##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
  þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-51966
 IdleAire Technologies Corporation
 
 (Exact name of small business issuer as specified in its charter)
 Delaware
    
    62-1829384(State or other jurisdiction of incorporation or
    
    (IRS Employerorganization)
    
    Identification No.)
  
 (Address of principal executive offices)
  
 (Issuers telephone number)
 Securities registered under Section 12(b) of the Exchange Act:
 Title of each class
    
    Name of each exchange on which registeredN/A
    
    N/A
  
 
  Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and
no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB . o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
 State issuers revenues for its most recent fiscal year. $13,977,225
 State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to
the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified
date within the past 60 days. (  N/A  )
 
 Check whether the registrant filed all documents and reports required to be filed by Section 12,13 or 15(d) of the
Exchange Act after the distribution of securities
under a plan confirmed by a court.         Yes o No o
  State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable
date:
  
 
  
 Transitional Small Business DisclosureFormat (Check one):
    
    Yes
    
    o
    
    
    
    No
    
    þ




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Table of Contents
 Part IItem 1 
    Description of Business
    
    
    1Item 1A 
    Risk Factors
    
    
    9Item 2 
    Description of Property
    
    
    15Item 3 
    Legal Proceedings
    
    
    15Item 4 
    Submission of Matters to a Vote of Security Holders
    
    
    15Part IIItem 5 
    Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases
of Equity Securities
    
    
    16Item 6 
    Managements Discussion and Analysis
    
    
    17Item 7 
    Financial Statements
    
    
    26Item 8 
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    27Item 8A 
    Controls and Procedures
    
    
    27Item 8B 
    Other Information
    
    
    27Part IIIItem 9

    Directors, Executive Officers, Promoters, Control Persons
and Corporate Governance; Compliance with Section 16(a) of the
Exchange Act
    
    
    28Item 10 
    Executive Compensation
    
    
    28Item 11 
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    28Item 12 
    Certain Relationships and Related Transactions, Director Independence
    
    
    28Item 13 
    Exhibits
    
    
    28Item 14 
    Principal Accountant Fees and Services
    
    
    28Signatures
    
    
    29




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Item 1.
Description
of Business.
 Overview
 ® ®
 (1)
    
    Fleet owners save money from reduced fuel cost, maintenance expenses and engine
wear; additionally, fleets enjoy the benefits of a driver recruitment and retention
tool.(2)
    
    Travel center operators realize a new and significant revenue stream with no
capital outlay since they receive lease consideration from us; our ATE® technology has
been endorsed by travel center associations and franchisees of national travel center
chains.(3)
    
    Truck drivers enjoy a quieter, cleaner resting environment with a clean supply
of heat, air and many of the creature comforts of a private home, including
convenient communication and entertainment options such as internet access, cable
television and pay-per-view movies.(4)
    
    Communities and the environment benefit from (i) improved highway safety as a
result of reduction of truck drivers sleep deprivation and (ii) better air quality as
a result of decreased noxious emissions. Through December 31, 2006, we estimate that
our ATE® system has eliminated approximately 113,705 metric tons of air
emissions over its lifetime use.
  ® ®
 Our Strengths
 Compelling Value Proposition. ®
 (1)
    
    Benefits for Fleet Owners.Truck fleets operate in a low margin business environment
and as such, fleet owners are increasingly concerned with their
profitability and, in
particular, the cost of diesel fuel. Our ATE®system eliminates the need for
idling during federally-mandated resting periods for drivers, saving approximately one
gallon of diesel fuel per hour of idling and reducing engine wear and maintenance expense.
In addition to reducing idling fuel costs, our ATE® system allows fleet owners
to (i) improve driver turnover, which has historically exceeded 100% annually, and related
recruiting costs; (ii) enable remote driver safety training; and (iii) improve
communication between fleet owners and drivers.
 1




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(2)
    
    Benefits for Travel Center Operators.Our ATE® system provides travel center
operators a new and significant revenue stream without any additional investment or
operating expense. Travel center operators provide truck parking spaces as an inducement
to purchase fuel, restaurant meals, truck maintenance, showers, laundry and other retail
products. Currently, few travel centers charge for parking spaces.Under our arrangements with travel centers, they receive lease consideration from us. We
believe that the installation of our ATE® system will result in higher occupancy
at travel centers, generating more customer traffic and increasing the potential for higher
margin retail sales for the travel center operators. Additionally, many travel center
operators have found that the parking lot redesign associated with an ATE®
installation results in better traffic flow and less parking lot accidents.(3)
    
    Benefits for Truck Drivers. Our ATE® system
allows drivers to enjoy in-cab creature comforts and other services during
federally-mandated resting periods. Under the Department of Transportations, or DOTs, hours
of service rule, truck drivers are required to rest a minimum of 10 hours after driving a
maximum of 11 hours. By using our ATE® system, a driver can park in a quieter area and
breathe temperature controlled, filtered and UVC light treated cleaner air, relax from the
stress of driving on congested highways with just in time freight delivery, rest better
over longer periods of time away from home and communicate better with friends and family
with the many home conveniences (i.e. satellite TV, Internet access, on-demand movies) in
the privacy of their cab. In addition, our ATE® system creates easier parking
in low light conditions, late at night after a long day which reduces truck accidents at
travel centers and their inherent income reducing downtime.(4)
    
    Benefits for Communities and the Environment.The reduction of idling by truck drivers
will significantly reduce air pollution, conserve energy and promote highway safety. Air
emissions resulting from idling significantly impact regional air quality and the ability
of local communities to comply with the EPAs National Ambient Air Quality Standards. We
believe that the use of our ATE® system will also provide significant highway
safety benefits. The substantial public benefits of our ATE® system have been
validated by the grants that have been awarded to the Company over the past six years by
the Department of Transportation, the Department of Energy, and various state and local
agencies. We were also given the 2003 EPA Clean Air Excellence Award.
 Strong Relationship with Travel Center Operators ® ® ® ®
 Significant Barriers to Entry
 (1)
    
    Capital-Intensive Industry.We spent five years and over $100 million developing,
engineering, testing and refining our service delivery module and proprietary software
interface and installing our first 24 sites. In addition, we raised approximately $234.8
million in 2005 through the sale of discount notes and warrants, the proceeds of which
allow us to commence implementation of a nationwide expansion of our ATE® system
network.
 2




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(2)
    
    Intellectual Property.We have been issued two patents by the U.S. Patent and Trademark
Office that provide broad protection of our product. In November 2002, we were issued a
patent to protect our business of providing convenience services to a stationary vehicle
allowing the vehicle to conserve fuel and reduce noise and particulate matter emissions by
shutting off the engine. This patent has coverage in the United States and will expire in
February 2020, subject to payment of customary maintenance fees. We currently have pending
patent applications to expand this patent coverage in Canada and Mexico.In March 2004, we were issued a patent in the United States that protects our system for
delivering services, including features allowing for remote equipment management. This
patent has coverage in the United States and will expire in September 2022, subject to
payment of customary maintenance fees. We currently have pending patent applications to
expand this patent coverage in Australia, Brazil, Canada, China, Costa Rica, Israel, Japan,
Mexico and the European Union. Additionally, we have applied for other patents seeking to
broaden patent coverage of our technology.We also have three registered service marks that have been issued in the United States:
IdleAire®, ATE® and ATE Advanced Travel Center
Electrification®.(3)
    
