFICIT)** **(CONTINUED)**
 
 On
        August
        25, 2004, the Company entered into a Consulting Fee Agreement with Carlyle
        Financial Consulting Group, which will continue to provide consulting services
        for all of the Company’s businesses and will also continue to coordinate
        prospective acquisitions in European countries and the Arabian Gulf. The
        consulting fee was negotiated for 1,400,000 shares of common stock, which
        the
        Company has registered with the Securities and Exchange Commission on Form
        S-8
        Registration Statement under the Securities Act of 1933.
 
 On
        September 9, 2004, the Company issued 200,000 shares of common stock of the
        Company in exchange for legal and professional services rendered and to be
        rendered.
 
 On
        November 8, 2004 the Company issued 157,788 shares of common stock of the
        Company in exchange for consulting services rendered.
 
 On
        November 11, 2004 the Company issued 463,776 shares of common stock of the
        Company in exchange for financial services. The services were never rendered
        and
        the shares were subsequently cancelled. These transactions have been
        retroactively restated back to the nine months ended March 31, 2005 to reflect
        the cancellation.
 
 On
        January 3, 2005 the Company issued 100,000 shares of common stock with a
        par
        value of $.001 for $300 cash.
 
 On
        April
        6, 2005 the Company issued 50,000 shares of common stock of the Company in
        exchange for consulting services rendered.
 
 On
        April
        20, 2005, the Company completed an offering of 1,800,000 units at a price
        of
        $0.50 per unit. Each unit consists of one share of common stock par value
        $.001
        and one warrant to purchase one share of common stock, exercisable for two
        years
        closing of the offering. The total amount the Company received was 900,000.
        As
        of March 31, 2006, only 1,232,311 shares have been issued.
 
 On
        April
        17, 2005, the Company issued 1,465,000 shares of common stock of the Company
        in
        exchange for a management-consulting contract. The contract is for a period
        of
        five years and is estimated to be worth $35,000 a year, totaling
        $175,000.
 
  F
            -
            19
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        10-** **STOCKHOLDERS'
        EQUITY (DEFICIT)** **(CONTINUED)**
 
 On
        April
        15, 2005, the Company issued 600,000 shares of common stock of the Company
        as
        compensation.
 
 On
        April
        15, 2005, the Company issued 20,000 shares of common stock of the Company
        as
        part of a previous agreement for consulting services rendered.
 
 In
        June
        2005, the Company issued 129,061 shares of common stock of the Company for
        legal
        services.
 
 During
        the year, the Company cancelled 860,000 of founder shares, which had been
        restated back to the period ended June 30, 2003.
 
 In
        August
        of 2005, the Company issued 1,465,000 shares of common stock in exchange
        for
        financial services. The services were never rendered and the shares were
        subsequently cancelled.
 
 In
        November of 2005 the Company issued 170,000 shares of common stock of the
        Company in exchange for consulting services rendered.
 
 In
        the
        three months ended March 31, 2006 the Company issued 30,000 shares of common
        stock and 50,000 warrants for consulting services valued at $97,820 and $150,000
        respectively. The Company also issued 35,000 shares for services then later
        canceled them due to lack of performance.
 
 The
        Company issued 10,000 shares as compensation valued at $38,000 for the three
        months ended March 31, 2006.
 
 In
        the
        same period the Company issued 319,672 and 10,000 shares of common stock
        in
        satisfaction of debt to a related company, valued at $975,000 and $40,890
        respectively.
 
 Also
        in
        the three months ended March 31, 2006 the Company issued 230,940 shares in
        satisfaction of debts to private lenders valued at $888,109 (see note
        13).
 
 In
        the
        same quarter the Company issued 500,000 warrants valued at $1,725,000 in
        deferred financing costs (see note 12).
 
 The
        Company also issued 134,570 shares of its common stock for
        cash.
  F
            -
            20
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        10-** **STOCKHOLDERS'
        EQUITY (DEFICIT)** **(CONTINUED)**
 
 For
        the
        nine months ended March 31, 2006, the Company issued 73,953 shares of common
        stock through the exercise of options. The options carry strike prices of
        $1.53
        and $2.15.
  For
        the
        nine months ended March 31, 2006, the Company issued 1,680,098 shares of
        common
        stock as part of their Standby Equity Agreement (See Note 8).
 
 The
        Company, at March 31, 2006, has 100,000,000 shares of preferred stock authorized
        and no shares issued and outstanding.
 
 **NOTE
        11-** **GOING
        CONCERN UNCERTAINTY**
 
 As
        shown
        in the accompanying financial statements, as is typical of companies going
        through the development stage, the Company incurred net losses for the nine
        and
        three months ended March 31, 2006 and 2005 and for the period December 30,
        2002
        to March 31, 2006. The Company is currently in the development stage, and
        there
        is no guarantee whether the Company will be able to generate enough revenue
        and/or raise capital to support current operations and generate anticipated
        sales. This raises substantial doubt about the Company’s ability to continue as
        a going concern. Management believes that the Company’s capital requirements
        will depend on many factors including the success of the Company’s product
        development efforts. The financial statements do not include any adjustments
        that might result from the outcome of these uncertainties.
 
 **NOTE
        12-** **COMMITEMENTS
        AND CONTINGENCIES**
 
 On
        August
        24, 2004 the Company entered into a Joint Venture Agreement with Adaptive
        Propulsion Systems, LLC (“Adaptive”), a wholly owned subsidiary of Tactronics.
        Adaptive will provide 100% of the capital and labor to build military grade
        engines based on the Registrant’s Dyna-Cam engine design. Adaptive will pay the
        Company a 20% gross royalty on all orders of the engines sold to the United
        States Government. The Company will have the rest of the world military market
        and all civilian commercial applications, and the Company will pay a five
        (5%)
        percent royalty on such orders to Adaptive. For the nine months ended March
        31,
        2006 the Company has research and development costs of approximately
        $2,239,000
  F
            -
            21
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        12-** **COMMITEMENTS
        AND CONTINGENCIES** **(CONTINUED)**
 
 In
        May
        2005, the Company filed suit against Transporter, Inc and its principals,
        David
        Werner and Craig Della Penna. The suit seeks to rescind the August 2004
        agreement under which the Company acquired the exclusive rights to certain
        video-conferencing technology. The Company contends that the principals
        intentionally misrepresented the status and capabilities of the technology
        that
        was acquired under the original agreement. The case is pending litigation.
        The
        Company has determined that the technology is worthless, and thus has impaired
        the asset in its entirety as of March 31, 2006.
 
