UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





[X]
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
      2007





[  ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE TRANSITION PERIOD FROM _______________ TO
      _______________


ALTAIR
      NANOTECHNOLOGIES INC.(Exact
      name of registrant as specified in its charter)Canada
            
            1-12497
            
            33-1084375(State
      or other jurisdiction
              of
      incorporation)
            
            (Commission
      File No.)
            
            (IRS
      Employer
              Identification
      No.)204
      Edison Way
              Reno,
      Nevada 89502-2306(Address
      of principal executive offices, including zip code)





Registrant's
telephone number, including area code:  (775) 856-2500





Securities
registered pursuant to Section 12(b) of the Act:





Common Shares, no par value
            
            NASDAQ Capital Market(Title
      of Class)
            
            (Name
      of each exchange on which
registered)





Securities
registered pursuant to Section 12(g) of the Act:  None








Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.   YES [
 ]    NO [X ]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   YES [ 
]   NO [X ]





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Report or any amendment to this
Report.  [  ]


i








Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“ accelerated filer ” and “ large accelerated filer ” in
Rule 12b-2 of the Exchange Act  (Check one):





Large
      accelerated filer     [   ]
            Accelerated
      filer    [X ]
            Non-accelerated
      filer    [  
]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act):   YES [  ] NO [X]





The
aggregate market value of the common shares held by non-affiliates of the
Registrant on June 30, 2007, based upon the closing stock price of the common
shares on the NASDAQ Capital Market of $3.54 per share on June 30, 2007, was
approximately $198,229,173.  Common Shares held by each officer and
director and by each other person who may be deemed to be an affiliate of the
Registrant have been excluded.





As of
March 10, 2008, the Registrant had 84,356,301 common shares
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Registrant’s Proxy Statement on Schedule 14A for the Registrant’s 2008
Annual Meeting of Shareholders are incorporated by reference in Part III as
specified.





























ii








INDEX TO FORM
10-K





PART
      I
            
            1Item
      1:
            Business
            1Item
      1A.
            Risk
      Factors
            23Item
      1B.
            Unresolved
      Staff Comments
            30Item
      2.
            Properties
            32Item
      3.
            Legal
      Proceedings
            32Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            32PART
      II
            
            33Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            33Item
      6.
            Selected
      Financial Data
            35Item
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
            36Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            45Item
      8.
            Financial
      Statements and Supplementary Data.
            45Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
            46Item
      9A.
            Controls
      and Procedures
            46Item
      9B.
            Other
      Information
            47PART
      III
            
            49Item
      10.
            Directors
      and Executive Officers of the Registrant
            49Item
      11.
            Executive
      Compensation
            49Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.........
            49Item
      13.
            Certain
      Relationships and Related Transactions
            49Item
      14.
            Principal
      Accountant Fees and Services
            49PART
      IV
            
            50Item
      15.
            Exhibits,
      Financial Statement Schedules and Reports on Form 8–K
            50





iii









PART
I





This
Annual Report on Form 10-K for the year ended December 31, 2007 (this “Report”)
contains “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that
involve risks and uncertainties.  Purchasers of any of the common
shares, no par value, (the “common shares”) of Altair Nanotechnologies Inc. are
cautioned that our actual results will differ (and may differ significantly)
from the results discussed in the forward-looking statements.  Factors
that could cause or contribute to such differences include those factors
discussed herein under “Item 1A. Risk Factors” and elsewhere in this Report
generally.  The reader is also encouraged to review other filings made
by us with the Securities and Exchange Commission (the “SEC”) describing other
factors that may affect future results of the Company.





Unless
the context requires otherwise, all references to “Altair,” “we,” “Altair
Nanotechnologies Inc.,” or the “Company” in this Report refer to Altair
Nanotechnologies Inc. and all of its consolidated
subsidiaries.   Altair currently has one wholly owned subsidiary,
Altair US Holdings, Inc., a Nevada corporation.  Altair US Holdings,
Inc. directly or indirectly wholly owns Altairnano, Inc., a Nevada corporation,
Mineral Recovery Systems, Inc., a Nevada corporation (“MRS”), and Fine Gold
Recovery Systems, Inc., a Nevada corporation (“Fine Gold”).  AlSher
Titania LLC, a Delaware limited liability company, is 70% owned by Altairnano,
Inc.  We have registered or are in the process of registering the
following trademarks: Altair Nanotechnologies®, Altair Nanomaterials®,
AltairnanoTM, TiNano®, Nanocheck® and RenaZorb®.  Any other trademarks
and service marks used in this Report are the property of their respective
holders.




Item
1: Business







We are a
Canadian corporation, with principal assets and operations in the United States,
whose primary business is developing and commercializing nanomaterial and
titanium dioxide pigment technologies. We are organized into three divisions, a
Power and Energy Group (formally known as the Advanced Materials and Power
Systems Division), a Performance Materials Division, and a Life Sciences
Division.  Our research, development, production and marketing efforts
are currently directed toward three primary market applications that utilize our
proprietary technologies:





·
            Power
      and Energy Group


o
            The
      design, development, and production of our nano lithium Titanate battery
      cells, batteries, and battery packs as well as related design and test
      services.


o
            The
      development, production and sale for testing purposes of electrode
      materials for use in a new class of high performance lithium ion batteries
      called nano lithium Titanate batteries.