    Contractual Customer Base.We have agreements with over 1,900 fleets pursuant to which
fleet owners pay for the basic services we provide their truck drivers. Adoption and
payment of our basic services by fleet owners promotes usage of our ATE®
systems.
 Proprietary Solution Addressing a Large, Untapped Market Opportunity ®
 Evolving Regulatory Environment
 Experienced and Proven Management Team
 Our Strategy
 Build
and Operate a Nationwide
ATE ® System Network ®
 3




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® ® ®
 Expand Long-Term Agreements for Truck Idling Locations
 Continue to Attract Truck Fleet Owners
 Focus on Customer Service and Target Marketing Efforts at Truck Drivers. ® ® ®
 Continue to Seek Grant Funding ® ®
 Our Product
 ®
 4




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®
 ® ® ® ®
  Our Expansion Plan
 ®
 ® ® ®
 ® ® ® ®
 ®
 5




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®
 Regulatory Environment
  DOTs Hours of Service Rule
  (1)
    
    Drivers must rest 10 or more consecutive hours after driving 11 hours in any 14-hour
on-duty window;(2)
    
    The 14-hour on-duty window may not be extended with off-duty time for meal and fuel
stops;(3)
    
    There is a prohibition on driving after being on duty 60 hours in 7 consecutive days,
or 70 hours in 8 consecutive days, but drivers can restart the 7/8 day period anytime a
driver has 34 consecutive hours off duty; and(4)
    
    Commercial motor vehicle drivers using the sleeper berth provision must take at least 8
consecutive hours in the sleeper berth, plus 2 consecutive hours either in the sleeper
berth, off duty, or any combination of the two.
 The Clean Air Act Amendments of 1990
   6




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State Anti-Idling Regulations
  Suppliers
 ®
 Research and Development
 ®
 Employees
  Competition
 ®
 Auxiliary Power Units (APUs) ®
 7




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Battery Systems
 Engine Optimizers
 Truck Stop Electrification (TSE)
   Motel Rooms
 Team Drivers
 Stop Idling
 Additional Information
  8




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Item 1A.
Risk Factors.
 We have a limited operating history, and neither our historical results of operations, nor our
business and financial expectations, may be an accurate indicator of our future operating results
or business prospects.
 ®
 We have a history of net losses and an accumulated deficit of $153 million at December 31, 2006.
We cannot guarantee if, when and the extent that we will become profitable, or that we can maintain
profitability once it is achieved.
  
    
    Costs associated with our national expansion plan and the build-out of our ATE® system network;
    
    Continued success in securing additional parking spaces for installation of our ATE® systems;
    
    Market acceptance of our ATE® technology;
    
    High diesel prices;
    
    Changes in the regulatory environment;
    
    Adoption of our technology by fleet owners and usage by truck drivers; and
    
    Changes in general economic conditions.
  ® ® ® ®
 9




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We cannot accurately predict the size of the idling-reduction market, and it may be smaller or
slower to develop than we expect.
  ®
 The trucking industry is highly fragmented and regulated.
    Our success is dependent on the market acceptance of our ATE ® systems.
 ® ® ® ® ® ®
 
    
    our failure to educate the truck drivers of the benefits for using the ATE®systems;
    
    truck drivers unwillingness to change their idling habits; and
    
    the introduction of competing products or services in the market.
 10




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We will require significant capital to complete our nation-wide ATE ® system expansion
plan  , and financing may not be available to us on reasonable terms, if at all .
 ® ®
 As we continue the nationwide expansion of our ATE ® system network, we may have
difficulty managing our growth and expanding our operations successfully.
 ®
 Our business is subject to seasonal volatility and our operating results may fluctuate on a
quarterly and annual basis .
 ®
 We depend upon our key personnel to run our business and manage our business growth. The loss of
any one of them could have a materially adverse effect on our business, operating results and
financial condition.
  11




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Although we are in active negotiation with travel centers, travel center operators and truck fleet
owners to expand our network coverage, our expansion plan may not succeed as quickly as
anticipated, if at all.
 ® ®
 We rely on third-party suppliers for the manufacture and assembly of our ATE ® systems,
and may not be able to meet the schedule of our expansion plan if our suppliers cannot meet the
specific quantity and quality requirements.
 ® ®
 We rely on electrical power utilities and communications companies, including Internet and
bandwidth providers, data centers, satellite communications and mobile network providers, to
provide their services to customers through our ATE ® systems. If these companies cannot
provide reliable access or if there are failures or delays in providing such services, our ability
to service our customers would be negatively impacted, which could materially adversely affect our
business, operating results and financial condition.
    12




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We may have difficulty scaling and adapting our existing architecture to accommodate increased
traffic and technology
advances or changing business requirements, which could lead to the loss of customers and cause us
to incur expenses to make architectural changes.
  We could experience system failures and capacity constraints, which could materially adversely
affect our business and operating results.
  
    
    Cause customers to seek damages from us for losses incurred;
    
    Require us to incur expenses, either earlier or in amounts greater than originally
planned, to replace existing equipment, expand facilities or add redundant facilities;
    
    Damage our reputation of reliability;
    
    Cause customers and others to cancel contracts with us; and
    
    Make it more difficult for us to attract new customers.
  Unauthorized disclosure of data, whether through breach of our computer systems or otherwise, could
expose us to protracted and costly litigation or cause us to lose customers.
 ® ®
 We may not be able to protect our intellectual property, brands or technology effectively, or we
may be subject to claims of infringement.
  13




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We are unable to predict the future availability of governmental grants.
  We have incurred increased legal and financial compliance costs common to publicly held companies
as a result of becoming a reporting company under SEC rules in July 2006.
  Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404) will require the Company to document and test its
internal controls over financial reporting beginning with the fiscal
year ending December 31, 2007. Additionally, beginning with the
year ending December 31, 2008, Section 404 will require an independent registered public accounting firm
to: (i) report on managements assessment as to the effectiveness of these internal controls over financial
reporting; and (ii) independently opine on the effectiveness of these internal controls over financial reporting.
Any delays or difficulty in satisfying these requirements
could cause our shareholders to lose confidence in us and adversely affect our ability to raise
additional financing through sale of equity or debt securities.
  14




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##### 



Item 2. Description of Property.
     Item 3. Legal Proceedings.
    Item 4. Submission of Matters to a Vote of Security Holders.
  15




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##### 



PART II
 Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases
of Equity Securities.
         EQUITY COMPENSATION PLAN INFORMATION
  Number of
    
    Weightedsecurities to be
    
    average exerciseissued upon exercise
    
    price of
    
    Number ofof outstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    remaining availablePlan category
    
    and rights
    
    and rights
    
    for future issuance(a)
    
    (b)
    
    ( c)Equity compensation
plans approved by
security holders
    
    
    4,513,081
    
    
    $
    1.73
    
    
    
    12,977,257Equity compensation
plans not approved
by security holders
    
    
    0
    
    
    
    n/a
    
    
    
    0Total
    
    
    4,513,081
    
    
    $
    1.73
    
    
    
    12,977,257
 16




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##### 



Stock Option Plan
   Item 6. Managements Discussion and Analysis.
 Forward-looking Statements or Information
  ®
  ®
  17




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Overview
 ® ® ® ®
 How We Generate Revenue
  
    
    Basic and premium services. Basic services include HVAC and shore power electricity,
basic satellite television (20 channels), unlimited local telephone and Internet access.
Our basic services are charged hourly, with a one hour minimum. The retail rate per hour
for basic services was $2.18 as of December 31, 2006, with an approximate 15% discount for
fleets and gold members. To obtain the discount rate for basic services, a fleet company
must sign a fleet contract. Premium services include premium satellite television (46
channels), movies-on-demand, Ethernet or wireless based Internet access, unlimited long
distance telephone service, and driver training modules. These services are generally sold
in packages or blocks of time. Additionally, basic and premium services include revenues
from the amortization of annual gold card membership sales. The Gold Card membership allows
members to purchase our products and selected services at a discount. Any driver may
purchase a gold membership for $10 which is effective for 6 months. For the years ended
December 31, 2006 and 2005, revenues from basic and premium services accounted for 90.4%
and 89.8% of our net product revenues, respectively.
    