 In
        October 2005, the Company entered into a business consulting agreement with
        Wexler Kronen Capital Associates. Wexler is to provide consulting and
        promotional services for a period of 12 months. The payment for these services
        is $7,000 per month, 10,000 shares of restricted stock and 3 warrants. Each
        warrant is exercisable for 35,000 shares at various exercise prices. One
        for
        $4.00, the second for $4.50 and the third for $5.00. The warrants expire
        October
        2008.
  In
        November 2005, the Company entered into a business consulting agreement with
        Redwood Consultants L.L.C. Redwood is to provide consulting services for
        a
        period of 12 months to the Company. As part of this agreement, the Company
        issued 50,000 restricted shares with an additional 50,000 shares to be issued
        March 9, 2006 and July 9, 2006. All 150,000 were issued at commencement of
        the
        agreement and have been recorded as a prepaid asset on a prorata basis. In
        addition, the company has granted warrants to purchase 250,000 shares at
        $4.00
        per share which expire November 2007.
 
 In
        January 2006, the Company entered into a business consulting agreement with
        John
        F. Walter. Walter is to provide consulting services for a period of 12 months
        to
        the Company in exchange for monthly payments of $10,000. The contract is
        renewable annually.
 
  F
            -
            22
  **AXIAL
        VECTOR ENGINE CORPORATION AND SUBSIDIARY**
 **(FORMERLY
        AERO MARINE ENGINE, INC.)**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(CONTINUED)**
 **MARCH
        31, 2006 AND 2005**
 **(UNAUDITED)**
 
 **NOTE
        13-** **BAD
        DEBT - SUBSCRIPTION RECEIVABLE**
 
 In
        the
        three months ended March 31, 2006, the Company issued shares of its common
        stock
        to private lenders in satisfaction of debts misrepresented as those of the
        Company. It was discovered that in 2005 specific lenders had lent sums of
        money
        to an individual who misrepresented himself as having the authority of the
        Company. The individual borrowed funds and provided lenders a note promising
        repayment in shares of the Company’s common stock if the borrowings were not
        repaid within a specific period.




F
          -
          23




**Item
      2.   Plan of
      Operation**




**Forward-Looking
      Statements**




Historical
      results and trends should not be taken as indicative of future operations.
      Management’s statements contained in this report that are not historical facts
      are forward-looking statements within the meaning of Section 27A of the
      Securities Act of 1933, as amended, and Section 21E of the Securities and
      Exchange Act of 1934 (the “Exchange Act”), as amended. Actual results may differ
      materially from those included in the forward-looking statements. The Company
      intends such forward-looking statements to be covered by the safe-harbor
      provisions for forward-looking statements contained in the Private Securities
      Litigation Reform Act of 1995, and is including this statement for purposes
      of
      complying with those safe-harbor provisions. Forward-looking statements, which
      are based on certain assumptions and describe future plans, strategies and
      expectations of the Company, are generally identifiable by use of the
      words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,”
“prospects,” or similar expressions. The Company’s ability to predict results or
      the actual effect of future plans or strategies is inherently uncertain. Factors
      which could have a material adverse affect on the operations and future
      prospects of the Company on a consolidated basis include, but are not limited
      to: changes in economic conditions, legislative/regulatory changes, availability
      of capital, interest rates, competition, and generally accepted accounting
      principles. These risks and uncertainties should be considered in evaluating
      forward-looking statements and undue reliance should not be placed on such
      statements. Further information concerning the Company and its business,
      including additional factors that could materially affect the Company’s
      financial results, is included herein and in the Company’s other filings with
      the SEC.




**Our
      Internal Combustion Engine**




We
      were
      incorporated in the state of Nevada on May 10, 2001. On June 30, 2003, we
      acquired the operating assets of Dyna−Cam Engine Corp. ("Dyna−Cam"). Dyna−Cam
      was a development stage company that possessed the intellectual property rights
      for a unique, axial cam−drive, free piston, internal combustion engine. We
      acquired the assets of Dyna−Cam with the intention to further develop, produce,
      and sell this mechanical engine primarily for aircraft and marine applications.





In
      2004,
      a dispute arose between our company and Dyna-Cam and its principals concerning
      our rights to the Dyna-Cam engine, which resulted in litigation and claims
      filed
      in the United States District Court, Central District of California. During
      this
      difficult time, we abandoned our plans to utilize the mechanical engine as
      designed by Dyna−Cam Engine Corp., and instead focused our attention on a
      digital engine with technologies that incorporate significantly enhanced
      performance characteristics and new design features. Ultimately, our new digital
      Axial Vector engine does not rely upon any technology purchased from Dyna-Cam.
      The mechanical Dyna-Cam engine designs and concepts were largely available
      in
      the public domain.





To
      assist
      us with the testing of the Axial Vector engine and in-house trails, we entered
      into a joint venture agreement (“Agreement”) with Adaptive Propulsion Systems,
      LLC (“Adaptive”). Under the terms of the Agreement, Adaptive agreed to utilize
      its expertise to modify the engine; however, we will have all rights to any
      patentable technology that emerges. The term of this


4


agreement
      is 20 years unless revised by joint agreement of the parties. The Agreement
      further grants Adaptive the exclusive right to sell the Axial Vector internal
      combustion engine to the United States military and all militaries of NATO
      countries. The Agreement was later amended to expand the exclusive right granted
      to Adaptive to include the military of the United Arab Emirates and the GCC.
      Adaptive will be obligated to pay us a royalty of 20% of the gross sales.
      Conversely, for all other militaries and all commercial non-military sales
      of
      internal combustion engines we make utilizing the Axial Vector design, we will
      pay Adaptive a royalty of 5% of gross sales.





During
      the testing process with Adaptive that commenced in October 2005, significant
      results affecting the design and composition of the Axial Vector engine emerged.
      Through this testing, we were able to construct the engine with different alloys
      that produced a 205 horsepower Axial Vector engine with a weight range of 98
      lbs. to 65 lbs. depending upon the alloys we use. Another significant
      breakthrough during our testing revealed that the Axial Vector engine was
      capable of maintaining its performance level while adjusting to various fuels
      and a different mixture of fuels. The design of the Axial Vector engine offers
      significantly reduced weight, size, emissions and maintenance while gaining
      vast
      increases in horsepower, torque and fuel economy.





