**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**FORM      10-QSB**

| [X]                      | Quarterly                Report pursuant to Section 13 or 15(d) of the Securities Exchange                Act of                1934 |
|--------------------------|--------------------------------------------------------------------------------------------------------------------------------------|
|                     |                                                                                                                                 |
|                     | For                the quarterly period ended: **December                31, 2006**                                                  |
|                     |                                                                                                                                 |
| [                 ] | Transition                Report pursuant to 13 or 15(d) of the Securities Exchange Act of                1934                       |
|                     |                                                                                                                                 |
|                     | For                the transition period __________                to __________                                           |
|                     |                                                                                                                                 |
|                     | Commission                File Number: **000-49698**                                                                            |

**Axial      Vector Engine Corporation**

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

| **One                World Trade Center****121                S.W. Salmon Street, 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) |

**[X]      Yes [  ] No**

**[       ] Yes [X] No**

**36,322,596      common shares as of January 23, 2007.**

**Yes      [  ] No [X]**

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***Table          of Contents***

|                                                       | **TABLE                OF CONTENTS**                                                            |   Page |
|------------------------------------------------------------|-------------------------------------------------------------------------------------------------|------------------|
| **PART                I - FINANCIAL INFORMATION**     |
| Item                1.                                     | Financial                Statements                                                             |  3     |
| Item                2.                                     | Plan                of Operation                                                           | 4                |
| Item                3.                                     | Controls                and Procedures                                                          | 19               |
|  **PART                II - OTHER INFORMATION**  |
| Item                1.                                     | Legal                Proceedings                                                           | 21          |
| Item                2.                                     | Unregistered                Sales of Equity Securities and Use of                Proceeds  | 21          |
| Item                3.                                     | Defaults                Upon Senior Securities                                             | 21               |
| Item                4.                                     | Submission                of Matters to a Vote of Security                Holders          |  22         |
| Item                5.                                     | Other                Information                                                           |  22         |
| Item                6.                                     | Exhibits                                                                                        |  22         |

----

***Table          of Contents***

**PART      I - FINANCIAL INFORMATION**

**Item      1.** **     Financial      Statements**

| Our                unaudited consolidated                financial statements included in this Form 10-QSB are as                follows: |
|-------------------------------------------------------------------------------------------------------------------------------------------|
|  F-1                                                                                                                                 |  Consolidated                Balance Sheets as of December 31, 2006 and December 31, 2005 (Restated)                (Unaudited); |
|  F-2                                                                                                                                 |  Consolidated                Statements                of Operations for the three and six months ended December 31, 2006                and                2005 (Restated) with Cumulative Totals Since Inception (Unaudited); |
|  F-3                                                                                                                                 |  Consolidated                Statements of Changes in Stockholders’ Equity for the three and six months                ended December 31, 2006 (Restated) (Unaudited); |
|  F-4                                                                                                                                 |  Consolidated                Statements of Cash Flows for the three and six months ended December                31,                2006 and 2005 (Restated) with Cumulative Totals Since Inception                (Unaudited); |
|  F-5                                                                                                                                 |  Notes                to Consolidated Financial Statements December 31, 2006 and                2005(Unaudited). |

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***Table          of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY **

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

**(A        DEVELOPMENT STAGE COMPANY) **

**CONSOLIDATED        BALANCE SHEETS **

**DECEMBER        31, 2006 AND 2005 (Restated)**

**(Unaudited)        **

|                                                                               |   |                    **December                  31****,                  2006** |        |                    **December                  31****,                  2005 (Restated)****Note                  2** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|-------------|---------------------------------------------------------------------------------------------------------------------------|--------|
| **ASSETS**                                                                         |   |                                                                           |        |                                                                                                                 |   |
| Current                  Assets:                                                   |   |                                                                                |        |                                                                                                                      |   |   |   |
| Cash                  and cash equivalents                                         |   | $                                                                                   | 27,189      |                                                                                                                      | $      | 44,526 |   |
| Deposit                                                                            |   |                                                                                | 22,670      |                                                                                                                      |   | 22,670 |   |
| Due                  from employee                                                 |   |                                                                                | 1,000       |                                                                                                                      |   | - |   |
| Prepaid                  expenses                                                  |   |                                                                                | 15,000      |                                                                                                                      |   | 27,330 |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
| Total                  Current Assets                                              |   |                                                                                | 65,859      |                                                                                                                      |   | 94,526 |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
| Property                  and equipment, net (Note 5)                              |   |                                                                                | 148,880     |                                                                                                                      |   | 37,079 |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
|                    Due                  from shareholder                      |   |                                                                                | 10,000      |                                                                                                                      |   | - |   |
|                                                                               |   |                                                                                |             |                                                                                                                      |   |  |   |
| Intangible                  assets- patents, net                                   |   |                                                                                | 243,838     |                                                                                                                      |   | 243,324 |   |
|                                                                               |   |                                                                                |             |                                                                                                                      |   |  |   |
| **TOTAL                  ASSETS**                                                  |   | $                                                                                   | 468,577     |                                                                                                                      | $      | 374,929 |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |  |   |
| **LIABILITIES                  AND STOCKHOLDERS' DEFICIT**                         |   |                                                                                |        |                                                                                                                      |   |   |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
| **LIABILITIES**                                                                    |   |                                                                                |        |                                                                                                                      |   |   |   |
| Current                  Liabilities:                                              |   |                                                                                |        |                                                                                                                      |   |   |   |
| Accounts                  payable and accrued expenses                             |   | $                                                                                   | 952,947     |                                                                                                                      | $      | 655,293 |   |
| Payroll                  tax liabilities                                           |   |                                                                                | 39,079      |                                                                                                                      |   | 11,823 |   |
| Current                  portion of note payable (Note 6)                          |   |                                                                                | 1,253,795   |                                                                                                                      |   | 995,000 |   |
| Contingent                  share-based payment (Note 7)                           |   |                                                                                | -           |                                                                                                                      |   | - |   |
| Liability                  for stock to be issued (Note 8)                         |   |                                                                                | 340,327     |                                                                                                                      |   | 710,361 |   |
| Share-based                  fee liability- warrants (Note 9)                      |   |                                                                                | 2,084,884   |                                                                                                                      |   | 5,132,486 |   |
| Share-based                  fee liability- options (Note 10)                      |   |                                                                                | 2,856,220   |                                                                                                                      |   | 2,710,370 |   |
| Share-based                  compensation liability- options (Note 11)             |   |                                                                                | 5,615,400   |                                                                                                                      |   | 6,698,480 |   |
| Accrued                  interest - shareholder loan (Note 13)                     |   |                                                                                | 89,242      |                                                                                                                      |   | 53,699 |   |
| Due                  to related company (Note 12)                                  |   |                                                                                | 301,339     |                                                                                                                      |   | 301,339 |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
| Total                  Current Liabilities                                         |   |                                                                                | 13,533,233  |                                                                                                                      |   | 17,268,851 |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
| Note                  Payable (Note 14)                                            |   |                                                                                | 47,604      |                                                                                                                      |   | - |   |
| Due                  to shareholder (Note 13)                                      |   |                                                                                | 948,814     |                                                                                                                      |   | 1,714,222 |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
|                      Total Long - Term Liabilities                  |   |                                                                                | 996,418     |                                                                                                                      |   | 1,714,222 |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
| **Total                  Liabilities**                                             |   |                                                                                | 14,529,651  |                                                                                                                      |   | 18,983,073 |   |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
| **STOCKHOLDERS'                  DEFICIT**                                         |   |                                                                                |        |                                                                                                                      |   |   |   |
| Preferred                  stock, $.001 par value; 100,000,000 shares authorized   |   |                                                                                |        |                                                                                                                      |   |   |   |
| no                  shares issued and outstanding                                  |   |                                                                                | -           |                                                                                                                      |   | - |   |
| Common                  stock, $.001 par value; 100,000,000 shares authorized      |   |                                                                                |        |                                                                                                                      |   |   |   |
| 36,322,596                  and 33,713,166 shares issued and outstanding (Note 15) |   |                                                                                | 36,323      |                                                                                                                      |   | 33,713 |   |
| Additional                  paid-in capital                                        |   |                                                                                | 23,522,177  |                                                                                                                      |   | 17,011,211 |   |
| Prepaid                  share-based fees (Note 16)                                |   |                                                                                | (2,069,553  | )                                                                                                                         |   | (3,019,138 | ) |
| Prepaid                  share-based compensation (Note 16)                        |   |                                                                                | (189,875    | )                                                                                                                         |   | (840,875 | ) |
| Beneficial                  reduction of share-based liability (Note 17)           |   |                                                                                | 13,528,016  |                                                                                                                      |   | 4,898,109 |   |
| Deficit                  accumulated during the development stage                  |   |                                                                                | (48,888,162 | )                                                                                                                         |   | (36,691,164 | ) |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
| **Total                  Stockholders' Deficit**                                   |   |                                                                                | (14,061,074 | )                                                                                                                         |   | (18,608,144 | ) |
|                                                                               |   |                                                                                |        |                                                                                                                      |   |   |   |
| **TOTAL                  LIABILITIES AND STOCKHOLDERS' DEFICIT**                   |   | $                                                                                   | 468,577     |                                                                                                                      | $      | 374,929 |   |