·
            Performance
      Materials Division


o
            Through
      AlSher Titania, the development and production of high quality titanium
      dioxide pigment for use in paint and coatings, and nano titanium dioxide
      materials for use in a variety of applications including those related to
      removing contaminants from air and
water.


o
            The
      testing, development,  marketing and/or licensing of
      nano-structured ceramic powders for use in various application, such as
      advanced performance coatings, air and water purification systems, and
      nano-sensor applications.








1




·
            Life Sciences
      Division


o
            The
      co-development of RenaZorb, a test-stage active pharmaceutical ingredient,
      which is designed to be useful in the treatment of elevated serum
      phosphate levels in human patients undergoing kidney
    dialysis.


o
            The
      development of a manufacturing process related to a test-stage active
      pharmaceutical ingredient, which is designed to be useful in the treatment
      of companion animals.





We also
provide contract research services on select projects where we can utilize our
resources to develop intellectual property and/or new products and
technology.  In the near term, as we continue to develop and market
our products and technology, contract services will continue to be a substantial
component of our operating revenues.  During the years ended December
31, 2007, 2006 and 2005, contract services revenues comprised 55%, 67%, and 70%,
respectively, of our operating revenues.  In the summary of our
business below, we describe our various research products in connection with our
description of the business segment to which each relates.





Our
Proprietary Nanomaterials and Pigment Process





Most of our existing products,
potential products and contract research services are built upon our proprietary
nanomaterials and titanium dioxide pigment technology.  We acquired
the basis for this technology from BHP Minerals International, Inc. in 1999 and,
over the past seven years, have continued to expand and refine various
applications of the technology.  Today, we use the technology in order
to produce various finely-sized powders that have current or potential
applications in a wide range of industries, including pharmaceuticals, titanium
dioxide pigment, and high performance rechargeable
batteries.  Although the existing and potential applications are
varied, each is directly or indirectly built upon the ingenuity of our
management, research and development staff and engineering team and our
proprietary nanomaterials and titanium dioxide pigment technology.





This
nanomaterials and titanium dioxide pigment technology enables our production of
conventional titanium dioxide pigment products that are finely sized powders
consisting of titanium dioxidecrystals.  These
powders approximate 170-300 nanometers in size. This technology is also capable
of producing titanium dioxide and other metal and mixed metal oxide
nanomaterials.  These are specialty products with a size range of 10
to 100 nanometers (approximately one tenth the size of conventional titanium
dioxide pigment).  The primary products currently being produced in
the processing plant are titanium dioxide, lithium titanate spinel, and
lanthanum products.





Using
this technology, we are in various stages of research, development and marketing
of numerous products and potential products.  We also use this
technology to provide contract research services on select projects where we can
utilize our resources to develop intellectual property and/or new products and
technology.




Power
and Energy Group




Primary
Products




Nano
lithium Titanate batteries and electrode materials




We are
developing, marketing, producing and selling our proprietary rechargeable
lithium ion battery, which we have branded as our nano lithium Titanate
batteries.  We are also seeking to develop, license, manufacture and
sell our proprietary lithium titanate spinel (“LTO”) electrode materials for use
in batteries being developed by other companies.




2




As
explained in greater detail below, principal features used to compare
rechargeable batteries including power, discharge rates, energy density, cycle
life, calendar life and recharge time.  In laboratory and field tests,
our nano lithium Titanate batteries have exhibited power, rates of
charge,  operating temperature range, cycle life, and expected
calendar life that far exceed those of rechargeable batteries currently being
used for target applications.  We believe that with these strengths
our nano lithium Titanate batteries are superior alternatives for rechargeable
battery uses that require power, durability and exposure to the
elements.   These include all types of electric automobiles,
electric utility services and uninterruptible power supplies.





Key Business Developments in
Power and Energy





Phoenix Relationship.  In January 2007, we
entered into a multi-year purchase and supply agreement with Phoenix Motorcars,
Inc., succeeded by Phoenix MC, Inc. (“Phoenix”), for lithium nano lithium
Titanate battery packs to be used in electric vehicles produced by
Phoenix.  Contemporaneously, Phoenix placed firm purchase orders for
35KWh battery pack systems valued at $1,040,000 and placed an indicative blanket
purchase order for up to 500 battery pack systems to be delivered during 2007
(projected value at the time between $16 and $42 million). The second release
order valued at $2,210,000 was placed in May 2007.  Due to a slow down
in production relating primarily to delays in Phoenix obtaining funding,
projected orders for 2007 of between $16 and $42 million for 2007 were not
achieved.




After
title passed to Phoenix for the first-generation battery packs produced under
the two release orders, internal testing and modeling revealed a module
configuration problem.  Our research indicated that the manner in
which battery modules within the battery packs were configured could, under
certain rare circumstances, cause battery modules within the first-generation
battery packs to overheat and fail.  The configuration issue relates
specifically to the configuration and structure of the first-generation electric
battery packs and does not indicate an issue in our core lithium Titanate cell
technology or in our battery modules for stationary applications, which are of a
completely different design.  We met with Phoenix and presented
several work-arounds to ensure safe use of the first-generation battery
packs.  Unable to define an acceptable work-around, we agreed to
replace 47 of the existing packs sold to Phoenix by means of a credit against
re-designed second-generation battery packs and related engineering
services.  Modeling and design of the modules for the
second-generation battery packs is substantially complete.  Once
testing and computer modeling confirm that the revised design resolves the
potential overheating issue, we expect to commence delivery of second-generation
battery packs to Phoenix.  We are currently negotiating a development
and supply agreement with Phoenix.