    Ancillary products. Ancillary products include window adaptors, telephones, computer
accessories including keyboards, Ethernet and Wi-Fi cards, remotes and coaxial and power
cables. For the years ended December 31, 2006 and 2005, revenues from the sale of
ancillary products accounted for 9.6% and 10.2% of our net product revenues, respectively.
    
    Amortization of grants. Through December 31, 2006, we have been awarded approximately
$54.3 million in cumulative-to-date grant assistance from governmental agencies of which we
have received $12.5 million. Grant revenues consist of amortization of grant funds
received and recognized as follows: (i) grants with continuing service requirements are
recognized on a straight-line basis over the life of the contract; (ii) grants designated
for funding of revenue-generating equipment are recognized on a straight-line basis over
the life of the respective equipment; and (iii) grants funded based on hours of emission
reduction are recognized based on actual usage over the term of the grant.
    
    Other revenues. Other revenues consist principally of dormancy fees charged to inactive
cards and advertising revenues.
 18




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Trends in Our Business
 ® ®
  Total Sites
    
    New SitesTravel
    
    Fleet
    
    
    
    
    
    
    
    
    
    Travel
    
    Fleet
    
    ClosedCenters
    
    Terminals
    
    Other
    
    Total
    
    Centers
    
    Terminals
    
    SitesSite AnalysisDecember 31, 2005
    
    
    21
    
    
    
    
    
    
    
    3
    1
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    January 1  March 31
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    March 31, 2006
    
    
    22
    
    
    
    
    
    
    
    3
    
    
    
    25
    
    
    
    1
    
    
    
    
    
    
    
    April 1  June 30
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    15
    
    
    
    
    
    
    
    (3
    )June 30, 2006
    
    
    34
    
    
    
    
    
    
    
    3
    
    
    
    37
    
    
    
    16
    
    
    
    
    
    
    
    (3
    )July 1  September 30
    
    
    30
    
    
    
    2
    
    
    
    (2
    )2
    
    
    30
    
    
    
    30
    
    
    
    2
    
    
    
    (2
    )September 30, 2006
    
    
    64
    
    
    
    2
    
    
    
    1
    
    
    
    67
    
    
    
    46
    
    
    
    2
    
    
    
    (5
    )October 1  December 31
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    32
    
    
    
    
    
    
    
    December 31, 2006
    
    
    96
    
    
    
    2
    
    
    
    1
    
    
    
    99
    
    
    
    78
    
    
    
    2
    
    
    
    (5
    )
 
 (1)
    
    Included 2 rest stops and 1 distribution center.(2)
    
    The 2 rest stops were decommissioned and the equipment was relocated.  
    
    Occupancy calculated as the total amount of hours of ATE® system time used by our
customers divided by the total amount of hours available for ATE® system use, assuming
24-hour availability for every parking space. We analyze occupancy to evaluate utilization
overall as well as individual site performance. Annual occupancy was 19.5% and 19.9% for
2006 and 2005, respectively. On an aggregate basis, current year occupancy also includes
start-up time associated with new sites. For our core comp sites (opened for at least
one year), annual occupancy averaged 25.0% for 2006. This percentage includes the addition
of 33 parking spaces during 2006 for expansion to an existing core comp site.
 
    
    Fleet Usage calculated as the percentage of hours used by fleet customers as compared
to total hours. Annual fleet usage was 62.6% and 29.1% for 2006 and 2005, respectively.
We believe this is an important metric as it validates the network effect on growing
usage.
 ®
 19




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®
  Results of Operations
  % of
    
    
    
    
    
    
    % ofYear Ended
    
    
    Total Net
    
    
    Year Ended
    
    
    Total NetDecember 31,
    
    
    Product
    
    
    December 31,
    
    
    Product2006
    
    
    Revenues
    
    
    2005
    
    
    RevenuesStatements of Operating Data:Net revenues:Basic and premium services, net
    
    $
    10,911,458
    
    
    
    90.4
    %
    
    $
    3,827,768
    
    
    
    89.8
    %Ancillary product sales
    
    
    1,152,627
    
    
    
    9.6
    
    
    
    435,206
    
    
    
    10.2Net product revenues
    
    
    12,064,085
    
    
    
    100.0
    
    
    
    4,262,974
    
    
    
    100.0Grant revenues
    
    
    1,512,819
    
    
    
    
    
    
    
    1,827,528Other revenues
    
    
    400,321
    
    
    
    
    
    
    
    261,830Total net revenues
    
    
    13,977,225
    
    
    
    
    
    
    
    6,352,332Operating expenses:Direct site operating costs (1)
    
    
    23,363,113
    
    
    
    193.7
    
    
    
    10,252,863
    
    
    
    240.5Cost of ancillary product sales
    
    
    835,451
    
    
    
    6.9
    
    
    
    548,532
    
    
    
    12.9Depreciation and amortization
    
    
    9,467,015
    
    
    
    78.5
    
    
    
    5,444,382
    
    
    
    127.7Selling, general & administrative expenses
    
    
    15,968,890
    
    
    
    132.4
    
    
    
    13,316,195
    
    
    
    312.4Research and development expenses
    
    
    121,745
    
    
    
    1.0
    
    
    
    192,388
    
    
    
    4.5Impairment of long-lived assets
    
    
    1,303,885
    
    
    
    10.8
    
    
    
    
    
    
    
    0.0Loss on settlement of asset retirement
obligation
    
    
    317,973
    
    
    
    2.6
    
    
    
    
    
    
    
    0.0Loss on disposal of fixed assets
    
    
    3,180,659
    
    
    
    26.4
    
    
    
    1,024,288
    
    
    
    24.0Total operating expenses
    
    
    54,558,731
    
    
    
    452.2
    %
    
    
    30,778,648
    
    
    
    722.0
    %Loss from operations
    
    
    (40,581,506
    )
    
    
    
    
    
    
    (24,426,316
    )Interest expense, net
    
    
    (19,703,231
    )
    
    
    
    
    
    
    (2,438,586
    )Net loss
    
    $
    (60,284,737
    )
    
    
    
    
    
    $
    (26,864,902
    )
 
 (1)
    
    Exclusive of depreciation and amortization expense, presented
in a separate caption. Total net revenues
 
    
    Basic and premium services, net.Basic and premium services, net, increased $7,083,690 or
185% from 2005 to 2006, due principally to: (i) an increase in the average number of
ATE®-equipped spaces available for rent from 1,329 spaces to 2,939 spaces which contributed to
an increase in total hours of usage from
2,288,721 hours to 5,010,915 hours; (ii) an average annual 18% price increase to basic
services; (iii) a percentage decrease in customer discounts from 20.5% to 13.3% of gross
product revenues; and (iv) an increase of $1,111,269 or 127% in gross premium services.
 20




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##### 




    
    Ancillary product sales.Ancillary product sales increased $717,421, or 165%, for the year
ended December 31, 2006 compared to the year ended December 31, 2005, due principally to a
$439,060 increase in adapter sales, a $137,053 increase in keyboard sales and a $131,614
increase in cable sales.
 Operating expenses.
 