We
      anticipate that lab testing and the necessary modifications will be completed
      prior to the end of our fiscal year on June 30, 2006. At that point, we will
      conduct beta testing at various sites in Panama, New Zealand, the United States
      and the United Arab Emirates. Negotiations are underway for the terms of
      operation of those beta test sites. The beta test sites will be used to test
      the
      engine’s power generation capabilities, performance and fuel usage, as well as
      to determine its cost and reliability.





Once
      the
      testing and beta trials are complete and the product is available for sale,
      Adaptive will provide all of the capital, manufacturing facilities and labor
      required to build military grade engines using our Axial Vector design. Initial
      manufacturing of our digital Axial Vector engine and Axial Flux Generator
      (GENSET), described below, is planned for no later than December 2006. In the
      event that the Axial Vector engine proves suitable for military and commercial
      use, we plan over the next twelve months to license our Axial Vector engine
      for
      a wide variety of applications presently performed by the conventional internal
      combustion engine. Specifically, we intend to license the manufacturing rights
      to our technology for specific applications in defined geographical
      areas.





We
      have
      filed patents on the technologies underlying our Axial Vector engine.
      Additionally, certain design patents have been registered in jurisdictions
      outside of the United States and ongoing work of our patent attorneys involves
      protection of proprietary inventions and the patent ability
      thereof.





Subsequent
      to the reporting period, we settled the lawsuit with Dyna-Cam and its principals
      and reaffirmed our right to the assets we purchased in 2003, including the
      original design to the Dyna-Cam mechanical engine. We will not pay anything
      to
      Dyna-Cam or its principals in connection with the settlement and expect a
      written form of the settlement to be signed within 30 days. The lawsuit
      involving Dyna-Cam should have no adverse consequences to our company going
      forward. Due to this recent development, management has decided to upgrade
      and
      potentially


5


market
      the mechanical engine designed by Dyna-Cam. Because our Agreement with Adaptive
      encompasses the Dyna-Cam mechanical engine, we plan to move forward with the
      development of the mechanical Dyna-Cam engine in addition to developing our
      digital Axial Vector engine for other applications identified where cost benefit
      ratio is favorable. We are in the process of assimilating our digital technology
      from our new digital engine, which is presently at various stages of patent
      protection, into the Dyna-Cam mechanical engine with the hope to create an
      enhanced product.




**Our
      Power Generators**




We
      intend
      to build several models of generator sets that utilize our Axial Vector engine.
      We use the term GENSETS to describe all models and sizes of our integrated
      Axial
      Vector engines and our Axial Flux generators we intend to develop and
      manufacture. We are seeking to develop a generator with a high power density
      Axial Flux design that has one-third of the volume and half the weight of the
      average generator. We anticipate that these generators will be utilized for
      a
      wide variety of applications including military, commercial, and residential
      uses.





We
      entered into an agreement with Adaptive to assist us in the design, development,
      and manufacture a family of seven GENSETS ranging from 7.5 kilowatt to 1
      megawatt contingent upon our ability to secure financing. On April 25, 2005,
      we
      completed a Financing Agreement in the amount of $4,000,000 with Alliance
      Capital Management to satisfy the contingency set forth in our agreement with
      Adaptive. There are no related party relationships with Alliance Capital
      Management. We paid Adaptive $3,171,000 to complete the development of the
      engines for the proposed GENSET product line. Additional sums are owed to
      Adaptive for equipment purchased that is involved in the research, development
      and production of the power generator since we decided to develop and utilize
      the more efficient Axial Flux generator in our GENSET rather than conventional,
      off-the-shelf generators integrated into our GENSET. On December 5, 2005, we
      entered into a subsequent agreement with Adaptive to pay them $668,160.00 in
      six
      monthly installments of $11,360.00. The first payment was due and paid in
      February 2006. The March 2006 payment was due and not yet paid as of March
      31,
      2006. We are working out an arrangement with Adaptive to remedy the failure
      to
      pay in the next installment. It is anticipated that there will be additional
      costs for off-site performance evaluation, operating costs and other data
      collection on the GENSET.





Under
      the
      terms of this agreement, Adaptive can utilize its expertise to modify the power
      generator; however, we will have all rights to any patentable or proprietary
      technology that emerges. Adaptive will be obligated to pay us a royalty of
      20%
      of the gross sales to the military licenses it currently holds. Conversely,
      for
      all commercial nonmilitary sales of power generator and /or GENSETS made
      utilizing the Axial Vector engine and generator design, we will pay Adaptive
      a
      royalty of 5% of gross sales. The payments to Adaptive are made in cash and
      made
      pursuant to a payment schedule. The term of this agreement with Adaptive is
      20
      years unless revised by joint agreement of the parties.





The
      development process for these power generators commenced in the last quarter
      of
      the fiscal year ended June 30, 2005. On October 29, 2005, we agreed to pay
      Adaptive approximately $660,000 to retain personnel to improve the functionality
      of the Axial Flux design of our


6


generator
      to be utilized in our GENSETS. We anticipate that Adaptive will be able to
      comply with the terms of this agreement and complete the development of our
      prototypical 200 kW Axial Flux generator driven by a 352 HP Axial Vector Engine
      (“prototypical generator”) in early June 2006. We anticipate commencing beta
      testing on our prototypical generator initially at Adaptive's facilities in
      July
      2006. Thereafter, we intend to conduct beta testing at four different global
      locations with varying climates and elevations commencing for a period of 4,000
      hours (5.5 months) to validate the 40,000 hour design of mean-time-between-major
      overhaul. During this time we will also conduct tests to estimate the Mean
      Time
      to Failure (“MTF”) of our prototypical generator and engine.





The
      planned MTF testing will consist of running the engine and generator for 166
      days and taking laser measurements of components to estimate the wear at the
      conclusion of the test. This testing will provide us with an accurate gauge
      of
      the endurance of the engine and generator. Based upon the results of the MTF
      and
      beta testing, further modifications may be required.





Initial
      commercial manufacturing production of the GENSETS is intended to be at
      Adaptive's facilities commencing in December 2006. In the expected event that
      we
      are successful in generating revenue from licensing our technology and product
      sales, we will seek to increase our manufacturing capacity.