AES
Relationship.  In July 2007, we entered into a multi-year development
and equipment purchase agreement with AES Energy Storage, LLC (“AES”), a
subsidiary of global power leader The AES Corporation.  The AES
Corporation is one of the world’s largest power companies, with operations in 28
countries on five continents.  The AES Corporation generation and
distribution facilities have the capacity to serve 100 million people
worldwide.  Under the terms of the deal, we are working jointly with
AES to develop a suite of energy storage solutions specifically for
AES.  These energy storage products are expected to deliver in excess
of 1 megawatt of power and 500 kilowatt-hours of energy.  We are
working with AES to apply these products and systems at strategic points within
the electrical grid to more efficiently deal with congestion, peak energy
consumption, and real-time fluctuations in electricity supply and
demand.  We believe that the quick response time, extended life, and
power profile of our batteries and energy storage products are well suited to
improving performance in these areas with lower environmental impact than
traditional generation solutions.




3




On August
3, 2007, we received an initial $1,000,000 order in connection with the AES
Joint Development and Equipment Purchase Agreement for a 500 kilowatt-hour
energy storage product.  In accordance with this purchase order, two 1
megawatt stationary battery packs (energy equivalent for each pack based on
anticipated operational time is 250 kilowatt-hours of energy each) were
manufactured in Indiana and completed according to the delivery schedule in
December 2007.  This initial product is intended for use as a
short-term duration buffer to regulate the frequency and voltage of the
electrical utility system grid.  This buffering is called Regulation
Services, and it serves to smooth the short term supply-demand imbalances
inherent in power generation and delivery, thereby improving the quality of
power delivered.  The stationary battery packs have been connected to
the electrical grid and full testing has commenced.  Assuming the
successful testing of these packs, we expect our development relationship with
AES to continue through 2008.




Alcoa
Relationship.  In September 2006, we signed an agreement with Alcoa’s
AFL Automotive business to jointly develop a battery pack
system.  This collaboration brings together our innovative nano
lithium Titanate battery technology and AFL Automotive’s expertise in vehicle
electrical distribution systems, power management electronics and its
substantial presence as a world renowned supplier to the automotive
market.  AFL Automotive is also a major supplier of lightweight, high
strength aluminum components to the automotive industry.  The
agreement provides for the delivery of an integrated battery pack system for the
medium-duty hybrid truck market using our nano lithium Titanate battery
technology and AFL Automotive’s electrical interconnect and application
technology to integrate the battery pack system into the vehicle’s electrical
architecture.  The scope of the joint development agreement involved
system design, development and prototyping.  During the development
and prototyping phase of this agreement, each party was responsible for its own
costs and expenses.  Any revenues received in connection with the sale
of the prototype battery would be shared based on the proportion of documented
costs incurred in connection with this project.  No significant
revenues or expenses were incurred in connection with this agreement in 2006 or
2007.  Based on work performed to date, both parties informally agreed
in 2007 to shift focus from a product designed for the medium-duty hybrid truck
market to a specialty power application.  After reviews of a specialty
cell and new pack concept that we are proposing are completed by ALCOA, we
expect to negotiate a new development agreement by the third quarter of
2008.




Department
of Energy Contracts.  On September 9, 2006, approval was finalized on
the $2.5 million grant received from the U.S. Department of
Energy.  Of the $2.5 million, $2.4 million will be available, after
the deduction of administrative fees, to fund research for the following
programs: Battery technology, Nanosensors, and Nanomaterials
characterization.  This is a prime grant under which we are directly
responsible for the contract administration. The Nanosensors and Nanomaterials
characterization programs are discussed subsequently under the related
divisions.   The battery technology program consists of two
objectives, 1) Design, Synthesis, and Testing of Li-ion Hosts for Cathode
Service and 2) Development, Testing, and Demonstration of High Rate Low
Temperature Lithium Ion Battery, funded in the amounts of $508,000 and $606,000
respectively in 2006.  Objective 1 under the grant continues research
on optimized anode and cathode materials for high power, safe, fast charge
batteries.  The agreement anticipates that this work will be
accomplished over 24 months.  This research will also extend the
collaboration with Rutgers University for prototype cell
testing.  Objective 2 furthers the investigation of extreme
temperature range battery performance and extends over 12
months.  During 2007, the program associated with objective 2 was
extended through September 2008.  Of this grant, $1,114,000 is
allocated to the battery optimization program.  Work continues as
planned under these objectives.  Through December 31, 2007 $706,865 in
revenue has been recognized in connection with this grant.





Target
Markets





According to information supplied by JMP
Securities in January 2007,the market for
power storage devicesis approximately $55 billion
($31 billion lead acid, $9 billion alkaline, $8 billion lithium ion, and
$7 billion all other).  Lithium ion and advanced technology
rechargeable batteries are expected to gradually increase their share of the
world rechargeable battery market.  New developments indicate that
high power batteries of this type will ultimately be developed for application
as replacements for lead acid batteries and Nickel Metal Hydride, or NiMH,
batteries in automobiles, electric vehicles, and hybrid electric vehicles where
direct electrical energy for starting and passing will assist the gasoline
engines.  Also, the development of power storage systems for
stationary power, electric utility grid services and wind, fuel cell and solar
generation systems will require enhanced battery capabilities.