    
    Direct site operating costs.Our site level costs and expenses primarily consist of (i)
salaries and benefits for a team of site representatives, (ii) lease consideration for
parking spaces, (iii) cost of electricity, satellite television and movies, (iv) telephone
and communications, (v) ancillary cost of goods sold, and (vi) equipment maintenance costs.
Direct site operating costs increased $13,110,250, or 128%, from 2005 to 2006, principally
due to the addition of 80 new sites. However, as a percentage of net product revenues,
direct site operating costs decreased from 241% in 2005 to 194% in 2006. This decrease was
principally due to a reduction in site-level salaries and benefits as a percentage of net
product revenues from 156% of net product revenues, or $6,658,561, in 2005 to 111% of net
product revenues, or $13,337,602, in 2006. As job duties became better defined and the
number of repeat customers continued to increase, we were able to reduce staffing at each
of our sites.
    
    Cost of ancillary product sales.Cost of ancillary product sales increased $286,919 or
52% from 2005 to 2006, consistent with the growth in ancillary product sales. During 2006,
the Company increased the volume of ancillary product sales to a level sufficient to
sustain a positive margin, as compared with 2005 which experienced negative margins.
    
    Selling, general and administrative expenses.Selling, general and administrative
expenses increased $2,652,695, or 20%, in 2006 compared to 2005, due primarily to increases
in: corporate salaries and related benefits of $2,710,356 associated with increased
headcounts, occupancy and equipment costs of $1,065,385, marketing expenses of $321,401,
travel costs of $334,814, and franchise and property taxes of $496,535 which were partially
offset by a decrease in accounting, professional consulting and temporary labor costs of
$3,005,734, which was primarily due to the Company bringing in-house site related surveying
and construction activities during 2006. Selling, general and administrative expenses
declined as a percentage of net product revenues from 312% in 2005 to 132% in 2006 as the
increased revenue base was able to absorb more of the corporate costs and the consulting
needs decreased.
    
    Impairments, Disposals and Site Closures.During 2006, the Company began full-scale
execution of its ATE® network expansion plan, which included use of funds raised in the
2005 Senior Discount Notes Offering and earmarked for capital expansion of core sites
meeting certain site selection criteria. In addition, the Company identified and evaluated
non-core sites which no longer complied with the new site selection criteria. Based on such
evaluations, the Company opened 80 new sites, closed five non-core sites, and determined
that two remaining non-core sites were impaired. Accordingly, the Company recorded a
$1,303,885 impairment charge, a $317,973 loss on settlement of its asset retirement
obligations and wrote off approximately $706,000 of fixed assets associated with closed or
impaired sites in 2006. Additionally, during 2006, the Company determined that certain
potential new sites were no longer viable candidates for short-term site construction and
wrote off $562,961 of capitalized site survey costs. As a result of ongoing modification of
site equipment, the Company continued to identify obsolete, damaged or unusable equipment,
and wrote off such fixed assets of $1,911,698 in 2006 and $1,024,288 in 2005.
 21




---



##### 



Interest income (expense), net.
 Liquidity and Capital Resources
 ®
    Cash Flows
  
    
    Customers frequently purchase branded member cards and assorted prepaid plans for future
use. As of December 31, 2006, we have deferred recognition of related trade revenues of
approximately $1.2 million to future periods.
    
    Through December 31, 2006, we have been awarded approximately $54.3 million in
cumulative-to-date grants of which we have invoiced approximately
$17.3 million. Of the
total amount invoiced, we have deferred recognition of $12.0 million of related revenue to
future periods. Of the remaining $37.0 million in grant monies not yet invoiced, such
amounts will become collectible as additional sites are constructed. However, there can be
no assurance that all amounts will be collected. In addition, we plan to continue our
efforts to pursue other grant opportunities.
  22




---



##### 



Year EndedDecember 31,2006
    
    2005Activity:Operating activities
    
    $
    (34,092,663
    )
    
    $
    (19,731,788
    )Investing activities
    
    
    45,243,042
    
    
    
    (4,254,293
    )Financing activities
    
    
    (443,513
    )
    
    
    28,342,954Net increase (decrease) in cash
    
    $
    10,706,866
    
    
    $
    4,356,873
 Operating Activities
  Investing Activities
  ® ®
 Financing Activities
    23




---



##### 



Off-Balance Sheet Arrangements
  Recently Issued Accounting Pronouncements
 The Fair Value Option for Financial Assets and Financial Liabilities
 Including an amendment of FASB Statement No. 115
 Fair Value Measurements
 Accounting for Uncertainty in
Income Taxes Accounting for Income Taxes
 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross Versus Net Presentation)
 Critical Accounting Policies, Judgments and Estimates
  24




---



##### 



Impairment of Long-Lived Assets. Accounting for the Disposal or Impairment of
Long-Lived Assets
 Asset Retirement Obligations. Accounting for Asset Retirement Obligations Accounting for Conditional Asset Retirement Obligations  an
interpretation of FASB Statement No. 143.
  Stock-Based Compensation. Accounting for
Stock-Based Compensation, Accounting for Stock Issued
to Employees.
    25




---



##### 



Item 7. Financial Statements.
 The information required by this item is attached hereto beginning at page F-1 of this Annual
Report on Form 10-KSB .
 26




---



##### 



Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
  Item 8A. Controls and Procedures.
      Item 8B. Other Information.
  27




---



##### 



PART III
 Item 9. Directors, Executive Officers, Promoters , Control Persons and Corporate Governance;
Compliance With Section 16(a) of the Exchange Act.
  Item 10.
Executive Compensation.
  Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  Item 12.
Certain Relationships and Related Transactions, and Director Independence.
  Item 13. Exhibits.
    Item 14. Principal Accountant Fees and Services.
  28




---



##### 



SIGNATURES
  IdleAire Technologies CorporationDate: April 2, 2007
    By:
    /s/ Michael C. CrabtreeMichael C. CrabtreePresident and Chief Executive Officer  SIGNATURE
    
    TITLE
    
    DATE/s/ Michael C. Crabtree

Michael C. Crabtree
    
    President, Chief Executive Officer
and Chairman of the Board
    
    April 2, 2007/s/ Paul W. Boyd

Paul W. Boyd
    
    Chief Financial Officer and Treasurer
    
    April 2, 2007/s/ James H. Price

James H. Price
    
    Senior Vice President, General Counsel
and Director
    
    April 2, 2007/s/ J. Tom Badgett

J. Tom Badgett
    
    Chief Information Officer, Secretary and
Director
    
    April 2, 2007/s/ David Gill

David Gill
    
    Director
    
    April 2, 2007/s/ Lana R. Batts

Lana R. Batts
    
    Director
    
    April 2, 2007/s/ Dan H. Felton III

Dan H. Felton III
    
    Director
    
    April 2, 2007
 29




---



##### 



IdleAire Technologies Corporation
 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
 Exhibit No.
    