**Consulting
      Agreements**





On
      January 15, 2006, we entered into a Management Consulting Agreement with Mr.
      John F. Walter. Mr. Walter will provide consulting services consistent with
      his
      professional expertise in power generation, power generating companies,
      management consulting, serving on the Advisory Council for our Company, and
      assisting in the establishment and development of beta testing sites and the
      test protocol. The agreement provides for compensation of $10,000.00 per month,
      plus reasonable expenses. The term of the agreement is for one year, renewable
      annually subject to mutual agreement.





On
      February 10, 2006, we entered into an Agreement with CollegeStock, Inc. to
      render public relations, communications, advisory and consulting services
      including development, implementation, and maintenance of an ongoing program
      to
      increase the investment community’s awareness of our Company’s activities and
      stimulate interest in our Company. The term of agreement is three months and
      CollegeStock, Inc. will be paid $15,000.00 cash for its services.




**Purchase
      and Sale of Plant or Significant Equipment**




To
      date,
      Adaptive has performed all of our research, testing, and product development.
      If
      we are successful in developing products for military and commercial use, we
      intend to license the manufacturing rights. As a result, we do not anticipate
      any purchase or sale of and equipment over the next twelve months.




**Licenses**




On
      September 10, 2005, we entered into a memorandum of understanding (“MOU”) with
      Kirloskar Oil Engines Limited (“KOEL”), an Indian based manufacturer and
      engineering


7


company.
      We are working toward the execution of a definite agreement with KOEL where
      we
      would grant KOEL the exclusive right to utilize our technology for
      non−automotive applications including tractor engines, loader engines, fork lift
      truck engines, and other farm and forestry applications. The execution of a
      definitive agreement is contingent upon completion of the parties due diligence
      which was anticipated to be occur in January 2006. The parties have extended
      the
      anticipated closing date of a definitive agreement to July 2006 in order to
      provide the senior managers from KOEL with an opportunity to conduct additional
      due diligence at beta test sites where further product testing will be ongoing.
      Pursuant to the terms of the MOU, KOEL placed $1,000,000 into a segregated
      account which it controls and we have granted them a right of first refusal
      with
      respect to the right to utilize our technology for non−automotive applications
      including tractor engines, loader engines, fork lift truck engines, and other
      farm and forestry applications should the parties fail to executive a definitive
      agreement.





**Joint
      Venture Agreements**





***Wiser-AVEC***





On
      April
      3, 2006, we entered into an agreement titled “Joint Venture Agreement” with
      Wiser of Ras Al Khaimah, a United Arab Emirates entity (“Wiser”), pursuant to
      which we have agreed to form with Wiser a joint venture entity named Wiser
      AVEC
      Power Corporation (“Wiser-AVEC”) to carry out the operations of a joint venture.
      We own forty-nine percent and Wiser owns fifty-one percent of the capital stock
      of Wiser-AVEC. Under the Joint Venture Agreement, and as consideration for
      the
      respective shares of the capital stock of Wiser-AVEC, we provided cash
      contributions of 73,500 UAE Dirhams (approximately US$20,013 ) and Wiser
      provided cash contributions of 76,500 UAE Dirhams (approximately US$20,830
      to
      finance Wiser-AVEC’s operations. Distributions of profits will be made, subject
      to an appropriate amount held in retention for Wiser-AVEC, on the basis of
      51%
      to Wiser and 49% to us.





The
      purpose of Wiser-AVEC is to engage in the distribution of Axial
      Vector Ô engines,
      Axial Flux Generators, and Axial Vector TM engine
      hydraulic and pneumatic pumps for non-military commercial applications in the
      countries of the Gulf Cooperation Council. These countries include Saudi Arabia,
      Kuwait, Bahrain, Qatar, the United Arab Emirates, and the Sultanate of Oman.
      Under the Joint Venture Agreement, we will issue a license allowing Wiser-AVEC
      to distribute, sell and service our products to commercial, non-military markets
      directly or indirectly via distributors or agents. We will further assist in
      the
      identification and recruitment of skilled and experienced professionals to
      assist in the management of Wiser-AVEC in setting up multilevel sales and
      distribution networks as appropriate at the expense of Wiser-AVEC. We will
      further grant Wiser-AVEC initially the right to distribute, sell and service
      our
      AVEC based technology products in the following specific
      applications:





1.
            GENSETS
                (Axial VectorTM engine and Axial Flux high power density Generator and
                Inverter).


2.
            Axial
                VectorTM engines for maritime vessels and pleasure
                craft.


3.
            Axial
                VectorTM engines for miscellaneous utilities such as single and multi-stage
                water pumps, hydraulic pumps and pneumatic pumps. Engine applications
                shall exclude the use as automotive and truck engines in the non-military,
                commercial sector.


8


We
      are
      further required to locate and establish Beta test sites for the GENSETS (by
      July 2006) and locate and establish possible Beta test sites for diesel-electric
      Hybrid power-train during 2007.





Conversely,
      Wiser’s responsibilities under the Joint Venture Agreement include:





1.
            Establish
                and meet a “minimum” performance for its
                Territory.


2.
            Provide
                suitable office facilities which Wiser-AVEC shall rent for market
                price.


3.
            Provide
                facilities and infrastructure required to distribute, sell and service
                our
                engines and products at the expense of
                Wiser-AVEC.


4.
            Provide
                overall local management, staff and workforce to include administration,
                manufacturing and marketing / sales in consultation with us at the
                expense
                of Wiser-AVEC.


5.
            Provide
                Corporate Governance with us having budgetary review and approval
                as a
                joint venture partner.





In
      addition, Wiser agreed to advance funds necessary for all costs and expenses
      incurred after execution of the Joint Venture Agreement in connection with
      the
      formation, registration, and operation of Wiser-AVEC. Such funds, however,
      will
      be repaid to Wiser from the profits of Wiser-AVEC.





Under
      the
      Joint Venture Agreement, Wiser-AVEC will be managed by a board of directors
      consisting of two directors chosen by Wiser and one director chosen by us.
      These
      three directors will have the sole voting power for Wiser-AVEC’s board of
      directors. Other directors will be appointed but will have no voting power.
      Wiser will choose a non-voting director to be Wiser-AVEC’s Chief Executive
      Officer and we will choose a non-voting director to be Wiser-AVEC’s Chief
      Financial Manager. The Joint Venture Agreement further provides for the powers
      and authority held by the board of directors of Wiser-AVEC and the powers and
      authority retained by its shareholders.