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***Table          of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**CONSOLIDATED        STATEMENTS OF OPERATIONS **

**FOR        THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2006 AND 2005 (Restated)**

**(WITH        CUMULATIVE TOTALS SINCE INCEPTION)**

**(Unaudited)        **

|                                                                     | For                  the Three Months Ended December 31, 2006 |        | For                  the Six Months Ended December 31, 2006 |   | For                  the Three Months Ended December 31, 2005 | For                  the Six Months Ended December 31, 2005 |   |                    Cumulative                  Totals December                  30, 2002 through December                  31,                  2006** ** |
|--------------------------------------------------------------------------|---------------------------------------------------------------|-------------|-------------------------------------------------------------|--------|---------------------------------------------------------------|-------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                     |                                                          |        |                                                        |   |                                                     |                                                        |   |                                                                                                                                                           |                      |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **SALES**                                                           | $                                                             | -           |                                                        | $      | -                                                             |                                                        | $      | -                                                                                                                                                                   | $ | - |   | $ | - |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **COST                  OF SALES**                                       |                                                          | -           |                                                        |   | -                                                             |                                                        |   | -                                                                                                                                                                   |   | - |   |   | - |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **GROSS                  PROFIT**                                        |                                                          | -           |                                                        |   | -                                                             |                                                        |   | -                                                                                                                                                                   |   | - |   |   | - |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **OPERATING                  EXPENSES**                                  |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| Accounting                  and auditing                                 |                                                          | 45,763      |                                                        |   | 222,638                                                       |                                                        |   | 4,942                                                                                                                                                               |   | 18,378 |   |   | 320,541 |
| Administration                                                           |                                                          | (103)       |                                                        |   | 2,684                                                         |                                                        |   | 296                                                                                                                                                                 |   | 2,985 |   |   | 153,201 |
| Advertising,                  promotion, consulting and travel (Note 18) |                                                          | 324,624     |                                                        |   | 801,358                                                       |                                                        |   | 1,051,806                                                                                                                                                           |   | 1,851,807 |   |   | 7,751,739 |
| Beneficial                  share-based fee (Note 19)                    |                                                          | 139,272     |                                                        |   | 278,544                                                       |                                                        |   | (4,548,728)                                                                                                                                                         |   | 278,544 |   |   | 2,288,032 |
| Board                  compensation (Note 20)                            |                                                          |        |                                                        |   | 58,590                                                        |                                                        |   | -                                                                                                                                                                   |   | 142,290 |   |   | 1,330,830 |
| Depreciation                  (Note 5)                                   |                                                          | 4,616       |                                                        |   | 6,096                                                         |                                                        |   | -                                                                                                                                                                   |   | 1,552 |   |   | 52,710 |
| Financing                  cost - standby equity agreement (Note 2 )     |                                                          | -           |                                                        |   | -                                                             |                                                        |   | -                                                                                                                                                                   |   | - |   |   | 7,320,000 |
| Legal                  fees (Note 21)                                    |                                                          | 357,753     |                                                        |   | 588,099                                                       |                                                        |   | 191,877                                                                                                                                                             |   | 782,105 |   |   | 6,010,829 |
| Insurance                                                                |                                                          | 16,979      |                                                        |   | 36,223                                                        |                                                        |   | 9,873                                                                                                                                                               |   | 12,001 |   |   | 83,089 |
| Interest                                                                 |                                                          | 15,399      |                                                        |   | 16,201                                                        |                                                        |   | -                                                                                                                                                                   |   | 777,622 |   |   | 150,092 |
| Office                  expense                                          |                                                          | 47,950      |                                                        |   | 69,749                                                        |                                                        |   | 56,329                                                                                                                                                              |   | 58,577 |   |   | 279,758 |
| Officers’                  compensation (Note 22)                  |                                                          | 202,750     |                                                        |   | 618,000                                                       |                                                        |   | 234,750                                                                                                                                                             |   | 1,437,356 |   |   | 11,203,363 |
| Payroll                  taxes                                           |                                                          | 5,973       |                                                        |   | 36,246                                                        |                                                        |   | 11,344                                                                                                                                                              |   | 18,230 |   |   | 81,288 |
| Rent                                                                     |                                                          | 5,425       |                                                        |   | 11,954                                                        |                                                        |   | 6,466                                                                                                                                                               |   | 7,465 |   |   | 92,699 |
| Research                  and development (Note 23)                      |                                                          | 125,442     |                                                        |   | 238,395                                                       |                                                        |   | 624,000                                                                                                                                                             |   | 1,239,851 |   |   | 5,187,964 |
| Salaries                  and wages-administration                       |                                                          | 26,471      |                                                        |   | 81,223                                                        |                                                        |   | 7,567                                                                                                                                                               |   | 64,567 |   |   | 511,811 |
| Salaries                  and wages-engineering                          |                                                          | 25,000      |                                                        |   | 50,000                                                        |                                                        |   | 25,812                                                                                                                                                              |   | 25,812 |   |   | 166,712 |
| Impairment                  of intangible asset                          |                                                          | -           |                                                        |   | -                                                             |                                                        |   | -                                                                                                                                                                   |   | - |   |   | 3,701,347 |
| **Total                  Operating Expenses**                            |                                                          | 1,343,314   |                                                        |   | 3,116,000                                                     |                                                        |   | (2,323,666)                                                                                                                                                         |   | 6,719,142 |   |   | 46,686,005 |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **NET                  LOSS BEFORE OTHER INCOME (EXPENSE)**              |                                                          | (1,343,314) |                                                        |   | (3,116,000)                                                   |                                                        |   | 2,323,666                                                                                                                                                           |   | (6,719,142) |   |   | (46,686,005) |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **OTHER                  INCOME (EXPENSE)**                              |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| Bank                  interest                                           |                                                          | -           |                                                        |   | -                                                             |                                                        |   | 5                                                                                                                                                                   |   | 71 |   |   | 71 |
| Write                  off of worthless inventory                        |                                                          | -           |                                                        |   | -                                                             |                                                        |   | -                                                                                                                                                                   |   | - |   |   | (266,519) |
| Refunds                                                                  |                                                          | 3,497       |                                                        |   | (24,903)                                                      |                                                        |   | 2,587                                                                                                                                                               |   | 2,587 |   |   | (22,316) |
| Lawsuit                  settlements                                     |                                                          | -           |                                                        |   | -                                                             |                                                        |   | -                                                                                                                                                                   |   | - |   |   | (1,805,429) |
| Impairment                  of property and equipment                    |                                                          | -           |                                                        |   | -                                                             |                                                        |   | -                                                                                                                                                                   |   | - |   |   | (107,964) |
| **Total                  Other Income (Expense)**                        |                                                          | 3,497       |                                                        |   | (24,903)                                                      |                                                        |   | 2,592                                                                                                                                                               |   | 2,658 |   |   | (2,202,157) |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **NET                  LOSS BEFORE PROVISION FOR INCOME TAXES**          |                                                          | (1,339,817) |                                                        |   | (3,140,903)                                                   |                                                        |   | 2,326,258                                                                                                                                                           |   | (6,716,484) |   |   | (48,888,162) |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| Provision                  for income taxes (Note 24)                    |                                                          | -           |                                                        |   | -                                                             |                                                        |   | -                                                                                                                                                                   |   | - |   |   | - |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **NET                  LOSS APPLICABLE TO COMMON SHARES**                | $                                                             | (1,339,817) |                                                        | $      | (3,140,903)                                                   |                                                        | $      | 2,326,258                                                                                                                                                           | $ | (6,716,484) |   | $ | (48,888,162) |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **NET                  LOSS PER SHARE -BASIC (Note 4)**                  | $                                                             | (.04)       |                                                        | $      | (.09)                                                         |                                                        | $      | (.07)                                                                                                                                                               | $ | (.19) |   |   |   |
|                                                                     |                                                          |        |                                                        |   |                                                          |                                                        |   |                                                                                                                                                                |   |   |   |   |   |
| **NET                  LOSS PER FULLY DILUTED SHARES (Note 4 )**         | $                                                             | (.03)       |                                                        | $      | (.07)                                                         |                                                        | $      | (.06)                                                                                                                                                               | $ | (.16) |   |   |   |