    Description
    
    Method of Filing3.1.1
    
    Amended and Restated Certificate of Incorporation of the
Company, dated May 7, 2002
    
    Incorporated by
reference to
Exhibit 3.1.1 in
the Form 10SB filed
with the SEC on May
2, 2006.3.1.2
    
    Certificate of Designation of Voting Powers, Designations,
Preferences, Limitations, Restrictions and Relative Rights
of Series A Convertible Preferred Stock of IdleAire
Technologies Corporation, dated December 30, 2002
    
    Incorporated by
reference to
Exhibit 3.1.2 in
the Form 10SB filed
with the SEC on May
2, 2006.3.1.3
    
    First Certificate of Amendment to Amended and Restated
Certificate of Incorporation of IdleAire Technologies
Corporation, dated November 11, 2003
    
    Incorporated by
reference to
Exhibit 3.1.3 in
the Form 10SB filed
with the SEC on May
2, 2006.3.1.4
    
    First Amendment to Certificate of Designation of Voting
Powers, Designations, Preferences, Limitations,
Restrictions and Relative Rights of Series A Convertible
Preferred Stock of IdleAire Technologies Corporation, dated
November 11, 2003
    
    Incorporated by
reference to
Exhibit 3.1.4 in
the Form 10SB filed
with the SEC on May
2, 2006.3.1.5
    
    Certificate of Designation of Voting Powers, Designations,
Preferences, Limitations, Restrictions and Relative Rights
of Series B Convertible Preferred Stock of IdleAire
Technologies Corporation, dated November 11, 2003
    
    Incorporated by
reference to
Exhibit 3.1.5 in
the Form 10SB filed
with the SEC on May
2, 2006.3.1.6
    
    First Amendment to Certificate of Designation of Voting
Powers, Designations, Preferences, Limitations,
Restrictions and Relative Rights of Series B Convertible
Preferred Stock of IdleAire Technologies Corporation, dated
October 29, 2004
    
    Incorporated by
reference to
Exhibit 3.1.6 in
the Form 10SB filed
with the SEC on May
2, 2006.3.1.7
    
    Certificate of Designation of Voting Powers, Designations,
Preferences, Limitations, Restrictions and Relative Rights
of Series C Convertible Preferred Stock of IdleAire
Technologies Corporation, dated November 3, 2004
    
    Incorporated by
reference to
Exhibit 3.1.7 in
the Form 10SB filed
with the SEC on May
2, 2006.3.1.8
    
    Second Certificate of Amendment to Amended and Restated
Certificate of Incorporation of IdleAire Technologies
Corporation, dated December 21, 2005
    
    Incorporated by
reference to
Exhibit 3.1.8 in
the Form 10SB filed
with the SEC on May
2, 2006.3.1.9
    
    Third Certificate of Amendment to Amended and Restated
Certificate of Incorporation of IdleAire Technologies
Corporation, dated January 20, 2006
    
    Incorporated by
reference to
Exhibit 3.1.9 in
the Form 10SB filed
with the SEC on May
2, 2006.3.2
    
    Bylaws of IdleAire Technologies Corporation
    
    Incorporated by
reference to Exhibit 3.2 in the
Form 10SB filed
with the SEC on May
2, 2006.
 E-1




---



##### 



4.1.1
    
    Form of 13% Senior Secured Discount Note
    
    Incorporated by
reference to
Exhibit 4.1.1 in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.2
    
    Warrant Agreement, dated as of December 30, 2005, between
IdleAire Technologies Corporation and Wells Fargo Bank,
National Association, as Warrant Agent
    
    Incorporated by
reference to
Exhibit 4.1.2 in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.2a
    
    Amendment to Warrant Agreement, dated as of December 27,
2006, between IdleAire Technologies Corporation and Wells
Fargo Bank, National Association, as Warrant Agent
    
    Filed herewith.4.1.3
    
    Warrant Agreement, dated December 30, 2005, with Jefferies
& Company, Inc.
    
    Incorporated by
reference to
Exhibit 4.1.3 in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.4
    
    Warrant Agreement, dated May 23, 2001, to Purchase Common
Stock with Lana Batts
    
    Incorporated by
reference to
Exhibit 4.1.4 in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.4a
    
    First Amendment to Warrant Agreement to Purchase Common
Stock with Lana Batts
    
    Incorporated by
reference to
Exhibit 4.1.4a in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.4b
    
    Second Amendment to Warrant Agreement to Purchase Common
Stock, dated May 23, 2004, with Lana Batts
    
    Incorporated by
reference to
Exhibit 4.1.4b in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.4c
    
    Third Amendment to Warrant Agreement to Purchase Common
Stock, dated May 23, 2005, with Lana Batts
    
    Incorporated by
reference to
Exhibit 4.1.4c in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.5
    
    Warrant Agreement to Purchase Common Stock, dated January
18, 2002, with CIBC World Markets Corp.
    
    Incorporated by
reference to
Exhibit 4.1.5 in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.6
    
    Warrant Agreement to Purchase Common Stock, dated April 18,
2005, with Ralph Head
    
    Incorporated by
reference to
Exhibit 4.1.6 in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.7
    
    Form of Series A Convertible Preferred Stock Securities
Purchase Agreement
    
    Incorporated by
reference to
Exhibit 4.1.7 in
the Form 10SB filed
with the SEC on May
2, 2006.
 E-2




---



##### 



4.1.8
    
    Form of Series B Convertible Preferred Stock Securities
Purchase Agreement
    
    Incorporated by
reference to
Exhibit 4.1.8 in
the Form 10SB filed
with the SEC on May
2, 2006.4.1.9
    
    Form of Series C Convertible Preferred Stock Securities
Purchase Agreement
    
    Incorporated by
reference to
Exhibit 4.1.9 in
the Form 10SB filed
with the SEC on May
2, 2006.10.1
    
    Securities Purchase Agreement, dated May 12, 2005, between
the Company, CTV Holdings, Inc. and PB Constructors, Inc.
    
    Incorporated by
reference to
Exhibit 10.1 in the
Form 10SB filed
with the SEC on May
2, 2006.10.2
    
    Purchase Agreement, dated December 28, 2005, between the
Company and Jefferies & Company, Inc.
    
    Incorporated by
reference to
Exhibit 10.2 in the
Form 10SB filed
with the SEC on May
2, 2006.10.3
    
    Indenture, dated as of December 30, 2005, among the Company
and Wells Fargo Bank, National Association, as trustee and
collateral agent
    
    Incorporated by
reference to
Exhibit 10.3 in the
Form 10SB filed
with the SEC on May
2, 2006.10.4
    
    Registration Rights Agreement, dated December 30, 2005,
between the Company and Jefferies & Company, Inc.
    
    Incorporated by
reference to
Exhibit 10.4 in the
Form 10SB filed
with the SEC on May
2, 2006.10.5
    
    Subordination Agreement, dated December 30, 2005, among the
Company, the named noteholders, Wells Fargo Bank, National
Association, as the collateral agent and Dan H. Felton,
III, as administrative agent
    
    Incorporated by
reference to
Exhibit 10.5 in the
Form 10SB filed
with the SEC on May
2, 2006.10.6
    
    Disbursement Agreement, dated as of December 30, 2005,
among the Company, Wells Fargo Bank, National Association,
as disbursement agent and the trustee
    
    Incorporated by
reference to
Exhibit 10.6 in the
Form 10SB filed
with the SEC on May
2, 2006.10.6.1
    
    Amendment to Disbursement Agreement, dated January 31, 2006
    
    Incorporated by
reference to
Exhibit 10.6.1 in
the Form 10SB filed
with the SEC on May
2, 2006.10.7
    
    Security Agreement, dated as of December 30, 2005 between
the Company and the Collateral Agent
    
    Incorporated by
reference to
Exhibit 10.7 in the
Form 10SB filed
with the SEC on May
2, 2006.10.8
    
    Amended and Restated 2000 Stock Option Plan
    
    Incorporated by
reference to
Exhibit 10.8 in the
Form 10SB filed
with the SEC on May 2, 2006.
 E-3




---



##### 



10.8.1
    
    Second Amended and Restated 2000 Incentive Stock Plan
    
    Filed herewith.10.9.1
    
    Senior Management Agreement, dated as of June 17, 2002,
between the Company and Michael C. Crabtree
    