4





Our
technology provides a fundamental building block for a new generation of
rechargeable batteries.  Currently our primary markets are
in the electric vehicle sector and electric utility grid
services.  As discussed above, we have an active development and
supply relationship with Phoenix for electrical vehicle battery packs and AES in
the electrical grid market.  We have also provided electrode
materials, cells, batteries and battery packs to, and had early stage
discussions with, various established automobile companies that are
evaluating our technology for use in hybrid electric vehicles and plug-in
electric vehicles.  These discussions could lead to commercial
relationships that will be characterized by a revenue stream consisting of one
or more of development funding, materials manufacturing and
royalties.





We are
focusing our marketing and development efforts on markets presently dominated by
Nickel Cadmium, or NiCd, and Nickel Metal Hydride, or NiMH, batteries, such as
automobiles, in which rapid charging, long cycle life and the additional power
from the rapid discharge should prove advantageous and in stationary power
applications such as electric grid services and uninterruptible power supply,
where rapid charging, long calendar life, low maintenance, tolerance to
temperature extremes and power resulting from rapid discharge should prove
advantageous.





Key
Features





Rechargeable batteries are made from various materials,
each of which has certain characteristics or tendencies, depending upon how the
products are configured.  Some of the key concepts used when comparing
rechargeable batteries include the following:





·
            Power:  A battery’s power rating is its
      ability to deliver current while maintaining its
      voltage.





·
            Discharge:  Discharge refers to the
      dissipation of a battery’s stored energy as a result of intended transfer
      of that energy (either gradually or in one or more large bursts) or as a
      result of the unintended leakage of that energy.  This latter
      type of leakage is referred to as “self discharge” and isa natural
      tendency of all batteries at a rate that is proportional to
      temperature.  A “deep discharge”
      refers to the discharge of substantially all of the stored energy in a
      battery between recharges.  In general, deep discharges reduce
      the cycle life of batteries.





·
            Energy density:A battery’s
      energy density relates to the total unit volume of materials comprising a
      battery that will deliver a watt-hour of energy.  A battery with
      high energy density will deliver more energy per unit volume than a
      battery with lower energy density.





·
            Cycle life:  The ability of a
      rechargeable battery to accept a charge tends to diminish as a result of
      repeat charge/discharge cycles.  A battery’s “cycle life” is the
      number of times it can be charged and discharged without a significant
      reduction in its ability to accept a
  charge.





·
            Calendar
      life:  A battery’s calendar life relates to the period of time
      that a battery will preserve its capability to deliver a significant
      portion of its newly built energy storage
  capacity.





·
            Recharge
      time:  Recharge time is the minimum amount of time it takes to
      replenish a battery’s energy.





5


Other important factors include the cost,
safety,environmental
friendlinessand extreme temperature
performance of a battery.  Although being on the positive side of each
of the characteristics is desirable in all rechargeable batteries, the
importance of these various characteristics depends primarily upon the
anticipated use of a battery.  For example, high power, which is
important in ahand-held cordless power tool isnot very important in a battery designed to power a
cell phone because a cell phone needs very little power; however, high specific
energy density may be important in a cell phone battery because consumers desire
to be able to use a cell phone for a long time between recharge and want to
carry as little weight and volume as possible.





The
principal advance we have made is in the optimization of nano-structured lithium
LTO electrode materials that replace graphite electrode materials used in the negative electrode ofcurrent lithium ion batteries.  When used with
apositive electrode from a common lithium
ion battery, battery cells operate at very high charge and discharge
rates.  Our current non-optimized cells are capable of recharge times
of 10 minutes to 90%, or more, of initial battery capacity and 10 minute
discharges with 90%, or more, capacity utilizations.





Our
nano-structured LTO is non-reactive with the electrolytes used in common lithium ion systems.  This greatly
reduces the negative electrode resistance, and thus, passage of lithium ions to
the electrode surface.  Since the material is nano-structured, the
surface area available to lithium ions is greatly enhanced – by up to 100 times
– over graphite based systems.  The material allows for a greatly
facilitated, thus rapid, access to the active sites necessary for battery
function.  In addition, the small size of the nanoparticles
dramatically reduces the distance from the surface to inner active sites,
further reducing resistance to high rate operation.These characteristics permit our battery
cells to deliver more power and recharge much faster than other types of
rechargeable batteries described in the subsection entitled “Competition” below.





Our
nano-structured LTO is termed a zero strain material, meaning that the material
essentially does not change shape upon the entry and exit of a lithium ion into
and from the particle.  Since most battery materials suffer from this
mechanical stress and strain (this particle fracturing reduces the life of the
battery), battery calendar life and cyclelife is greatly enhanced using our nano-structure LTO.In January 2007, we completed 25,000 deep
charge/discharge cycles of our innovative battery cells.  Even after
25,000 cycles the cells still retained over 80% of their original charge
capacity. This represents a significant improvement over conventional,
commercially available rechargeable battery technologies such as lithium ion,
NiMH and NiCD. These other commercially available rechargeable batteries
typically retain that level of charge capacity only through approximately 1,000
deep charge/discharge cycles.Nano-structured
LTO offers a near-term promise of lithium
nano-titanate batteries that exhibit rapid charge and discharge, longer cycle
life and safer performance than either currently available NiMH or lithium ion
batteries.  These results support the feasibility of a power lithium
nano-titanate battery pack half the size of those currently being tested for
hybrid electric vehicle applications.