The
      board
      of directors of Wiser-AVEC may request that we and Wiser contribute additional
      funds in the form of loans in proportion to our share ownership in Wiser-AVEC.
      We agreed to pay such loans along with Wiser upon mutually agreeable
      terms.





To
      date
      Wiser-AVEC has no operating history and, therefore, we cannot predict what
      its
      results of operation will be, or how those operations will impact our operating
      results.





***Emirates
      Advance Investment***





On
      January 3, 2005, we entered into a Memorandum of Understanding (“MOU”) with
      Emirates Advance Investment (“EAI”). The purpose of the MOU was to outline the
      understanding of the parties concerning the establishment of a joint venture
      between EAI and us. However, EAI did not meet the time requirements to sign
      the
      propo sed
      joint
      venture agreement. We therefore withdrew the joint venture offer and EAI
      agreed.


9





**Changes
      in Number of Employees**





As
      previously stated, our research, product development, and testing is primarily
      being conducted by Adaptive. We anticipate that we will hire additional
      full−time employees to assist our operations once the testing and development of
      our generators and engines is completed and they are ready for manufacture
      and
      sale.




**Impairment
      of Assets**




On
      August
      24, 2004 an Exclusive Purchase Agreement was executed whereby International
      Equity Partners SA, a Mexican corporation, acquired 100% of the issued and
      outstanding shares of stock of Transporter, Inc., a Nevada corporation, which
      has developed video conferencing software allowing the creation of virtual
      private networks that are PC based, have no need to use servers or special
      equipment, and operate on any broadband connection. The purchase price was
      $3,000,000, $100,000 of which was payable within 60 days of the date of the
      Exclusive Purchase Agreement with the balance payable in intervals over 24
      months. In addition, the former stockholders of Transporter, Inc., Craig Della
      Penna and Daniel H. Werner, were to be issued 1,000,000 shares of the common
      stock of our company. The certificates for the shares would bear the appropriate
      2-year legend, after the removal of which the shares are guaranteed to be worth
      at least $2.00 per share, and, if worth less, additional shares of stock will
      then be issued to make up the difference.




By
      Agreement also dated August 24, 2004, our company acquired through an assignment
      by International Equity Partners, SA all right, title, and interest in the
      aforesaid Exclusive Purchase Agreement in exchange for 25,000,000 shares of
      common stock of our company. International Equity Partners is an entity solely
      owned by Samuel J. Higgins, the majority shareholder and officer of the Company.
      The agreement was impaired and we exited the business when we filed suit against
      Craig Della Penna and Daniel Werner for breach of the agreement and fraud and
      served them with process on May 27, 2005. The lawsuit is pending in Federal
      District Court in the State of Oregon.




**Results
      of Operations for the Three and Nine Months Ended March 31, 2006 and
      2005**




We
      did
      not earn any revenue during the three or nine months ended March 31, 2006 or
      2005 and have not earned any revenue since our inception. We do not anticipate
      earning any revenue until we have completed testing and development of our
      engines and generators and commenced the manufacturing of these products for
      military and commercial use.





We
      incurred operating expenses in the amount of $2,830,789 for the three months
      ended March 31, 2006, compared to operating expenses of $134,418 for the three
      months ended March 31, 2005. We incurred operating expenses in the amount of
      $6,235,853 for the nine months ended March 31, 2006, compared to operating
      expenses of $1,161,767 for the nine months ended March 31,
      2005.


10





Our
      operating expenses for the three month period ended March 31, 2005 were
      primarily attributable to professional and consulting fees in the amount of
      $85,014. Our operating expenses for the nine month period ended March 31, 2005
      were primarily attributable to professional and consulting fees in the amount
      of
      $259,064 as well as impairment of goodwill and intangibles in the amount of
      $812,500.





Our
      operating expenses for the three month period ended March 31, 2006 were
      primarily attributable to research and development expenses in the amount of
      $813,577, professional and consulting fees in the amount of 806,647, and bad
      debt from our subscription receivables in the amount of 888,109. For a
      description of the category for bad debt from our subscription receivables,
      please see the section in this report titled, “Legal Proceeding” located in Part
      II, Item 1. Our operating expenses for the nine month period ended March 31,
      2006 were primarily attributable to research and development expenses in the
      amount of $3,052,788, professional and consulting fees in the amount of
      $1,465,526, and bad debt from our subscription receivables in the amount of
      888,109.





We
      have
      incurred a net loss of $2,846,655 for the three months ended March 31, 2006,
      compared to $136,454 for the three months ended March 31, 2005. We have incurred
      a net loss of $6,280,798 for the nine months ended March 31, 2006, compared
      to
      net loss of $ 1,167,154 for the nine months ended March 31, 2005.




**Liquidity
      and Capital Resources**




As
      of
      March 31, 2006, we had total current assets of $295,559 and total assets in
      the
      amount of $2,301,894. Our total current liabilities as of March 31, 2006 were
      $4,687,598. As a result, on March 31, 2006, we had working capital deficit
      of
      $4,392,039.





We
      have
      not earned any revenue since our inception. As a result, we need additional
      financing in order to sustain our business operations including development
      and
      testing of our engines and generators. On April 25, 2005, the Company entered
      into a Standby Equity Distribution Agreement with Alliance Capital Management.
      Under the agreement, the Company may issue and sell to Alliance Capital
      Management common stock for a total purchase price of up to $4.0 million. The
      amount of each advance is subject to an aggregate minimum advance of $400,000
      and payable on the 5th of each month commencing May 5, 2005 and continuing
      through February 5, 2006. We have received all $4,000,000.00 under this
      agreement in exchange for 1,680,098 shares of our common stock, which was issued
      as follows: 173,724 shares on 6/08/05; 200,000 shares on 6//08/05; 149,254
      shares on 7/28/05; 201,005 shares on 8/09/05; 189,983 shares on 10/20/05;
      286,792 shares on 11/16/05; 159,363 shares on 11/16/05; 254,777 shares on
      12/21/05; 65,200 shares on 2/14/06.