    Incorporated by
reference to
Exhibit 10.9.1 in
the Form 10SB filed
with the SEC on May
2, 2006.10.9.2
    
    Senior Management Agreement, dated as of June 17, 2002,
between the Company and David Everhart
    
    Incorporated by
reference to
Exhibit 10.9.2 in
the Form 10SB filed
with the SEC on May
2, 2006.10.9.3
    
    Senior Management Agreement, dated as of June 17, 2002,
between the Company and Tom Badgett
    
    Incorporated by
reference to
Exhibit 10.9.3 in
the Form 10SB filed
with the SEC on May
2, 2006.10.9.4
    
    Senior Management Agreement, dated as of June 17, 2002,
between the Company and James H. Price
    
    Incorporated by
reference to
Exhibit 10.9.4 in
the Form 10SB filed
with the SEC on May
2, 2006.10.9.5
    
    Employment Agreement, dated as of May 6, 2002, between the
Company and Paul Boyd
    
    Incorporated by
reference to
Exhibit 10.9.5 in
the Form 10SB filed
with the SEC on May
2, 2006.10.10.1
    
    License and Installation Agreement, dated as of December 1,
2003, by and between Pilot Travel Centers LLC and the
Company CTR
    
    Incorporated by
reference to
Exhibit 10.10.1 in
the Form 10SB
Amendment 2 filed
with the SEC on
July 31, 2006.10.10.2
    
    Lease and Installation Agreement, dated as of April 7,
2004, by and between Petro Shopping Centers, L.P. and the
Company CTR
    
    Incorporated by
reference to
Exhibit 10.10.2 in
the Form 10SB
Amendment 2 filed
with the SEC on
July 31, 2006.10.10.3
    
    Lease and Installation Agreement, dated as of August 20,
2004, by and between TA Operating Corporation and the
Company CTR
    
    Incorporated by
reference to
Exhibit 10.10.3 in
the Form 10SB
Amendment 2 filed
with the SEC on
July 31, 2006.10.11
    
    First Amendment to Senior Management Agreement by and
between the Company and David Everhart, dated October 31,
2006.
    
    Incorporated by
reference to
Exhibit 10.1 in the
Form 10-QSB filed
with the SEC on
November 14, 2006.10.12
    
    Aircraft Lease Agreement, dated as of December 1, 2006, by
and between Cross County Carriers, Limited and the Company
    
    Filed herewith.10.13
    
    Aircraft Lease Agreement, dated as of November 1, 2006, by
and between JLC Aviation LLC and the Company
    
    Filed herewith.14.1
    
    Code of Business Conduct
    
    Filed herewith.
 E-4




---



##### 



14.2
    
    Code of Business Conduct and Ethics for Members of the
Board of Directors
    
    Filed herewith.14.3
    
    Code of Ethics for CEO and Financial Officers
    
    Filed herewith.31.1
    
    Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    Filed herewith.31.2
    
    Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    Filed herewith.32.1
    
    Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
    
    Filed herewith.32.2
    
    Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
    
    Filed herewith.
 Legend:CTR
    
    Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
 E-5




---



##### 



PART II
    Contents
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Financial StatementsBalance Sheets
    
    
    F-3Statements of Operations
    
    
    F-4Statements of Stockholders Equity (Deficit)
    
    
    F-5Statements of Cash Flows
    
    
    F-6Notes to Financial Statements
    
    
    F-7
 F-1




---



##### 



Nashville, TennesseeMarch 30, 2007
    
    /s/ Ernst & Young LLP
 F-2




---



##### 



December 31,
    
    December 31,2006
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    16,632,466
    
    
    $
    5,925,600Short-term investments
    
    
    15,000,000
    
    
    
    Accounts receivable
    
    
    5,395,962
    
    
    
    768,204Accounts receivable  related parties
    
    
    191,973
    
    
    
    5,000Inventories
    
    
    950,742
    
    
    
    292,710Prepaid expenses and other current assets
    
    
    1,915,075
    
    
    
    947,615Total current assets
    
    
    40,086,218
    
    
    
    7,939,129Restricted cash and investments
    
    
    39,221,783
    
    
    
    202,772,260Deposits with related party vendor
    
    
    14,103,670
    
    
    
    Deposits with other vendors
    
    
    1,871,075
    
    
    
    232,779Property and equipment, net
    
    
    137,507,599
    
    
    
    33,252,636Deferred financing costs, net
    
    
    29,452,860
    
    
    
    29,506,307Other assets
    
    
    110,130
    
    
    
    82,270Total assets
    
    $
    262,353,335
    
    
    $
    273,785,381Liabilities and stockholders equity (deficit)Current liabilities:Accounts payable
    
    $
    4,771,924
    
    
    $
    1,022,239Accounts payable to related party vendors
    
    
    2,735,245
    
    
    
    1,653,816Accrued expenses
    
    
    4,387,943
    
    
    
    1,901,377Deferred trade revenue
    
    
    1,221,147
    
    
    
    990,165Deferred grant revenue
    
    
    1,161,344
    
    
    
    1,381,426Total current liabilities
    
    
    14,277,603
    
    
    
    6,949,023Deferred grant revenue
    
    
    10,812,118
    
    
    
    5,610,783Other liabilities
    
    
    2,965,167
    
    
    
    Secured convertible notes
    
    
    100,000
    
    
    
    100,000Senior secured discount notes
    
    
    234,510,984
    
    
    
    201,690,400Total liabilities
    
    
    262,665,872
    
    
    
    214,350,206Stockholders equity (deficit):Series A convertible preferred stock, $0.001 par value; 22,000,000
shares authorized, 17,171,448 shares issued and outstanding
    
    
    30,349,676
    
    
    
    30,349,676Series B convertible preferred stock, $0.001 par value; 13,000,000
shares authorized, 12,566,774 shares issued and outstanding
    
    
    49,055,727
    
    
    
    49,055,727Series C convertible preferred stock, $0.001 par value; 11,000,000
shares authorized, 4,473,032 shares issued and outstanding
    
    
    22,155,254
    
    
    
    22,155,254Common stock, $0.001 par value; 200,000,000 shares authorized,
48,646,610 and 48,533,272 shares issued at December 31, 2006 and
December 31, 2005, respectively
    
    
    48,647
    
    
    
    48,533Stockholder subscription receivable
    
    
    (925,000
    )
    
    
    (925,000
    )Treasury stock, 111,111 common shares, at cost
    
    
    (200,000
    )
    
    
    (200,000
    )Deferred compensation
    
    
    
    
    
    
    (96,000
    )Additional paid-in capital
    
    
    52,207,709
    
    
    
    51,766,798Accumulated deficit
    
    
    (153,004,550
    )
    
    
    (92,719,813
    )Total stockholders equity (deficit)
    
    
    (312,537
    )
    
    
    59,435,175Total liabilities and stockholders equity (deficit)
    
    $
    262,353,335
    
    
    $
    273,785,381
 See accompanying notes.
 F-3




---



##### 



For the year endedDecember 31,2006
    
    2005Net revenues:Basic and premium services, net
    
    $
    10,911,458
    
    
    $
    3,827,768Ancillary product sales
    
    
    1,152,627
    
    
    
    435,206Grant revenues
    
    
    1,512,819
    
    
    
    1,827,528Other revenues
    
    
    400,321
    
    
    
    261,830Total net revenues
    
    
    13,977,225
    
    
    
    6,352,332Operating expenses:Direct site operating costs (1)
    
    
    23,363,113
    
    
    
    10,252,863Cost of ancillary product sales
    
    
    835,451
    
    
    