Our
nano-structured LTO also represents a breakthrough in low- and high-temperature
performance.  Nearly 90% of room temperature charge retention is
realized at -30°C from
Altair’s nano-structured LTO cells.  In contrast, common lithium ion technology possesses virtually no
charging capabilities at this low temperature, and the other rechargeable
battery types described in the subsection entitled
“Competition” below take 10 to 20 times longer to charge at this low
temperature.





We are
also testing the safety of batteries made using our nano-structured
LTO.  Graphite negative electrode materials used in typical lithium
ion batteries are known to suffer from thermal runaway issues at temperatures
above 130°C, while
lithium titanium spinel oxides are known to be safe for an additional 120°C or up to temperatures of
about 250°C.  In May 2006, we
completed a safety testing cycle for lithium ion battery products using our
nano-structure LTO that replaces the graphite used in “standard” lithium ion
batteries.  In the safety testing cycle, we subjected our batteries to
temperatures up to 240o C, which
is more than 100o C above
the temperature at which graphite-based batteries can exhibit thermal run away
and explode.  In addition, we performed high-rate overcharge,
puncture, crush, drop and other comparative tests alongside a wide range of
graphite-based battery cells with no malfunctions, explosions or safety concerns
exhibited by our nano-structured LTO cells.  In comparison, the graphite
cells, put to the same tests, routinely smoked, caught fire and
exploded.





6




We
recently discovered a potential problem with the configuration of modules
comprising the first-generation battery packs sold to Phoenix.  In the
first-generation battery packs, 48 individual cells comprise one module, and 28
modules comprise one battery pack.  The configuration problem was
discovered by our researchers in the course of an exhaustive testing and
computer modeling process to investigate possible modes of potential failure in
our battery modules.  Their analysis revealed that, under certain rare
circumstances battery modules as configured for use in Phoenix vehicles, might
overheat and fail.  This potential problem relates specifically to the
configuration and structure of the first-generation electric battery packs and
does not indicate an issue in our core lithium Titanate cell technology or in
our battery modules for stationary applications, which are of a completely
different design.  We have substantially completed the modeling and
design of the modules for the second-generation battery packs for delivery to
Phoenix that we expect will eliminate the overheating risk.


The current generation of batteries made with our
nano-structured LTO exhibit lower energy density at room
temperatures.  If density is measured by weight, our batteries made
with our nano-structured LTO have energy densities that are better than lead
acid, NiCd and NiMH batteries and approximately 70% of conventional lithium
ion batteries.This indicates
that our lithium Titanate batteries may be more suited to power applications
that are not limited as to physical size of the battery as opposed to consumer
product uses such as cell phones and laptop computers.




Proprietary
Rights





We have
been awarded four U.S. and several international patents protecting this
technology including: 1) Method for producing catalyst structures, 2) Method for
producing mixed metal oxides and metal oxide compounds, 3) Processing for making
lithium titanate, and 4) Method for making nano-sized and sub-micron-sized
lithium-transition metal oxides.  The U.S. patents expire in 2020,
2021 and 2022.





We have
filed five U.S. patent applications directed to a variety of inventions related
to aspects of our electrochemical cells:  “Nano-Materials – New
Opportunities for Lithium Ion Batteries”; “Methods for Improving Lithium-Ion
Battery Safety”; “Method for Preparing a Lithium-Ion Cell”; “Method for
Preparing a Lithium-Ion Battery”; and, “Method for Synthesizing Nano-Sized
Lithium Titanate Spinel.”





Competition





Advanced Lithium Ion
Batteries.  We are not aware of any commercial products
available with the same characteristics as our nano-structured LTO and our nano
lithium Titanate batteries and battery packs.  A competitor company
has recently announced an advanced Li-Ion battery.  This battery
appears to have some advantages over other types of common Li-Ion batteries, but
appears to lack certain features, such as cycle life and performance at
temperature extremes, that distinguish our batteries from the
competition.  In addition, we believe, many large companies, such as
automobile manufacturers, are attempting to develop lithium ion batteries that
are suitable for high-power applications such as hybrid electric vehicles and
plug-in hybrid electric vehicles.  Many of these companies have
significant human and financial resources, a well-known brand name, existing
distribution channels and other advantages over us.  Were such
companies to develop a product technology with features that are similar or
superior to those of our nano lithium Titanate batteries, that company would
have a significant competitive advantage.





7


Existing
Technologies. Lead acid, NiCd and NiMH batteries presently dominate our
target markets.  Lead acid batteries are used everyday by anyone who
drives an automobile or operates an electric-powered wheel chair, scooter or
golf cart.  They are also the battery-of-choice for uninterruptible
power supplies.  Lead acid batteries are an inexpensive, relatively
simple to manufacture, mature, reliable technology that possesses a relatively
low self discharge rate.  The modern sealed versions also need little
or no maintenance.  However, lead acid batteries are quite heavy,
giving them very poor weight to energy and powerratios, which limit practical use to
stationary and transportion applications.  They also suffer from
long recharge times, relatively low energy capacities and cannot be stored for
long periods in a discharge state without service-life failure.  In
addition, they possess a very limited deep dischargecycle life, and thermal runaway can occur with improper
charging.  The highly toxic metal, lead, and highly corrosive sulfuric
acid used in lead acid batteries render them environmentally
unfriendly.