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***Table          of Contents***

**AXIAL          VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A          DEVELOPMENT STAGE COMPANY) **

**CONSOLIDATED          STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY **

**FOR          THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2006 (Restated)**

**(Unaudited)**

| **Description**                                                             |   |                        **Prepaid                      Shares &BeneficialReductionCommon** |       |                        **Additional****Paid-In                      Capital** |   |                        **Deficit****Accumulated****During                      the****Development****Stage** |   |                        **Total                      Stockholders’ Equity** |       |
|-----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|------------|
|                                                                        |   |                                                                                          |       |                                                                          |   |                                                                                                         |   |                                                                             |       |                          |   |
|                                                                        |   |                                                                                          |       |                                                                          |   |                                                                                                         |   |                                                                             |       |                        |   |
| Balance,                      June 30, 2006-restated (Note 2)               |   | $                                                                                                  | 9,428,959  |                                                                               | $      | 35,004                                                                                                            |   | $                                                                                     | 20,988,208 |   | $ | (45,747,259 | ) | $ | (15,295,088 | ) |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Issuance                      of shares for services                        |   |                                                                                               |       |                                                                               |   | 73                                                                                                                |   |                                                                                  | 566,814    |   |   |   |   |   | 566,887 |   |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Reduction                      in prepaid shares                            |   |                                                                                               | 400,148    |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   | 400,148 |   |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Beneficial                      reduction in option value outstanding       |   |                                                                                               | 1,039,334  |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   | 1,039,334 |   |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Issuance                      of stock for cash                             |   |                                                                                               | -          |                                                                               |   | 1,017                                                                                                             |   |                                                                                  | 1,674,883  |   |   |   |   |   | 1,675,900 |   |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Net                      loss for the three months ended September 30, 2006 |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   | (1,801,086 | ) |   | (1,801,086 | ) |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Balance,                      September 30, 2006                            |   | $                                                                                                  | 10,868,441 |                                                                               | $      | 36,094                                                                                                            |   | $                                                                                     | 23,229,905 |   | $ | (47,548,345 | ) | $ | (13,413,905 | ) |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Issuance                      of stock for cash                             |   |                                                                                               | -          |                                                                               |   | 179                                                                                                               |   |                                                                                  | 192,322    |   |   |   |   |   | 192,500 |   |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Issuance                      of shares for services                        |   |                                                                                               |       |                                                                               |   | 50                                                                                                                |   |                                                                                  | 99,950     |   |   |   |   |   | 100,000 |   |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Reduction                      in prepaid shares                            |   |                                                                                               | 400,148    |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   | 400,148 |   |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Net                      loss for the three months ended December 31, 2006  |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   | (1,339,817 | ) |   | (1,339,817 | ) |
|                                                                        |   |                                                                                               |       |                                                                               |   |                                                                                                              |   |                                                                                  |       |   |   |   |   |   |   |   |
| Balance,                      December 31, 2006                             |   | $                                                                                                  | 11,268,589 |                                                                               | $      | 36,323                                                                                                            |   | $                                                                                     | 23,522,177 |   | $ | (48,888,162 | ) | $ | (14,061,074 | ) |

----

***Table          of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**CONSOLIDATED        STATEMENTS OF CASH FLOW **