    548,532Depreciation and amortization
    
    
    9,467,015
    
    
    
    5,444,382Selling, general and administrative expenses
    
    
    15,659,273
    
    
    
    10,911,501Consulting fees with related party vendor
    
    
    309,617
    
    
    
    2,404,694Research and development expenses
    
    
    121,745
    
    
    
    192,388Impairment of long-lived assets
    
    
    1,303,885
    
    
    
    Loss on settlement of asset retirement obligations
    
    
    317,973
    
    
    
    Loss on disposal of fixed assets
    
    
    3,180,659
    
    
    
    1,024,288Total operating expenses
    
    
    54,558,731
    
    
    
    30,778,648Loss from operations
    
    
    (40,581,506
    )
    
    
    (24,426,316
    )Interest income
    
    
    7,161,662
    
    
    
    89,541Interest expense
    
    
    (26,864,893
    )
    
    
    (1,023,238
    )Interest expense to related parties
    
    
    
    
    
    
    (1,504,889
    )Net loss
    
    $
    (60,284,737
    )
    
    $
    (26,864,902
    )
 
 (1)
    
    Excludes depreciation expense in the amount of $8,549,764 and $4,534,468 for 2006 and 2005,
respectively, reported in a separate caption. See accompanying notes.
 F-4




---



##### 



Series A
    
    Series B
    
    Series C
    
    
    
    
    
    Stockholder
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    TotalConvertible
    
    Convertible
    
    Convertible
    
    
    
    
    
    Subscription
    
    Treasury
    
    Deferred
    
    Paid-in
    
    Accumulated
    
    StockholdersPreferred
    
    Preferred
    
    Preferred
    
    Common
    
    Receivable
    
    Stock
    
    Compensation
    
    Capital
    
    Deficit
    
    Equity (Deficit)Balance at December 31, 2004
    
    $
    30,349,676
    
    
    $
    49,066,452
    
    
    $
    1,702,500
    
    
    $
    48,384
    
    
    $
    (220,959
    )
    
    $
    (200,000
    )
    
    $
    
    
    
    $
    10,672,706
    
    
    $
    (65,854,911
    )
    
    $
    25,563,848Issuance of common stock (400
shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    
    
    
    
    333Issuance of preferred or common
stock for
goods or services
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,058
    
    
    
    
    
    
    
    1,527,064Cash collected on prior year stock
subscription
receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,959
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,959Issuance of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120,000
    )
    
    
    120,000
    
    
    
    
    
    
    
    Amortization of deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    24,000Issuance of stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,326,271
    
    
    
    
    
    
    
    40,326,271Other
    
    
    
    
    
    
    (10,725
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,725
    )Issuance of Series C preferred
stock (4,132,532 shares)
    
    
    
    
    
    
    
    
    
    
    18,952,754
    
    
    
    
    
    
    
    (925,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,027,754Conversion
of senior secured convertible notes (114,940 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    566,642
    
    
    
    
    
    
    
    566,757Exercise of incentive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,788
    
    
    
    
    
    
    
    53,816Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,864,902
    )
    
    
    (26,864,902
    )Balance at December 31, 2005
    
    $
    30,349,676
    
    
    $
    49,055,727
    
    
    $
    22,155,254
    
    
    $
    48,533
    
    
    $
    (925,000
    )
    
    $
    (200,000
    )
    
    $
    (96,000
    )
    
    $
    51,766,798
    
    
    $
    (92,719,813
    )
    
    $
    59,435,175FAS 123(R) reclassification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,000
    
    
    
    (96,000
    )
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207,342
    
    
    
    
    
    
    
    207,342Anti-dilution stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146,416
    
    
    
    
    
    
    
    146,416Issuance of warrants for goods or
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,000
    
    
    
    
    
    
    
    49,000Exercise of incentive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,766
    
    
    
    
    
    
    
    133,836Exercise of stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387
    
    
    
    
    
    
    
    431Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,284,737
    )
    
    
    (60,284,737
    )Balance at December 31, 2006
    
    $
    30,349,676
    
    
    $
    49,055,727
    
    
    $
    22,155,254
    
    
    $
    48,647
    
    
    $
    (925,000
    )
    
    $
    (200,000
    )
    
    $
    
    
    
    $
    52,207,709
    
    
    $
    (153,004,550
    )
    
    $
    (312,537
    )
 See accompanying notes.




---



##### 



For the year endedDecember 31,2006
    
    2005Operating activitiesNet loss
    
    $
    (60,284,737
    )
    
    $
    (26,864,902
    )Adjustments to reconcile net loss to net cash used in
operating activities:Non-cash interest expense
    
    
    26,211,619
    
    
    
    2,308,792Amortization of deferred financing charges
    
    
    594,000
    
    
    
    Depreciation and amortization
    
    
    9,467,015
    
    
    
    5,444,382Impairment of long-lived assets
    
    
    1,303,885
    
    
    
    Accretion of asset retirement obligations
    
    
    402,178
    
    
    
    Loss on settlement of asset retirement obligation
    
    
    317,973
    
    
    
    Loss on disposal of fixed assets
    
    
    3,180,659
    
    
    
    1,024,288Share-based compensation expense
    
    
    207,342
    
    
    
    24,000Issuance of warrants for goods or services
    
    
    49,000
    
    
    
    1,527,064Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,814,731
    )
    
    
    (355,062
    )Inventories
    
    
    (658,032
    )
    
    
    39,875Prepaid expenses and other assets
    
    
    (833,054
    )
    
    
    (635,591
    )Interest income earned on restricted cash
    
    
    (6,159,198
    )
    
    
    Acquisition of short-term trading securities, net
    
    
    (15,000,000
    )
    
    
    Accounts payable
    
    
    3,581,172
    
    
    
    (1,474,465
    )Accrued expenses
    
    
    3,589,280
    
    
    
    (878,258
    )Deferred trade revenue
    
    
    230,982
    
    
    
    368,720Deferred grant revenue
    
    
    4,981,253
    
    
    
    (260,631
    )Cash settlement of asset retirement obligation
    
    
    (459,269
    )
    
    
    Net cash used in operating activities
    
    
    (34,092,663
    )
    
    
    (19,731,788
    )Investing activitiesPurchases of property and equipment from related party vendors
    
    
    (30,428,298
    )
    
    
    (1,556,800
    )Purchases of property and equipment
    
    
    (78,284,062
    )
    
    
    (2,645,268
    )Increase in deposit with related party vendor toward equipment purchases
    
    
    (14,103,670
    )
    
    
    Increase in deposits with other vendors toward equipment purchases, net
    
    
    (1,638,296
    )
    
    
    (17,283
    )Cost of patents
    
    
    (12,307
    )
    
    
    (34,942
    )Restricted cash released to operations
    
    
    169,709,675
    
    
    
    Net cash provided by (used in) investing activities
    
    
    45,243,042
    
    
    
    (4,254,293
    )Financing activitiesProceeds from issuance of common stock
    
    
    
    
    
    
    333Proceeds from issuance of preferred stock
    
    
    
    
    
    
    17,017,029Proceeds from exercise of stock options and warrants
    
    
    134,267
    
    
    
    53,816Collection of stock subscription receivable
    
    
    
    
    
    
    220,959Proceeds from issuance of stock warrants
    
    
    
    
    
    
    33,100,000Proceeds from issuance of senior secured discount notes
    
    
    
    
    
    
    201,690,400Payments on senior secured convertible notes
    
    
    
    
    
    
    (425,000
    )Debt financing costs incurred
    
    
    (540,553
    )
    