NiCd
batteries are inexpensive and fairly rugged, have
the longest cycle life of currently available rechargeable battery types,work best on deep discharge cycles and accept recharge at moderately fast
rates; however, charging rates must be reduced by a factor of 5 to 10 at
temperatures below 0°C (32͊°F) and above 30°C
(86°F).  On the other hand, NiCd
batteries suffer from relatively low energy density and relatively high
self-discharge rates necessitating re-charge after moderate periods of
storage.  More seriously, NiCd
batteries are exceedingly environmentally unfriendly.  The
metal cadmium is toxic and can cause several acute and chronic health effects in
humans, including cancer.  As a result, NiCd usage is being severely
restricted and/or phased-out altogether by some countries.





The metal
hydride used in NiMH technology is a direct replacement for cadmium in NiCd
batteries.  Thus, NiMH batteries
share and improve upon the
attributes of NiCd batteries, yet introduce
problems of their own.  On the
positive side, NiMH batteriesimprove upon
the energy capacity and power capabilitiesof NiCd (for the same size cell) by 30% to 40%.  Since they contain only mild toxins, NiMH batteries are more environmentally friendly than
both lead acid and NiCdbatteries.  Like NiCdbatteries, NiMH batteries can be
charged in about 3 hours.  Charging rates must be reduced by a factor
of 5 to 10 at temperatures below 0°C (32°F) and above 40°C
(104°F).  NiMH batteries suffer
from poor deep cycle ability, possessing a recharge capability of the order of
200 to 300 cycles.  While NiMH batteries are capable of high power discharge,
dedicated usage in high current applications limits cycle life even
further.  Shelf life is poor - on the order of three
years.  As noted above, NiCd batteries possess high self-discharge
rates, but this problem is exacerbated by up to 50% in NiMH
systems.  NiMH batteries are
intolerant to elevated temperature and, as a result, performance and capacity
degrade sharply above room temperature.  The most serious issue with
NiMH involves safety accompanying recharge.  The temperature and
internal pressure of a NiMH batterycell
rises sharply as the cell nears 100% state of charge, necessitating the
inclusion of complex cell monitoring electronics and sophisticated charging
algorithms in order to prevent thermal runaway.  While NiMH technology
is gaining prominence within the electric vehicle (EV) market and dominates thehybrid electric vehicle market,
this gain is placing pressures on the limited supply of nickel, potentially
rendering the technology economically infeasible for these applications as the
demand continues to rise.





Of all of
the available metals for use as a basis for practical batteries, lithium is the
most reactive and least dense, allowing for batteries with high specific
energy.Conventional lithium ion
batteries exhibit voltages of about 3.6V as compared to about 1.2V for
NiCd and NiMH and 2.0V for lead acid.  There is a relationship between
power P, voltage V and current I.  This relationship is best
summarized by this formula: P=IV.  Power is also defined as the time
rate of energy transfer; thus higher voltages typically lead to larger power and
/ or energy densities.  Lithium ion batteries are stable, charge somewhat rapidly (in hours), exhibit low
self-discharge, and require very little
maintenance.  Except as explained below, the safety, cycle life (about
300 to 400 cycles), calendar life (about 3 years), environmental impact and
power of lithium ion batteries is comparable to those of NiMH and NiCd
batteries.





8


Conventional, graphite-based, lithium ion batteries are
the batteries of choice in small electronics, such as cell phones and
portable computers, where high energy and light weight are
important.  These same attributes are desired for electric vehicle,
hybrid electric vehicle, power tool and uninterruptible power supply
markets.  However, these applications are principally high power
demand applications and/or pose other demands on usage, such as extremes of
temperature, need for short recharge times, high proportional (to stored energy)
current rates and even longer extended lifetimes.  Because of safety concerns related principally to the
presence of graphite, conventional graphite-based lithium ion batteries
sufficiently large for such power uses are considered unsafe.  In
addition, current lithium ion technology is capable of about 300 to 400
cycles and has a life of about 3 years, whereas the vehicles in which they are
used have lifetimes  as long as 10 to 15 years and require many
hundreds, even thousands, of charge/discharge cycles.  Conventional lithium ion batteries also do not function
well at extremely hot or cold temperatures.




The
Performance Materials Division





We have
named the portion of the nanomaterials and titanium dioxide pigment technology
that was developed to produce high quality titanium dioxide pigment the Altair
Hydrochloride Pigmentprocess, or
AHP.  This package of technologies includes four US patents, trade
secrets and know-how developed over nine years of research and
development.  The technology represents a comprehensive process to
extract heavy minerals such as titanium from raw materials, produce a high
quality titanium dioxide pigment and minimize environmental impact.