**FOR        THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2006 AND 2005 (Restated)**

**(WITH        CUMULATIVE TOTALS SINCE INCEPTION) **

**(Unaudited)**

|                                                                             | **Three                  Months Ended December 31, 2006**  |                 |  **Six                  Months Ended December 31, 2006**  |                    **Three                  Months Ended December 31, 2005****(Restated)** |                          |  **Six                  Months Ended December 31, 2005****(Restated)****See                  Note 2** |                 |                    **Cumulative                  Totals****December                  30, 2002 through**                   **December                  31****,                  2006** |
|----------------------------------------------------------------------------------|-----------------------------------------------------------------|----------------------|---------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|-------------------------------|------------------------------------------------------------------------------------------------------------|----------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                             |                                                       |                 |                                                           |                                                                                       |                          |                                                                                                  |                 |                                                                                                                                                                                       |
| **CASH                  FLOWS FROM OPERATING ACTIVITIES**                        |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| Net                  (loss)                                                      | $                                                               | (1,339,817)          |                                                                | $                                                                                               | (3,140,903)                   | $                                                                                                          | 2,326,258            |                                                                                                                                                                                            | $ | (                  6,716,484) |   | $ | (48,888,162) |
| Adjustments                  to reconcile net loss to net cash                   |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| used                  in operating activities:                                   |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| Common                  stock issued for services                                |                                                            | 490,148              |                                                                |                                                                                            | 703,108                       |                                                                                                       | (45,544)             |                                                                                                                                                                                            |   | 5,896,694 |   |   | 9,653,327 |
| Options                  issued for services                                     |                                                            | -                    |                                                                |                                                                                            | 119,500                       |                                                                                                       | (848,757)            |                                                                                                                                                                                            |   | (470,337) |   |   | 4,350,300 |
| Options                  issued as compensation                                  |                                                            | -                    |                                                                |                                                                                            | -                             |                                                                                                       | (2,064,300)          |                                                                                                                                                                                            |   | (845,010) |   |   | 7,847,510 |
| Warrants                  issued for services                                    |                                                            | -                    |                                                                |                                                                                            | -                             |                                                                                                       | (1,371,764)          |                                                                                                                                                                                            |   | (575,264) |   |   | 6,024,218 |
| Depreciation                  and amortization                                   |                                                            | 4,616                |                                                                |                                                                                            | 6,096                         |                                                                                                       | 2,082                |                                                                                                                                                                                            |   | 3,634 |   |   | 52,710 |
| Shares                  issued for lawsuit settlements                           |                                                            | -                    |                                                                |                                                                                            | -                             |                                                                                                       | -                    |                                                                                                                                                                                            |   | - |   |   | 1,805,428 |
| Impairment                  of property and equipment                            |                                                            | 0                  - |                                                                |                                                                                            | 0                  -          |                                                                                                       | 0                  - |                                                                                                                                                                                            |   | 0 |   |   | 107,964 |
| Impairment                  of goodwill and intangibles                          |                                                            | --                   |                                                                |                                                                                            | 0-                            |                                                                                                       | 0-                   |                                                                                                                                                                                            |   | - |   |   | 3,701,347 |
| Write-off                  of inventory                                          |                                                            | -                    |                                                                |                                                                                            | -                             |                                                                                                       | -                    |                                                                                                                                                                                            |   | 0- |   |   | 266,519 |
| **Changes                  in assets and liabilities**                           |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| (Increase)                  in prepaid expenses and other current assets         |                                                            | 52,000               |                                                                |                                                                                            | 24,000                        |                                                                                                       | (5,000)              |                                                                                                                                                                                            |   | (5,000) |   |   | (48,670) |
| Increase                  in accounts payable and accrued expenses               |                                                            | 382,173              |                                                                |                                                                                            | 1,096,932                     |                                                                                                       | 573,776              |                                                                                                                                                                                            |   | 589,397 |   |   | 1,081,269 |
|                                                                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| Total                  adjustments                                               |                                                            | 928,937              |                                                                |                                                                                            | 1,949,636                     |                                                                                                       | (3,759,507)          |                                                                                                                                                                                            |   | 4,594,114 |   |   | 34,841,922 |
|                                                                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **Net                  cash (used in) operating activities**                     |                                                            | (410,880)            |                                                                |                                                                                            | (1,191,267                  ) |                                                                                                       | (1,433,248)          |                                                                                                                                                                                            |   | (                  2,122,371) |   |   | (14,046,240) |
|                                                                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **CASH                  FLOWS FROM INVESTING ACTIVITIES**                        |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| Bank                  interest                                                   |                                                            | -                    |                                                                |                                                                                            | -                             |                                                                                                       | -                    |                                                                                                                                                                                            |   | - |   |   | 71 |
| Acquisition                  of intangible assets                                |                                                            | (515)                |                                                                |                                                                                            | (515)                         |                                                                                                       | (25,780)             |                                                                                                                                                                                            |   | (179,574) |   |   | (243,849) |
| Acquisitions                  of fixed assets                                    |                                                            | (80,960)             |                                                                |                                                                                            | (119,001)                     |                                                                                                       | -                    |                                                                                                                                                                                            |   | (19,572) |   |   | (164,833) |
|                                                                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **Net                  cash (used in) investing activities**                     |                                                            | (81,475)             |                                                                |                                                                                            | (119,516)                     |                                                                                                       | (25,780)             |                                                                                                                                                                                            |   | (199,146) |   |   | (408,601                  ) |
|                                                                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **CASH                  FLOWS FROM FINANCING ACTIVITIES**                        |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| Proceeds                  from the sale of stock                                 |                                                            | 192,500              |                                                                |                                                                                            | 1,868,400                     |                                                                                                       | -                    |                                                                                                                                                                                            |   | - |   |   | 6,356,170 |
| Proceeds                  from standby equity distribution agreement             |                                                            | -                    |                                                                |                                                                                            | -                             |                                                                                                       | -                    |                                                                                                                                                                                            |   | - |   |   | 4,000,000 |
| Liability                  for stock to be issued                                |                                                            | (53,000)             |                                                                |                                                                                            | (407,252)                     |                                                                                                       | 15,000               |                                                                                                                                                                                            |   | 625,862 |   |   | 340,326 |
| Conversion                  of shareholder debt to equity                        |                                                            | -                    |                                                                |                                                                                            | -                             |                                                                                                       | -                    |                                                                                                                                                                                            |   | - |   |   | 975,000 |
| Proceeds                  from note payable                                      |                                                            | 56,400               |                                                                |                                                                                            | 56,400                        |                                                                                                       | -                    |                                                                                                                                                                                            |   | - |   |   | 1,301,400 |
| Advances                  from shareholders                                      |                                                            | 50,000               |                                                                |                                                                                            | 186,712                       |                                                                                                       | 1,626,539            |                                                                                                                                                                                            |   | 2,042,820 |   |   | 2,973,826 |
| Payments                  on shareholder loan                                    |                                                            | (18,215)             |                                                                |                                                                                            | (419,535)                     |                                                                                                       | (300,000)            |                                                                                                                                                                                            |   | (300,000) |   |   | (2,011,012) |
| Advances                  (payments to) related company-net                      |                                                            | -                    |                                                                |                                                                                            | -                             |                                                                                                       | -                    |                                                                                                                                                                                            |   | (10,000) |   |   | 301,339 |
| Exercise                  of stock options                                       |                                                            | -                    |                                                                |                                                                                            | -                             |                                                                                                       | -                    |                                                                                                                                                                                            |   | - |   |   | 244,981 |
|                                                                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **Net                  cash provided by financing activities**                   |                                                            | 227,685              |                                                                |                                                                                            | 1,284,725                     |                                                                                                       | 1,341,539            |                                                                                                                                                                                            |   | 2,358,682 |   |   | 14,482,030 |
|                                                                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **NET                  INCREASE (DECREASE) IN**                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **CASH                  AND CASH EQUIVALENTS**                                   |                                                            | (264,670)            |                                                                |                                                                                            | (26,058)                      |                                                                                                       | (117,489)            |                                                                                                                                                                                            |   | 37,166 |   |   | 27,189 |
|                                                                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **CASH                  AND CASH EQUIVALENTS -**                                 |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **Beginning                  of period**                                         |                                                            | 291,859              |                                                                |                                                                                            | 53,247                        |                                                                                                       | 162,015              |                                                                                                                                                                                            |   | 7,360 |   |   | - |
|                                                                             |                                                            |                 |                                                                |                                                                                            |                          |                                                                                                       |                 |                                                                                                                                                                                            |   |   |   |   |   |
| **CASH                  AND CASH EQUIVALENTS -****December                  31** | $                                                               | 27,189               |                                                                | $                                                                                               | 27,189                        | $                                                                                                          | 44,526               |                                                                                                                                                                                            | $ | 44,526 |   | $ | 27,189 |

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***Table          of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        1.               **
**GOING        CONCERN UNCERTAINTY **

*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.*

**NOTE        2.                **
**BASIS        OF PRESENTATION AND RESTATEMENT **

consolidated          financial statements include the accounts of the Company and its wholly          owned subsidiaryDyna-Cam, Aero Marine Engine Corp. All significant          inter-company accounts and transactions are eliminated.