    
    (21,986,859
    )Payments on capital lease obligations
    
    
    (37,227
    )
    
    
    Proceeds from notes payable to related parties
    
    
    
    
    
    
    1,330,000Payments on notes payable to related parties
    
    
    
    
    
    
    (1,930,000
    )Restricted cash
    
    
    
    
    
    
    (200,727,724
    )Net cash (used in) provided by financing activities
    
    
    (443,513
    )
    
    
    28,342,954Net increase in cash and cash equivalents
    
    
    10,706,866
    
    
    
    4,356,873Cash and cash equivalents at beginning of period
    
    
    5,925,600
    
    
    
    1,568,727Cash and cash equivalents at end of period
    
    $
    16,632,466
    
    
    $
    5,925,600Supplemental non-cash activitiesAnti-dilution warrants as additional debt discount
    
    $
    146,416
    
    
    $
    Receipt of free equipment as a vendor concession
    
    $
    1,382,391
    
    
    $
    Issuance of warrants as debt issuance costs in connection with issuance
of senior secured discount notes
    
    $
    
    
    
    $
    5,521,782Conversion of senior secured convertible notes and accrued interest to
preferred stock
    
    $
    
    
    
    $
    566,757Issuance of warrants in satisfaction of accrued compensation
    
    $
    
    
    
    $
    199,600
 See accompanying notes.
 F-6




---



##### 



1. Organization
     F-7




---



##### 



2. Significant Accounting Policies
 Cash and Cash Equivalents
  Short-term Investments
  Restricted Cash and Investments
   F-8




---



##### 



Fair Value of Financial Instruments
   Concentrations of Credit Risk
   Inventories
  F-9




---



##### 



Property and Equipment
  Revenue-generating equipment
    3-15 yearsFurniture and fixtures
    5 yearsData processing equipment and software
    3 yearsAutomobiles and motorized equipment
    3 years
  Capitalized Leases
 Determining Whether an Arrangement
Contains a Lease Accounting for Leases .
 Impairment of Long-Lived Assets
 Accounting for the Disposal or Impairment of Long-Lived Assets.
 F-10




---



##### 



Asset Retirement Obligations
 Accounting for Asset Retirement Obligations Accounting for Conditional Asset Retirement Obligations  an interpretation of FASB Statement No.
143
  Revenue Recognition
    F-11




---



##### 



Senior Secured Discount Notes
  Deferred Financing Charges
   Advertising and Promotion
  Research and Development
  Patents
  F-12




---



##### 



Share-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees.
    Income Taxes
  F-13




---



##### 



Segment Information
 Disclosures about Segments of an Enterprise and Related
Information
 Comprehensive Income
 Reporting Comprehensive Income
 Use of Estimates
  Reclassifications
  New Accounting Standards
 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross Versus Net Presentation),
 F-14




---



##### 



Accounting for Uncertainty in
Income Taxes Accounting for Income Taxes
 Fair Value Measurements
 The Fair
Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB
Statement No. 115
 F-15




---



##### 



3. Property and Equipment
  December 31,2006
    
    2005Revenue-generating equipment
    
    $
    125,410,713
    
    
    $
    32,159,684Leasehold improvements
    
    
    826,722
    
    
    
    626,977Furniture and fixtures
    
    
    679,746
    
    
    
    480,457Data processing equipment and software
    
    
    4,998,987
    
    
    
    3,165,843Automobiles and motorized equipment
    
    
    1,521,893
    
    
    
    553,211Service units in process
    
    
    25,093,253
    
    
    
    8,839,686158,531,314
    
    
    
    45,825,858Less accumulated depreciation and amortization
    
    
    (21,023,715
    )
    
    
    (12,573,222
    )$
    137,507,599
    
    
    $
    33,252,636
    F-16




---



##### 



For the Year EndedDecember 31,2006
    
    2005Depreciation expense on revenue-generating equipment
    
    $
    8,549,764
    
    
    $
    4,534,468Depreciation expense on non-revenue-generating equipment
    
    
    888,958
    
    
    
    882,397Total depreciation expense
    
    $
    9,438,722
    
    
    $
    5,416,865
  4. Related Party Transactions
  F-17




---



##### 



F-18




---



##### 



5. Accrued Expenses
  December 31,2006
    
    2005Salaries and related personnel liabilities
    
    $
    1,803,899
    
    
    $
    835,888Accrued sales taxes
    
    
    895,990
    
    
    
    343,863Other liabilities
    
    
    1,688,054
    
    
    
    721,626$
    4,387,943
    
    
    $
    1,901,377
 6. Senior Secured Discount Notes with Warrants
   F-19




---



##### 



F-20




---



##### 



7. Secured Convertible Notes
   8. Stockholders Equity
 Common Stock and Warrants
  F-21




---



##### 



Preferred Stock
  9. Share-Based Compensation
    F-22




---



##### 



For the Years EndedDecember 31,2006
    
    2005Expected term in years
    
    
    5.6
    
    
    
    6.1Risk-free interest rate
    
    
    4.9
    %
    
    
    4.2
    %Expected dividend rate
    
    
    
    
    
    
    Expected volatility
    
    
    51.7
    %
    
    
    
 Share-Based Payment.
  F-23




---



##### 



Weighted
    
    WeightedAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term
    
    ValueOptions outstanding
at January 1, 2006
    
    
    4,027,829
    
    
    $
    1.96Granted
    
    
    908,075
    
    
    
    0.82Exercised
    
    
    (70,255
    )
    
    
    1.91Forfeited
    
    
    (352,568
    )
    
    
    1.99Options outstanding
at December 31,
2006
    
    
    4,513,081
    
    
    $
    1.73
    
    
    6.35 years
    
    $
    Options exercisable
at December 31,
2006
    
    
    3,534,338
    
    
    $
    1.69
    
    
    5.72 years
  F-24




---



##### 



10. Income Taxes
  2006
    
    2005U.S federal statutory rate
    
    
    34.0
    %
    
    
    34.0
    %State taxes (net of federal benefit)
    
    
    3.8
    
    
    
    2.8Change in deferred tax valuation allowance
    
    
    (37.6
    )
    
    
    (36.7
    )Other
    
    
    (0.2
    )
    
    
    (0.1
    )0.0
    %
    
    
    0.0
    %
  2006
    
    2005Deferred tax assets:Net operating loss carryforward
    
    $
    56,988,370
    
    
    $
    32,546,537Accrued liabilities
    
    
    379,955
    
    
    
    181,754Deferred revenue
    
    
    5,060,737
    
    
    
    3,089,179Other
    
    
    
    
    
    
    34,77562,429,062
    
    
    
    35,852,245Deferred tax liabilities:Depreciation
    
    
    (4,810,334
    )
    
    
    (1,026,399
    )Asset retirement obligations
    
    
    (126,449
    )
    
    
    Net deferred tax assets
    
    
    57,492,279
    
    
    
    34,825,846Valuation allowance
    
    
    (57,492,279
    )
    
    
    (34,825,846
    )$
    
    
    
    $
    
  F-25




---



##### 



11. Leases
   2007
    
    $
    692,9322008
    
    
    666,3312009
    
    
    668,9572010
    
    
    514,0562011
    
    
    495,966Thereafter
    
    
    608,842$
    3,647,084
  2007
    
    $
    321,7502008
    
    
    427,6802009
    
    
    427,6802010
    
    
    427,6802011
    
    
    320,760Thereafter
    
    
    72,9391,998,489Interest
    
    
    (653,325
    )$
    1,345,164
  F-26




---



##### 



12. Commitments and Contingencies
     13. Subsequent Event
  F-27