We
believe that AHP is the first new, comprehensive technology to produce titanium
dioxide pigment in over fifty years and takes advantage of new technologies to
enable high quality pigment production.  Titanium dioxide pigment is
produced in bulk and is used principally as a whitener and opacifier for paper,
plastics and paint.  AHP uses a dense-phase crystal growth technique
that controls crystal formation using a combination of mechanical, fluid
dynamics, chemical and thermal control.  We believe that costs
associated with this process will be lower than costs associated with
alternative processes.  All hydrochloric acid waste streams can be
recycled to recover acid, and the waste solids generated from the purification
process are easily manageable iron oxides.




In April
2007, we announced the formation of a joint venture company, called AlSher
Titania.  AlSher Titania represents a joint venture with The
Sherwin-Williams Company, one of the world's leading manufacturers of paint and
durable coatings.  AlSher Titania will combine the Altairnano
Hydrochloride Pigment (AHP) process and the Sherwin-Williams Hychlor Pigment
(SWHP) process and other technologies to develop and produce high quality
titanium dioxide pigment for use in paint and coatings, as well as nano titanium
dioxide materials for use in a variety of applications including those related
to removing contaminants from air and water.




As part
of the formation of AlSher Titania, we granted Alsher Titania an exclusive
license to use Altairnano’s technology (including its hydrochloric pigment
process) for the production of titanium dioxide pigment and other titanium
containing materials (other than battery or nanoelectrode
materials).  We received no consideration for the license other than
our 70% ownership interest in Alsher Titania.  Certain potential
improvements in the technology are licensed back to us subject to a royalty
equal to the greater of 5% of the nets sales price of derivative products or 10%
of the gross margin on such products.  Absent early termination, the
license extends through the expiration of the underlying patents.





Our
contribution to the joint venture also included certain pilot plants assets with
a book value, net of depreciation, of $3,110,000.  Sherwin agreed to
contribute cash to Alsher Titania and a license agreement related to a
technology for the manufacture of titanium dioxide using the digestion of
ilmenite in hydrochloric acid.


9




Target Markets and Marketing
Plans/Efforts




Assuming
testing and development is successful, AlSher Titania will produce pigment
products for Sherwin-Williams and other customers in the worldwide titanium
dioxide pigment market.  White titanium dioxide pigment is mainly used
in the production of paints, plastics, and paper and the total world market is
valued at approximately $9 billion US according to a report issued by TZ
Minerals in 2006, with a projected average annual growth in excess of 3% through
2015.




Research, Testing,
Development and Licensing Status





Sherwin-Williams
Relationship.  Through our joint venture with Sherwin-Williams, we
intend to commercialize the AHP technology in three stages, namely a piloting
program, a 5,000 ton per anum demonstration plant and a 70,000 ton per anum
commercial plant.  Our commitment to build and commission the initial
pilot plant was successfully completed at the end of February
2008.  Test results under the piloting program to date have been
positive and are expected to continue through the end of May
2008.  Beginning in the second quarter of 2008, AlSher expects to
prepare cost studies in anticipation of constructing the 5,000 ton per annum
demonstration plant.





Western
Oil Sands Relationship.  In January 2004, we entered into a license
agreement with Western Oil Sands, Inc., or Western Oil, with respect to its
possible use of the AHP for the production of titanium dioxide pigment and
pigment-related products at the Athabasca Oil Sands Project in Alberta, Canada,
and elsewhere. Upon execution of the agreement, we granted Western an exclusive,
conditional license to use the AHP on heavy minerals derived from oil sands in
Alberta, Canada.  The agreement also contemplated a three-phase,
five-year program pursuant to which the parties would work together to further
evaluate, develop and commercialize the AHP.  In the first phase of
the program, which was extended through December 2006, we, along with Western
Oil, evaluated the AHP to confirm that the AHP will produce pigment from oil
sands and to complete a characterization study.





During
December 2006, Western Oil requested an additional extension of phase one to
allow them to perform additional characterization of the feedstock source prior
to committing to phase two of the license agreement workscope.  In
light of the broad exclusive license granted to Western Oil in the initial
agreement, we declined to extend the terms of the license in order to preserve
our flexibility in other potential licensing arrangements that may not involve
an exclusive license for Western Oil.  Nonetheless, we continued to
work with Western Oil, under a paid contract through December 31, 2007, to
assist them in various development activities associated with production of a
pigment feedsource at a pilot plant located in our building.  In the
fourth quarter of 2007, Western Oil agreed to relocate its pilot plant from our
building as of the end of March 2008 to one of its facilities.  AlSher
Titania expects to discuss an alternative license with Western Oil and/or other
partners in 2008.




Proprietary
Rights





We have
been awarded four U.S. and 15 international patents protecting this technology
including: 1) Processing titaniferous ore to titanium dioxide pigment, 2)
Processing aqueous titanium chloride solutions to ultrafine titanium dioxide, 3)
Processing aqueous titanium solutions to titanium dioxide pigment and 4) Method
For Producing Mixed Metal Oxides and Metal Oxide Compounds.  The U.S.
patents expire in 2020 and 2021.  Two new patent applications have
also been filed recently.


10




Competition





Existing
pigment production technologies are owned and guarded by the top tier producers
that developed the technologies.  Such producers typically do not
grant licenses to competitors. As a result, companies seeking to enter into the
pigment production business generally are required to use alternative
technologies.  Companies assessing the viability of our process to
manufacture pigment from their resource are also evaluating alternatives;
including producing mineral concentrates for sale to pigment producers and
producing a high value synthetic rutile to be sold to pigment producers as feed
stock. They may elect to commercialize either of these alternatives instead of
producing pigment by the AHP.  We believe there are no competing new
technologies to produce titanium dioxide pigment.