In
      addition, on January 27, 2006, we entered into a loan agreement with Twilight
      Bay, LLC (“Twilight”) to borrow $250,000.00 at 24% interest per annum,
      compounded monthly, and to sign the Demand Note dated January 27, 2006. Under
      this agreement, we have received $125,000 on January 27, 2006 and an additional
      $125,000 on January 30, 2006.


11





Finally,
      on March 26, 2006, we entered into a “Bond Finance Agreement” with Wiser
      Financial Services, of Dubai, United Arab Emirates, to provide us with up to
      $5
      million in bond financing, to be drawn down by us on demand, with repayment
      due
      March 26, 2008. Any amounts drawn down will bear interest at a rate of 10.25%
      per annum. The agreement further granted a warrant to Wiser Financial Services
      to purchase 500,000 shares of our common stock through March 26, 2009, at a
      price of $5.00 per share. To date, we have not drawn any cash under the Bond
      Finance Agreement. However, this source of financing is adequate to satisfy
      our
      cash needs for the next twelve months.




**Off
      Balance Sheet Arrangements**




As
      of
      March 31, 2006, there were no off balance sheet arrangements.




**Going
      Concern**




We
      incurred net losses for the nine and three months ended March 31, 2006 and
      2005
      and for the period December 30, 2002 to March 31, 2006. We are currently in
      the
      development stage, and there is no guarantee whether we will be able to generate
      enough revenue and/or raise capital to support current operations and generate
      anticipated sales. This raises substantial doubt about our ability to continue
      as a going concern. Management believes that our capital requirements will
      depend on many factors including the success of our product development efforts.
      The financial statements do not include any adjustments that might result from
      the outcome of these uncertainties.




**Recently
      Issued Accounting Pronouncements**




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments, an amendment of FASB Statements No. 133 and 140.” SFAS
      No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No.
      D1,
“Application of Statement 133 to Beneficial Interests in Securitized Financial
      Assets,” and permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation, clarifies which interest-only strips and principal-only strips
      are
      not subject to the requirements of SFAS No. 133, establishes a requirement
      to
      evaluate interests in securitized financial assets to identify interests that
      are freestanding derivatives or that are hybrid financial instruments that
      contain an embedded derivative requiring bifurcation, clarifies that
      concentrations of credit risk in the form of subordination are not embedded
      derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying
      special-purpose entity from holding a derivative financial instrument that
      pertains to a beneficial interest other than another derivative financial
      instrument. SFAS No. 155 is effective for all financial instruments acquired
      or
      issued after the beginning of the first fiscal year that begins after September
      15, 2006. We are currently evaluating the effect the adoption of SFAS No. 155
      will have on our financial position or results of operations.




In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets, an amendment of FASB Statement No. 140.” SFAS No. 156 requires an entity
      to recognize a servicing asset or liability each time it undertakes an
      obligation to service a financial asset by


12


entering
      into a servicing contract under a transfer of the servicer’s financial assets
      that meets the requirements for sale accounting, a transfer of the servicer’s
      financial assets to a qualified special-purpose entity in a guaranteed mortgage
      securitization in which the transferor retains all of the resulting securities
      and classifies them as either available-for-sale or trading securities in
      accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and
      Equity Securities” and an acquisition or assumption of an obligation to service
      a financial asset that does not relate to financial assets of the servicer
      or
      its consolidated affiliates. Additionally, SFAS No. 156 requires all separately
      recognized servicing assets and servicing liabilities to be initially measured
      at fair value, permits an entity to choose either the use of an amortization
      or
      fair value method for subsequent measurements, permits at initial adoption
      a
      one-time reclassification of available-for-sale securities to trading securities
      by entities with recognized servicing rights and requires separate presentation
      of servicing assets and liabilities subsequently measured at fair value and
      additional disclosures for all separately recognized servicing assets and
      liabilities. SFAS No. 156 is effective for transactions entered into after
      the
      beginning of the first fiscal year that begins after September 15, 2006. We
      are
      currently evaluating the effect the adoption of SFAS No. 156 will have on our
      financial position or results of operations.






13




**Item
      3.  Controls and
      Procedures**




We
      maintains disclosure controls and procedures designed to ensure that information
      required to be disclosed in reports filed under the Securities Exchange Act
      of
      1934, as amended, is recorded, processed, summarized, accumulated and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding required
      disclosure.





Based
      upon their evaluation as of the end of the period covered by this report, our
      Chief Executive Officer and Chief Financial Officer concluded that, our
      disclosure controls and procedures are not effective to ensure that information
      required to be included in our periodic SEC filings is recorded, processed,
      summarized, and reported within the time periods specified in the SEC rules
      and
      forms.





A
      material weakness is a significant deficiency or a combination of significant
      deficiencies that result in a more than remote likelihood than a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected.





Bagell,
      Josephs, Levine and Company, LLC, our independent registered public accounting
      firm, has advised our management and the board of directors that it had
      identified the following material weaknesses in our internal
      controls:





A
      material weakness exists as of March 31, 2006, with regard to insufficient
      personnel in the accounting and financial reporting function due to the size
      of
      our company which prevents the ability to employ sufficient resources to have
      adequate segregation of duties within the internal control system. This material
      weakness affects management's ability to effectively review and analyze elements
      of the financial statement closing process and prepare consolidated financial
      statements in accordance with U.S. GAAP.





In
      addition, a material weakness exists as of March 31, 2006, in controls over
      closing procedures due to a number of adjustments made at the end of the
      three-month period. There were deficiencies in the analysis and reconciliation
      of general ledger accounts which were indicative of a material weakness in
      controls over closing procedures, including the (a) recognition of expenses
      in
      appropriate periods, and (b) the accounting and reporting of capital
      transactions.





In
      order
      to remediate this material weakness in our internal control over financial
      reporting, management is in the process of designing and implementing and
      continuing to enhance controls to aid in the correct preparation, review,
      presentation and disclosures of our Consolidated Financial Statements. We are
      continuing to monitor, evaluate and test the operating effectiveness of these
      controls.





Other
      than indicated above, there were no changes in our internal control over
      financial reporting that occurred during the last fiscal quarter that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.