----

***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        2.               **
**BASIS        OF PRESENTATION AND RESTATEMENT (CONTINUED) **

**Income        Statement for the three months ended December 31, 2005:**

|                                         |   | As                  Originally Reported |       | As                  Adjusted |   | Effect                   of Change |   |
|----------------------------------------------|--------|-----------------------------------------|------------|------------------------------|--------|-----------------------------------------|--------|
| Sales                                        |   | $                                       | -          |                         | $      | -                                       |   | $ | - |   |
| Cost                  of goods sold          |   |                                    | -          |                         |   | -                                       |   |   | - |   |
| Compensation                                 |   |                                    | 78,958     |                         |   | 234,750                                 |   |   | 155,792 |   |
| Professional                  and consulting |   |                                    | 431,716    |                         |   | (3,376,074                              | )      |   | (3,807,790 | ) |
| Advertising                  and promotions  |   |                                    | 73,588     |                         |   | 75,972                                  |   |   | 2,384 |   |
| Rent                                         |   |                                    | 7,369      |                         |   | 6,466                                   |   |   | (903 | ) |
| Research                  and development    |   |                                    | 1,023,360  |                         |   | 624,000                                 |   |   | (399,360 | ) |
| General                  and administrative  |   |                                    | 173,934    |                         |   | 108,634                                 |   |   | (65,300 | ) |
| Depreciation                                 |   |                                    | 2,082      |                         |   | -                                       |   |   | (2,082 | ) |
| Total                  Expenses              |   |                                    | 1,791,007  |                         |   | (2,326,252                              | )      |   | (4,117,259 | ) |
| Interest                  income             |   |                                    | 6          |                         |   | 6                                       |   |   | - |   |
| Interest                  expense            |   |                                    | (13,829    | )                            |   | -                                       |   |   | 13,829 |   |
| Net                  income (loss)           |   | $                                       | (1,804,830 | )                            | $      | 2,326,258                               |   | $ | 4,131,088 |   |
| Per                  Share Basic             |   |                                    | (.05       | )                            |   | .07                                     |   |   | .12 |   |
| Per                  Share Fully Diluted     |   |                                    | (.05       | )                            |   | .07                                     |   |   | .12 |   |

----

***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        2.                 **
**BASIS        OF PRESENTATION AND RESTATEMENT (CONTINUED) **

**Balance        Sheet **

**December        31, 2005 **

|                                                           |   |  As                  OriginallyReported |        |  AsAdjusted               |   |  Effect                  ofChange |   |
|----------------------------------------------------------------|--------|----------------------------------------------|-------------|--------------------------------|--------|----------------------------------------|--------|
|                                                           |   |                                    |        |                      |   |                              |   |
| **Assets**                                                     |   |                                    |        |                      |   |                              |   |
| Cash                                                           |   | $                                            | 43,846      |                           | $      | 44,526                                 |   | $ | 680 |   |
| Deposit                                                        |   |                                         | 22,670      |                           |   | 22,670                                 |   |   | - |   |
| Prepaid                  expenses                              |   |                                         | 455,871     |                           |   | 27,330                                 |   |   | (428,541 | ) |
| Total                  current assets                          |   |                                         | 522,387     |                           |   | 94,526                                 |   |   | (427,861 | ) |
| Property                  and equipment-net                    |   |                                         | 37,080      |                           |   | 37,079                                 |   |   | (1 | ) |
| Intangible                  assets-net                         |   |                                         | 243,324     |                           |   | 243,324                                |   |   | - |   |
| Total                  Assets                                  |   | $                                            | 802,791     |                           | $      | 374,929                                |   | $ | (427,862 | ) |
| **Liabilities                  and Stockholders' Deficit**     |   |                                         |             |                           |   |                                        |   |   |  |   |
| Accounts                  payable                              |   | $                                            | 721,237     |                           | $      | 667,115                                |   | $ | 54,122 |   |
| Current                  portion of note payable               |   |                                         | 2,995,000   |                           |   | 995,000                                |   |   | (2,000,000 | ) |
| Liability                  for stock to be issued              |   |                                         | 283,845     |                           |   | 710,362                                |   |   | 426,517 |   |
| Share-based                  fee liabilities                   |   |                                         | -           |                           |   | 14,541,336                             |   |   | 14,541,336 |   |
| Accrued                  interest - shareholder                |   |                                         | -           |                           |   | 53,699                                 |   |   | 53,699 |   |
| Due                  to related company                        |   |                                         | 301,339     |                           |   | 301,339                                |   |   | - |   |
| Total                  current liabilities                     |   |                                         | 4,301,421   |                           |   | 17,268,851                             |   |   | 12,967,430 |   |
| Note                  payable                                  |   |                                         | -           |                           |   | -                                      |   |   | - |   |
| Due                  to shareholder                            |   |                                         | 1,214,222   |                           |   | 1,714,222                              |   |   | 500,000 |   |
| Total                  Liabilities                             |   |                                         | 5,515,643   |                           |   | 18,983,073                             |   |   | 13,467,430 |   |
| Stockholders’                  Deficit                   |   |                                         |             |                           |   |                                   |   |   |   |   |
| Prepaid                  share-based fee                       |   |                                         | -           |                           |   | (3,019,138                             | )      |   | (3,019,138 | ) |
| Prepaid                  share-based compensation.             |   |                                         | -           |                           |   | (840,875                               | )      |   | (840,875 | ) |
| Common                  stock                                  |   |                                         | 33,713      |                           |   | 33,713                                 |   |   | - |   |
| Additional                  paid-in capital                    |   |                                         | 15,532,678  |                           |   | 17,011,211                             |   |   | 1,478,533 |   |
| Beneficial                  Reduction of Share Based Liability |   |                                         | -           |                           |   | 4,898,109                              |   |   | 4,898,109 |   |
| Accumulated                  deficit                           |   |                                         | (20,279,243 | )                              |   | (36,691,164                            | )      |   | (16,411,921 | ) |
| Total                  Stockholders' Deficit                   |   |                                         | (4,712,852  | )                              |   | (18,608,144                            | )      |   | (13,895,292 | ) |
| Total                  Liabilities and Stockholders'           |   |                                         |             |                           |   |                                        |   |   |  |   |
| Deficit                                                        |   | $                                            | 802,791     |                           | $      | 374,929                                |   | $ | (427,862 | ) |

----

***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        2.               **
**BASIS        OF PRESENTATION AND RESTATEMENT (CONTINUED) **

| Accumulated                  deficit June 30, 2006 original |   | $ | (38,874,824 | )      |
|-------------------------------------------------------------|--------|---|-------------|--------|
| Cumulated                  effect of Alliance warrants      |   | $ | (7,320,000  | )      |
| Incorrect                  accounts payable accrual         |   | $ | 447,565     |   |
| Accumulated                  deficit June 30, 2006 restated |   | $ | (45,747,259 | )      |

**NOTE        3.               **
**ORGANIZATION        **

----

***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        3.               **
**ORGANIZATION        (CONTINUED) **

**NOTE        4.                **
**SUMMARY        OF SIGNIFICANT ACCOUNTING POLICIES **

**Use        of Estimates **

----

***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        4.                **
**SUMMARY        OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) **

**Cash        and Cash Equivalents **

**Concentration        of Credit Risk **

**Property        and Equipment **

----

***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        4.                **
**SUMMARY        OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) **

**Reclassifications        **

**Income        Taxes **

**Advertising,        Promotion, Consulting, and Travel Expenses **

**Research        and Development **

Research        and development costs are expensed as incurred.