14




**Limitations
      on the Effectiveness of Controls**




Because
      of its inherent limitations, internal control over financial reporting will
      not
      provide absolute assurance that it will prevent or detect all errors and all
      fraud. A control system, no matter how well designed and operated, can provide
      only reasonable, not absolute, assurance that the control system’s objectives
      will be met. The design of a control system must reflect the fact that there
      are
      resource constraints, and the benefits of controls must be considered relative
      to their costs. These inherent limitations include the realities that judgments
      in decision-making can be faulty, and that breakdowns can occur because of
      simple error or mistake. The design of any system of controls is based in part
      upon certain assumptions about the likelihood of future events, and there can
      be
      no assurance that any design will succeed in achieving its stated goals under
      all potential future conditions. Over time, controls may need to change because
      of changes in conditions or deterioration in the degree of compliance with
      associated policies or procedures.








15




**PART
      II - OTHER INFORMATION**




**Item
      1.    Legal
      Proceedings**




Other
      than as set forth below, there have been no material developments in the ongoing
      legal proceedings previously reported in which we are a party. A complete
      discussion of our ongoing legal proceedings is discussed in our annual report
      on
      Form 10-KSB for the year ended June 30, 2005.




*Axial
      Vector Engine Corporation vs. Patricia Wilks and Dennis
      Palmer*




Axial
      Vector Engine Corporation vs. Patricia Wilks and Dennis Palmer was filed in
      United States District Court, Central District of California, Case No. CV04-8790
      (CBM) JTLx. This is an action brought by Axial Vector Engine against Wilks
      and
      Palmer to obtain a stoppage of their use of our name of Dyna Cam, that we
      purchased from them, and to shut down their website, along with other relief
      from them. The litigation was still pending as of December 31, 2005. Discovery
      is proceeding and depositions have started. We were granted a preliminary
      injunction shutting down the Defendant’s website, and ordering them to stop
      using the name of Dyna Cam. This matter is being handled by Cathy Pham, Wellman
      & Warren, 24411 Ridge Route, Suite 200, Laguna Hills, CA 92653, telephone
      949-580-3737, fax 949-580-3738.





An
      agreed
      upon settlement proposal has been circulated to the Defendants that would
      maintain the permanent injunction and a prohibition on the Defendants continuing
      to use the name Dyna Cam. It expected to be signed by both Parties and sent
      to
      the Court within the next several days




*Richard
      Powers, Raymond B Wedel, Jr. and Alan Cohen vs. Trans Max Technologies, Inc.,
      Aero Marine Engine, Inc., Tactronics, Permatune Electronics, Inc., and Bogner
      Industries, Inc.*




Richard
      Powers, Raymond B Wedel, Jr. and Alan Cohen vs. Trans Max Technologies, Inc.,
      Aero Marine Engine, Inc., Tactronics, Permatune Electronics, Inc., and Bogner
      Industries, Inc. was filed in the Supreme Court of the State of New York, Index
      No. 05-10880. This action was filed by three former alleged employees seeking
      unpaid wages and future wages. This case is currently in discovery mode, where
      Axial Vector is seeking proof from the Plaintiffs as to their employment and
      any
      employment agreements. As of December 31, 2005, this action is still pending
      in
      the New York Superior Court. This action has been stayed by the bankruptcy
      proceeding of a co-defendant. This matter is being handled by Michael T.
      Colvecchio, Lewis Johs Avallone Aviles & Kaufman, 425 Broad Hollow Road,
      Melville, NY 11747, telephone 631-755-0101, fax 631-755-0117.




*Aero
      Marine Engine, Inc. vs. Transporter, Inc. Craig Della Penna and Daniel H.
      Warner*




Aero
      Marine Engine, Inc. vs. Transporter, Inc. Craig Della Penna and Daniel H. Warner
      was filed in United States District Court, District of Nevada, Case No.
      CV-S-05-0664-RCJ-LRL. This action was filed by Axial Vector Engine Corporation
      seeking to rescind the Agreement with


16


Transporter,
      Inc. and seeking damages. As of December 31, 2005, the action filed in the
      District Court of Las Vegas has had a change of venue to Federal District Court
      in Portland, OR. The Defendants have not yet filed an Answer. Pleading motions
      are pending by the Defendant, as are motions by the Plaintiff for sanctions
      against the Defendant. Discovery has commenced. This matter is being handled
      by
      John J. Laxague (Joe) McDonald Carano Wilson, 2300 West Sahara Avenue, Suite
      1000, Las Vegas, NV 89102, telephone 702-873-4100, fax
      702-873-9966.




*Focus
      Partners vs. Axial Vector Engine Corporations*




Focus
      Partners vs. Axial Vector Engine Corporations was filed on May 2, 2005 in the
      Supreme Court of the State of New York, County of New York, Index No. 601897/05.
      This matter was brought by a trade creditor, pursuant to an agreement that
      Aero
      Marine Engine, Inc. had entered into. This matter was settled through a third
      party purchasing the stock from Focus Partners for the sum of $45,000.00,
      resulting in a dismissal of the action and no monies paid nor further stock
      issued by Axial Vector to the Plaintiff. This matter was handled by Michael
      T.
      Colvecchio, Lewis Johs Avallone Aviles & Kaufman, 425 Broad Hollow Road,
      Melville, NY 11747, telephone 631-755-0101, fax 631-755-0117.




*In
      the High Court of New Zealand, Auckland Registry, Matter of Section 37AC of
      the
      Securities Act 1978 in the Matter of Carol Ann Fagan and Robin Christopher
      Fagan
      and Charles Hamish McDonald; Robert James Franklin and Carolyn Jane Franklin
      and
      Cornwall Trustees Limited; Kevin Douglas Franklin and Janene Margaret Franklin
      and Robert James Franklin; Probitas Limited; Robin John Briggs and Rosemary
      Patricia Briggs; Graham John Briggs and Christopher James Briggs; Paul Younger
      and Jean Engebrikt Anne Younger; and Michael Paul Younger and Cindy May Younger
      and KCA Trustees Limited.*




During
      the current reporting period, we issued shares of our common stock to private
      lenders in satisfaction of debts misrepresented as those of our company. It
      was
      discovered that in 2005 specific lenders had lent sums of money to an individual
      who misrepresented himself as having the authority of our company. The
      individual borrowed funds and provided lenders a note promising repayment in
      shares of our common stock if the borrowings were not repaid within a specific
      period. Eight applicants filed in the High Court of New Zealand Auckland
      Registry, CIV-2005-404-7394. On Monday, March 6, 2006, Justice Frater ordered
      us
      to provide the allotments to the eight applicants as relief under s 37AC(1)(a)
      and (b) of the Securities Act 1978 in respect of the application of s 37 of
      the
      Act.