**Intangible        Assets **

----

***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        4.              **
**SUMMARY        OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) **

**Start-up        Costs **

*“*
*Reporting        on the costs of Start-up Activities”*

**Share-Based        Compensation **

*Accounting        for Share-Based Compensation” *

**(Loss)        Per Share of Common Stock **

The        following is a reconciliation of the computation for basic and diluted EPS:        

----

***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        4.               **
**SUMMARY        OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) **

|                                            |   | **Three                  Months Ended****December                  31****,****2006** |       | **Three                  Months Ended****December                  31****,                  2005****(Restated)** |   |
|-------------------------------------------------|--------|--------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|--------|
|                                            |   |                                                                                 |       |                                                                                                             |   |
| Net (loss)                                 |   | $                                                                                    | (1,801,086 | )                                                                                                                | $      | 2,326,259 |   |
|                                            |   |                                                                                 |       |                                                                                                             |   |   |   |
| Weighted-average                  common shares |   |                                                                                 |       |                                                                                                             |   |   |   |
| outstanding                  (Basic)            |   |                                                                                 | 36,094,046 |                                                                                                             |   | 34,657,010 |   |
|                                            |   |                                                                                 |       |                                                                                                             |   |   |   |
| Weighted-average                  common stock  |   |                                                                                 |       |                                                                                                             |   |   |   |
| equivalents:                                    |   |                                                                                 |       |                                                                                                             |   |   |   |
| Stock                  warrants                 |   |                                                                                 | 2,500,000  |                                                                                                             |   | 2,075,000 |   |
| Stock                  options                  |   |                                                                                 | 3,638,000  |                                                                                                             |   | 3,239,939 |   |
|                                            |   |                                                                                 |       |                                                                                                             |   |   |   |
| Weighted-average                  common shares |   |                                                                                 |       |                                                                                                             |   |   |   |
| outstanding                  (Fully Diluted)    |   |                                                                                 | 42,232,046 |                                                                                                             |   | 39,971,949 |   |

**Fair        Value of Financial Instruments **

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        4.               **
**SUMMARY        OF SIGNIFICANT ACCOUNTING POLICIES **
**(CONTINUED)        **

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        4.               **
**SUMMARY        OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

         

**NOTE        5.               ****PROPERTY        AND EQUIPMENT**

|                                                                   |   | 2006   |    | 2005   |   |
|------------------------------------------------------------------------|--------|--------|---------|--------|--------|
| Computer                                                               |   | $      | 41,837  |   | $      | 26,570 |   |
| Equipment                  and machinery                               |   |   | 13,274  |   |   | 13,274 |   |
| Leasehold                  Improvements                                |   |   | 5,533   |   |   |   |   |
| Office                  equipment                                      |   |   | 104,189 |   |   | 2,724 |   |
|                                                                   |   |   | 164,831 |   |   | 42,568 |   |
|                                                                   |   |   |    |   |   |  |   |
| Less:                  accumulated depreciation                        |   |   | (15,592 | )      |   | (5,489 | ) |
|                                                                   |   |   |    |   |   |  |   |
|                       Total Property and Equipment |   | $      | 148,880 |   | $      | 37,079 |   |

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        5.               **
**PROPERTY        AND EQUIPMENT (CONTINUED) **

**NOTE        6.              **
**CURRENT        PORTION OF NOTES PAYABLE **

$250,000        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. 

**NOTE        7.               **
**CONTINGENT        SHARE-BASED PAYMENT **
         

In        addition to the Note Payable above, the Transporter Inc., purchase in August        2004, consisted of the issuance by the Company of 1,000,000        shares to the former shareholders of Transporter, Inc. These shares are        guaranteed to have a value of $2.00 per share for a period of 2 years. Because        market share value is below $2.00 per share, there is no value placed for        this        contingent liability as of the reporting dates December 31, 2006 and 2005,        but is disclosed for reporting purposes only. 

**NOTE        8**
**LIABILITY        FOR STOCK TO BE ISSUED**         

|                               |   | Shares                  to be issued |    | Market                  Value |   |
|------------------------------------|--------|--------------------------------------|---------|-------------------------------|--------|
| December                  31, 2005 |   |                                 | 710,362 |                          | $      | 695,362 |   |
| December                  31, 2006 |   |                                 | 340,327 |                          | $      | 393,326 |   |

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        9.                **
**SHARED-BASED        FEE LIABILITY- WARRANTS **

| Warrant                  # |   | Unexercised#                  Shares |      | Exercise                  Price |   | Until     |   | Value                  at December 31, 2006 |    | Value                  at December 31, 2005 |
|----------------------------|--------|--------------------------------------|-----------|---------------------------------|--------|-----------|--------|---------------------------------------------|---------|---------------------------------------------|
| 11                         |   |                                 | 2,000,000 |                            |   | 4.00      |   |                                        | 5/2007  |                                        | $ | 1,600,000 |   | $ | 6,220,000 |
| 16-19                      |   |                                 | 50,000    |                            |   | 1.75-2.50 |   |                                        | 3/2010  |                                        | $ | 117,250 |   | $ | 284,250 |
| 12-14                      |   |                                 | 35,001    |                            |   | 3.00-5.00 |   |                                        | 10/2007 |                                        | $ | 40,134 |   | $ | - |
| 15                         |   |                                 | 250,000   |                            |   | 4.00      |   |                                        | 11/2007 |                                        | $ | 327,500 |   | $ | - |
| Total                      |   |                                 |      |                            |   |      |   |                                        |    |                                        | $ | 2,084,884 |   | $ | 6,504,250 |

**NOTE        10.            **
**SHARED-BASED        FEE LIABILITY- OPTIONS **

| Option |   |   |   |   |   | Unexercised                  #                  Shares December                  31, |   | Value                  December 31, |                  | Unexercised                  #                  Shares December                  31, |   | Value                  December 31, |
|--------|--------|--------|--------|--------|--------|--------------------------------------------------------------------------------------|--------|-------------------------------------|-----------------------|--------------------------------------------------------------------------------------|--------|-------------------------------------|
| #      |   | Price  |   | Until  |   | 2006                                                                                 |   | 2006                                |                  | 2005                                                                                 |   | 2005                                |
| 6      |   |   | 1.52   |   |   | 4/2010                                                                               |   |                                | 762,000               |                                                                                 | $      | 1,760,220                           |   |   | 2,604,820 |   | $ | 3,559,128 |
| 8      |   |   | 3.00   |   |   | 5/2011                                                                               |   |                                | 10,000                |                                                                                 |   | 23,000                              |   |   | - |   |   | - |
| 12     |   |   | 2.63   |   |   | 4/2011                                                                               |   |                                | 50,000                |                                                                                 |   | 117,000                             |   |   | - |   |   | - |
| 14     |   |   | 2.00   |   |   | 7/2011                                                                               |   |                                | 50,000                |                                                                                 |   | 119,500                             |   |   |   |   |   |   |
| 13     |   |   | 2.03   |   |   | 6/2011                                                                               |   |                                | 350,000               |                                                                                 |   | 836,500                             |   |   | - |   |   | - |
| Total  |   |   |   |   |   |                                                                                 |   |                                | 1,222,000   |                                                                                 |   | 2,856,220                      |   |   | 2,604,820 |   | $ | 3,559,128 |

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        11.            **
**SHARED-BASED        COMPENSATION LIABILITY- OPTIONS **

| Title     |   | Option# |   | Unexercised                  #Shares |   | Price     |   | Until  |      | Value                  at December 31, 2006 |   | Value                  at December 31, 2005 |
|-----------|--------|---------|--------|--------------------------------------|--------|-----------|--------|--------|-----------|---------------------------------------------|--------|---------------------------------------------|
| Board     |   |    | 1-3    |                                 |   | 279,000   |   |   | .50       |                                        |   | 12/09                                       |   | $ | 675,180 |   | $ | 1,065,780 |
| Sec/Treas |   |    | 4      |                                 |   | 1,000,000 |   |   | 1.52      |                                        |   | 4/10                                        |   | $ | 2,310,000 |   | $ | 3,820,000 |
| CEO       |   |    | 5      |                                 |   | 1,000,000 |   |   | 1.52      |                                        |   | 4/10                                        |   | $ | 2,310,000 |   | $ | 3,820,000 |
| Admin     |   |    | 7,8-11 |                                 |   | 140,000   |   |   | 2.15-2.63 |                                        |   | 8/10                                        |   | $ | 320,220 |   | $ | 57,000 |
| Total     |   |    |   |                                 |   |      |   |   |      |                                        |   |                                        |   | $ | 5,615,400 |   | $ | 8,762,780 |

**NOTE        12.             ****DUE        TO RELATED COMPANY**

**NOTE        13.             **
**DUE        TO SHAREHOLDERS **

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        13.            **
**DUE        TO SHAREHOLDERS (CONTINUED) **

**NOTE        14.             **
**NOTE        PAYABLE**

**NOTE        15.             **
**COMMON        STOCK **

**NOTE        16.             **
**PREPAID        SHARE-BASED FEES AND COMPENSATION **
**         **

**NOTE        17.             **
**BENEFICIAL        REDUCTION OF SHARE-BASED LIABILITIES **

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        18.             ****ADVERTISING,        PROMOTION, CONSULTING AND TRAVEL**** **

|                                      |   | December                  31,2006 |    | December                  31,2005 |   |
|-------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|
| Cash                  and accrued expense |   | $                                 | 224,624 |                              | $      | 126,174 |   |
| Common                  shares            |   |                              | 100,000 |                              |   | 529,600 |   |
| Options                                   |   |                              | -       |                              |   | 36,500 |   |
| Warrants                                  |   |                              | -       |                              |   |  |   |
| Total                                     |   | $                                 | 324,624 |                              | $      | 795,412 |   |

**NOTE        19.             **
**BENEFICIAL        SHARE-BASED FEE EXPENSE **

**NOTE        20.             ****BOARD        COMPENSATION**

accordance        with SFAS 123r this share-based compensation is retroactively expensed in        the        year issued and valued with an econometric model. Options to purchase 279,000        shares were valued at $3.31 per share at the date of issue.

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        21.             **
**LEGAL        FEES **
**         **

|                                      |   | December                  31, 2006 |    | December                  31, 2005 |   |
|-------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|
| Cash                  and accrued expense |   | $                                  | 357,753 |                               | $      | 191,544 |   |
| Common                  shares            |   |                               | -       |                               |   | - |   |
| Options                                   |   |                               | -       |                               |   | 393,035 |   |
| Total                                     |   | $                                  | 357,753 |                               | $      | 584,579 |   |

**NOTE        22.             ****OFFICERS’        COMPENSATION**** **

|                                                 |   | December                  31, 2006 |    | December                  31, 2005 |   |
|------------------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|
| CEO,                  Ray Brouzes                    |   |                               |         |                               |   |  |   |
| Salary                                               |   | $                                  | 25,000  |                               | $      | 50,000 |   |
| Common                  shares                       |   |                               | 162,750 |                               |   | 162,750 |   |
| Options                                              |   |                               | -       |                               |   | 510,000 |   |
| Total                                                |   | $                                  | 187,750 |                               | $      | 687,750 |   |
| Secretary/Treasurer,                  Samuel Higgins |   |                               |         |                               |   |  |   |
| Salary                                               |   | $                                  | 15,000  |                               | $      | 10,000 |   |
| Options                                              |   |                               | -       |                               |   | 510,000 |   |
| Total                                                |   | $                                  | 15,000  |                               | $      | 513,856 |   |
| CFO,                  Benjamin Langford              |   |                               |    |                               |   |  |   |
| Salary                                               |   | $                                  | -       |                               | $      | 1,000 |   |
| Total                                                |   | $                                  | -       |                               | $      | 1,000 |   |
| Total                  Officers’ Compensation  |   | $                                  | 202,750 |                               | $      | 234,750 |   |

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        23.             **
**RESEARCH        AND DEVELOPMENT **

**NOTE        24.             **
**PROVISION        FOR INCOME TAXES **

|                                       |   | 2006   |        |
|--------------------------------------------|--------|--------|-------------|
| Deferred                  tax assets       |   | $      | 16,621,975  |   |
| Less:                  valuation allowance |   |   | (16,621,975 | ) |
|                                       |   |   |        |   |
| Net                  deferred assets       |   | $      | -0-         |   |

** **

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        25.            **
**COMMITMENTS        AND CONTINGENCIES **

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***Table            of Contents***

**AXIAL        VECTOR ENGINE CORPORATION AND SUBSIDIARY**

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

**(A        DEVELOPMENT STAGE COMPANY) **

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**DECEMBER        31, 2006 AND 2005 **

**(Unaudited)**

**NOTE        26.            **
**SUBSEQUENT        EVENTS**

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***Table          of Contents***

**Item      2.      Plan of      Operation**

**Forward-Looking      Statements**

**Recent      Developments in Our Business**

***Developments      in Our Agreement with Adaptive***

----

***Table          of Contents***

***Advent      of the Axial Vector Workhorse 7.2***

***Developments      in Our Electric Motors***

*Initial      Applications*

----

***Table          of Contents***

*Energy      and Operating Cost Savings (Sources for Statistics in Exhibit      99.1)*

*Introduction      into the Marketplace*

----

***Table          of Contents***

*Industrial      Electric Motors (Sources for Statistics in Exhibit 99.1)*

*Refrigeration      (Sources for Statistics in Exhibit 99.1)*

----

***Table          of Contents***

*Air      Conditioning (Sources for Statistics in Exhibit 99.1)*

***Developments      in Initial Testing***

----

***Table          of Contents***

----

***Table          of Contents***

**1.**
**Subsystem      testing**

| a.   | Injection                system testing |
|----------------|-----------------------------------------|

| b.   | Piston-roller                / Cam interface |
|----------------|----------------------------------------------|

| c.   | Generator                coil resistance tests |
|----------------|------------------------------------------------|

| d.   | Generator                magnetic disk tests |
|----------------|----------------------------------------------|

**Engine      Testing**

| a.   | Overall                Engine Operation (such as HP and torque over RPM                range) |
|----------------|-----------------------------------------------------------------------------------------------|

| b.   | Fuel                System Evaluation |
|----------------|---------------------------------------|

| c.   | Air                System Evaluation |
|----------------|--------------------------------------|

| d.   | Cylinder                Blowby Measurements |
|----------------|---------------------------------------------|

| e.   | Oil                Consumption |
|----------------|--------------------------------|

| f.   | Heat                Rejection |
|----------------|-------------------------------|

| g.   | Friction                Measurement |
|----------------|-------------------------------------|

| h.   | Calibration                Mapping |
|----------------|------------------------------------|

| i.   | Exhaust                Emissions |
|----------------|----------------------------------|