On
      February 6 2006, International Equity Partners Stock partially resolved the
      issue of the New Zealand private lenders and issued its own stock as follows:
      Christopher James Briggs - 7,100 shares; William Ross Collier and Susan Louise
      Collier - 5,680 shares; Robert James Franklin, Carolyn Jane Franklin, and
      Cornwall Trustees, Ltd. as trustees of the RJ and CJ Franklin Family Trust
      -
      35,500 shares; R.J. and R.P. Briggs - 28,400 shares; David and Wendy Fagan
      -
      85,200 shares; Daryl Brian Klein - 4,260 shares; Alternate Investment Methods,
      Ltd. - 28,400 shares; Andrew Jack Thomas - 14,200 shares; and David James Shaw
      -
      2,000 shares.


17





On
      February 15, 2006, International Equity Partners Stock issued its own stock
      to
      the remaining New Zealand private lenders as follows: Anthony James Gibb -
      2,000
      shares; Arvin James Harris - 4,000 shares; Michelle Anne King - 1,420 shares;
      Mark Blakeway - 1,420 shares; Owen Saunders - 7,100 shares; and Neil and Joanne
      Wackrow - 4,260 shares; and 241,400 shares for shares issued to Michael and
      Cindy Younger, and Paul and Jean Younger in June 2005.





We
      issued
      a total of 459,260 shares of common stock to International Equity Partners
      in
      consideration for the release of claims against our company brought by these
      private lenders in New Zealand and an assignment of any claims we may wish
      to
      assert and a result of the private loan transactions.




**Item
      2.     UnregisteredSales of Equity
      Securities and Use of Proceeds**




The
      information set forth below relates to our issuances of securities without
      registration under the Securities Act during the reporting period which were
      not
      previously included in a Current Report on Form 8-K.





On
      January 3, 2006, we entered into an Agreement with The Research Works, LLC
      (“RW”). Under the Agreement, RW agreed to provide certain equity research
      services including the preparation of an equity research report. The term of
      the
      agreement was one year in duration commencing from the date of the first RW
      equity research report on our company. We agreed to pay RW a fee of 35,000
      shares of our common stock. However, these services were never rendered; thus,
      the shares were cancelled on March 30, 2006.





On
      January 10, 2006, our company and Premier Funding and Financial Services
      (“Premier”) entered into a Mutual Release Agreement. The Agreement releases each
      party from all obligations under an Agreement dated March 28, 2005. We agreed
      to
      issue 25,000 shares of common stock, 12,500 warrants at $1.75 per share, 12,500
      warrants at $2.00 per share, 12,500 warrants at $2.25 per share, and 12,500
      warrants at $2.50 per share.





On
      January 17, 2006, we issued 5,000 shares of common stock to Richard M. Wexler
      of
      Wexler Kronen Capital Associates for consulting services rendered in an
      agreement dated October 20, 2005.





On
      January 25, 2006, we issued 10,000 shares of common stock to Mammoth Corporation
      to secure performance of the Second Rider to the Security Agreement dated
      December 5, 2005 involving our company, International Equity Partners and
      Mammoth Corporation.





On
      January 26, 2006, we issued 10,000 shares of common stock to Oyvin Haugan
      pursuant to his signing bonus and to satisfy conditions of his Employment
      Agreement dated October 23, 2005.


18





On
      February 3, 2006, we issued 459,260 shares of common stock to International
      Equity Partners for consideration for the assignment of claims against Robert
      Fyn and the release of claims against our company brought by certain private
      lenders in New Zealand. International Equity Partners issued out of its own
      stock to satisfy a New Zealand court order to compensate these private lenders.





On
      February 13, 2006, we issued 65,200 shares of common stock to Alliance Capital
      Management for the February 2006 for the final funding payment under the
      Financing Agreement to satisfy the contingency of the Adaptive Propulsion
      Systems agreement. Related to Financing Agreement, Alliance Capital Management
      received, as additional consideration, one (1) warrant to purchase two million
      shares of common stock at a fixed rate of $4.00 per share for a period of two
      years.





On
      February 15, 2006, we issued 50,000 shares of common stock to Frank Gerardi
      as
      Trustee of Univest Management, Inc. in a private placement transaction for
      $100,000 in consideration.





On
      March
      14, 2006, we agreed to accept the proposal of Samuel J. Higgins to convert
      $975,000.00 of the debt owed to International Equity Partners by our company
      for
      319,672 shares of restricted common stock at the closing market price on March
      14, 2006 of $3.05 per share. Mr. Higgins is an officer and director of our
      Company and wholly owns International Equity Partners.





On
      March
      26, 2006, we granted a warrant to Wiser Financial Services to purchase 500,000
      shares of our common stock through March 26, 2009, at a price of $5.00 per
      share. The warrant is non−dilutable and will be adjusted to reflect any increase
      in the number of our issued and outstanding shares of common stock. The warrant
      also entitles Wiser Financial Services to participate in any secondary
      registration of our common stock upon exercise.





On
      March
      28, 2006, the Agreement between The Research Works, LLC and our Company was
      cancelled due to non-performance of work agreed to in the agreement. The
      Research Works returned the original stock certificate issuing 35,000 shares
      of
      common stock as payment. The agreement and the stock certificate issued to
      The
      Research Works, LLC was cancelled.




**Item
      3.     Defaultsupon Senior
      Securities**




None




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




No
      matters have been submitted to our security holders for a vote, through the
      solicitation of proxies or otherwise, during the quarterly period ended March
      31, 2006.




**Item
      5.     OtherInformation**




None.




19




**Item
      6.      Exhibits**




**Exhibit
                Number**
            **Description
                of Exhibit**31.1
            Certification
                of Chief Executive Officer pursuant to 18
                U.S.C. Section 1350, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer pursuant to 18
                U.S.C. Section 1350, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer and Chief
                Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002








20


**SIGNATURES**





In
      accordance with the requirements of the Securities and Exchange Act of 1934,
      the
      Registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.


**Axial
                  Vector Engine Corporation**Date:
              May
                  22, 2006By:
                  /s/ Raymond
                  BrouzesRaymond BrouzesTitle:    Chief
                  Executive Officer, Chief Financial Officer,
                and
                  Director
 
   21