**Generator      Testing**

| a.   | No                load test |
|----------------|-----------------------------|

| b.   | Load                test |
|----------------|--------------------------|

| c.   | Speed                - Load test |
|----------------|----------------------------------|

| d.   | Controls                testing |
|----------------|---------------------------------|

| e.   | Additional                tests to examine critical performance parameters and some critical                mechanical parameters for the magnets, axial clearance, coils and                gauss                generated. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| f.   | Detailed                GENSET testing will further                include: |
|----------------|-----------------------------------------------------------------------------|

| i.   |  Functionally              check, define and develop the operational characteristics of the              generator |
|----------------|-------------------------------------------------------------------------------------------------------------------------|
| ii.   | Overall                heat rate vs. rpm and load |
|-----------------|---------------------------------------------------|

| iii.   | Vibration                spectra for the overall GENSET |
|------------------|---------------------------------------------------------|

| iv.   | Voltage                vs. rpm vs. load for the axial flux                generator |
|-----------------|-------------------------------------------------------------------------------------|

| v.   | Temperature                of the magnet at full load |
|----------------|-------------------------------------------------------|

| vi.   | Efficiency                of rectifier vs. temperature vs.                load |
|-----------------|--------------------------------------------------------------------------------|

| vii.   | Efficiency                of inverter vs. temperature vs.                load |
|------------------|-------------------------------------------------------------------------------|

| viii.   | Engine                temperature at full power and varying                rpm |
|-------------------|--------------------------------------------------------------------------------|

| ix.   | Vibration                spectra for the engine vs. power |
|-----------------|-----------------------------------------------------------|

| x.   | Exhaust                temperature vs. power |
|----------------|----------------------------------------------|

| xi.   | Cooling                system thermostat setting and the resultant                effects |
|-----------------|-------------------------------------------------------------------------------------------|

| xii.   | Noise                spectra |
|------------------|------------------------------|

| xiii.   | Alignment                design |
|-------------------|---------------------------------|

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***Table          of Contents***

**GENSET      Testing **

| a.   | Overall                GENSET operation |
|----------------|-----------------------------------------|

| b.   | System                calibration |
|----------------|-----------------------------------|

| c.   | Efficiency |
|----------------|------------|

| d.   | Noise                emissions |
|----------------|--------------------------------|

| e.   | During                the early marriage period, the Control Systems must be verified for                perfect functioning, especially the rectifier, DC bus and inverter                - the                heart of the system |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| f.   | The                load sharing synchronization and the transfer panel that the client                operators must monitor and control - this is where interface with                the                client occurs. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**GENSET      Reliability **

| a.   | Durability                tests - 3 GENSETS proposed to be tested for 4,000 hours; durability                design                is 40,000 hours between major                overhauls |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| b.   | Beta                tests - 4 proposed Beta sites |
|----------------|---------------------------------------------------|

| c.   | Homologation                tests |
|----------------|-----------------------------------|

| d.   | Need                a UL Certification on the Inverter - a document of some 100 pages.                (UL                2200 is for the “Stationary Engine Generator Assemblies” and not just for                the inverter. Preponderance of safety concerns are however with the                inverter system.) |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Re-Emergence      of the Gasoline Powered Sinusoidal Cam Driven Mechanical      Engine***

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***Table          of Contents***

***Developments      in Beta Testing***

----

***Table          of Contents***

***Developments      in Licenses***

***Developments      in Distribution Agreements***

----

***Table          of Contents***

**Summary      of Product Research and Development Expenditures**

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

**Changes      in Number of Employees**

----

***Table          of Contents***

**Results      of Operations for the three and six months ended December 31, 2006 and      2005**

| 1.   | advertising                and promotion expenses in the amount of                $324,624; |
|----------------|---------------------------------------------------------------------------------------------|

| 2.   | compensating                our officers in the form of salaries, common shares, and options                with                associated payroll taxes in the amount of                $202,750; |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | legal                fees in the form of cash, accrued expenses and options valued at                $357,753; |
|----------------|----------------------------------------------------------------------------------------------------------------|

| 4.   | accounting                and auditing expenses in the amount of                $45,763; |
|----------------|------------------------------------------------------------------------------------------|

| 5.   | beneficial                share-based fee expenses for stock awards to vendors valued at $139,272;                and |
|----------------|-----------------------------------------------------------------------------------------------------------------------|

| 6.   | research                and developments costs of $176,913 as noted above. |
|----------------|----------------------------------------------------------------------------|

| 1.   | beneficial                share-based fee expenses for stock awards to venders valued at                $(4,548,728) as restated; |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------|

| 2.   | compensating                our officers in the form of salaries, common shares, and options                with                associated payroll taxes in the amount of                $234,750; |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | advertising                and promotion expenses in the amount of                $73,588; |
|----------------|--------------------------------------------------------------------------------------------|

| 4.   | financing                our Standby Equity Agreement in the amount of                $0; |
|----------------|-------------------------------------------------------------------------------------------|

| 5.   | research                and development costs of $1,023,360 as noted                above; |
|----------------|--------------------------------------------------------------------------------------------|

| 6.   | legal                fees in the form of cash, accrued expenses and options valued at                $191,877;                and |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------|

| 7.   | compensating                our board of directors with options valued at $0. |
|----------------|-------------------------------------------------------------------------------|

| 7.   | advertising                and promotion expenses in the amount of                $801,358; |
|----------------|---------------------------------------------------------------------------------------------|

| 8.   | compensating                our officers in the form of salaries, common shares, and options                with                associated payroll taxes in the amount of                $618,000; |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 9.   | legal                fees in the form of cash, accrued expenses and options valued at                $588,099; |
|----------------|----------------------------------------------------------------------------------------------------------------|

| 10.   | accounting                and auditing expenses in the amount of                $222,638; |
|-----------------|-------------------------------------------------------------------------------------------|

| 11.   | beneficial                share-based fee expenses for stock awards to vendors valued at $278,544;                and |
|-----------------|-----------------------------------------------------------------------------------------------------------------------|

| 12.   | research                and developments costs of $639,618 as noted above. |
|-----------------|----------------------------------------------------------------------------|

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***Table          of Contents***

| 8.   | beneficial                share-based fee expenses for stock awards to venders valued at                $278,544; |
|----------------|-------------------------------------------------------------------------------------------------------------------|

| 9.   | compensating                our officers in the form of salaries, common shares, and options                with                associated payroll taxes in the amount of                $1,437,356; |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.   | advertising                and promotion expenses in the amount of                $116,438; |
|-----------------|---------------------------------------------------------------------------------------------|

| 11.   | financing                our Standby Equity Agreement in the amount of                $0; |
|-----------------|-------------------------------------------------------------------------------------------|

| 12.   | research                and development costs of $2,239,211 as noted                above; |
|-----------------|--------------------------------------------------------------------------------------------|

| 13.   | legal                fees in the form of cash, accrued expenses and options valued at                $782,105;                and |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------|

| 14.   | compensating                our board of directors with options valued at $142,290. |
|-----------------|-------------------------------------------------------------------------------------|

**Liquidity      and Capital Resources**

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***Table          of Contents***

***Cash      Flows from Operating Activities***

***Cash      Flows from Investing Activities***

***Cash      Flows from Financing Activities***

**Off      Balance Sheet Arrangements **

**Going      Concern**

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***Table          of Contents***

**Critical      Accounting Policies**

*Accounting      for Share-Based Compensation” *

*"Share-based      Payments"  *

**Recently      Issued Accounting Pronouncements**

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***Table          of Contents***

**Item      3.     Controls and Procedures**

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***Table          of Contents***

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***Table          of Contents***

**PART      II - OTHER INFORMATION**

**Item      1.     Legal      Proceedings**

**Item      2.     Unregistered Sales of Equity      Securities and Use of Proceeds**

**Item      3.     Defaults upon Senior      Securities**

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***Table          of Contents***

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

**Item      5.     Other      Information**

**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 2002                                              |
| 31.2                  | 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 2002                                              |
| 32.1                  | 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 |
| 99.1                  | Statistics                                                                                                                                                                                                                                        |

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***Table          of Contents***

**SIGNATURES**

|   | **Axial                Vector Engine Corporation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Date:  | February                14, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   By:       /s/                Dr. Raymond                Brouzes                                                           Dr.                Raymond BrouzesTitle:**    Chief                Executive Officer and Director**  |

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***Table          of          Contents***