Secondary
Products and Projects in Performance Materials in Progress





The
secondary products and projects in our Performance Materials Division are all
projects with either limited revenue potential or which are at an early state of
research or development, but which provide, and may continue to provide,
supplemental income and the potential of future products to us.




Advanced
Performance Coatings





We have
developed thermal spray grade nanomaterial powders that can be applied as a
coating on the surface of metals by standard thermal spray
techniques.  Our nanomaterials coatings possess enhanced toughness and
increased hardness while retaining a flexible coating layer.  These
features contribute to superior abrasive wear resistance over the conventional
coating of the similar materials.  The nanomaterial coatings also
demonstrate improved porosity over standard thermal spray powders making them
more resistant to corrosive attack. We believe these performance improvements
will enable longer periods between maintenance, repairs and examinations of
these critical components, therefore improving the economics of the industrial
application.  Such nanomaterial based thermal spray products could be
used in a variety of harsh environment applications such as aerospace propulsion
systems, gas turbines, medical applications, heavy machinery in all industries,
boilers for power plants, waste incinerators, and the oil and gas
industry.





In March
2006, we entered into a supply and distribution agreement with Sulzer Metco, a
publicly-traded Swiss company involved in the design, manufacture and supply of
thermal spray materials, equipment and integrated system solutions for the
industrial market.  Under the terms of the agreement, the companies
agreed to jointly select and manage the commercialization of licensed products
comprising or incorporating our nano-structured titanium dioxide and
nano-structured yttria stabilized zirconium oxide. When an Altair
nano-structured powder is designated to be supplied under the agreement, Sulzer
Metco has the right to be the exclusive distributor of that product in the spray
coating field assuming that certain purchase and other commitments are
met.  Through December 31, 2007, the anticipated progress under this
agreement has not been achieved.  We believe the market for each such
product may be 2-5 tons annually in the near term with possible growth to as
much as 20-30 tons per product annually in the future.  In light of
the limited size of the potential market, we do not expect these performance
coatings to be a material source of revenue in the long term.  As
such, we have shifted our focus from the development of products under this
agreement to our other partners in the Power and Energy Group and in Life
Sciences.





In July
2007, we signed an agreement with PPG Industries, Inc. (“PPG”), as a
sub-contractor to their United States Air Force Research Labs
grant.  Under the terms of this grant, we will work jointly with PPG
to develop a nanometal oxide material and dispersion concentrates to create a
primer to be utilized in aerospace applications.  The total value of
the agreement is $290,000 over an 18 month term.  We also received a
$200,000 purchase order in July from a division of PPG, PRC-DeSoto
International, Inc., to perform research and development over a 6 month period
related to the same objectives as the grant noted above.  Through
December 31, 2007 approximately $202,000 of revenue has been recorded in
connection with these contracts.  It is anticipated that a research
and development agreement that will build upon the work currently being
performed will be negotiated with PRC-DeSoto International, Inc. in the first
quarter of 2008.





11


Based on
the work conducted by us to date, we have discovered new nanomaterial technology
that works well in aerospace applications as a replacement for hexavalent
chromium, which historically has been the compound of choice for preventing
corrosion.  However, hexavalent chromium is also highly
toxic.  PPG is the leading supplier of coatings for the global
aerospace market.  The results of all testing completed to date by PPG
and their customers has been positive with all tests passed.  Our
nanometal oxide primer offers PPG and their customers a much safer and more
environmentally compliant alternative that may also reduce their remediation
costs and their impact on the environment.





We
believe the market for these advanced products may be very large in the longer
term after thorough testing has been completed in various
applications.  The unique flexibility and bend ability of these
coatings may allow them to expand into markets currently being served by low
temperature applied coatings.




Proprietary
Rights





Our
thermal spray grade powders are protected by U.S. Patent titled, “Processing
aqueous titanium chloride solutions to ultrafine titanium dioxide,” which
expires in 2020.  We have also been issued a U.S. Patent titled
“Process for making nano-sized zirconia” which expires on November 2,
2021.





We have
filed several patent applications directed to metal oxides, including:
“Nano-


Structured
Iron Oxide”; “Nano-Structured Indium-Doped Iron Oxide”; and, “Method for Low
Temperature Production of Nano-Structured Iron Oxide Coatings.”





We have
filed a patent application entitled, “TEFLON Replacements and Related Production
Methods.




Nanosensors
Research Program





Since
September 2003, pursuant to a teaming/research agreement with
Western Michigan University funded by the Department of Energy, we
have been engaged in the development of a technology used in the detection of
chemical, biological and radiological agents.  We generated
approximately $15,000 and $482,000 in revenues through December 2006 and 2005,
respectively, as part of this program.  In August 2006, $981,000 of
the $2.5 million Department of Energy research grant received by Altair and its
partners was allocated to the continuation of this program.  Of this
amount, we recognized approximately $897,000 of revenues over the life of this
program of which $500,000 was earned by and paid to Western Michigan University
under a subcontract. The workscope associated with this grant builds upon the
accomplishments and progress made under the prior grants and will focus on
increasing the signal strength and selectivity of the sensing devices
developed.  The ultimate goal is to develop a unique nanosensor-based
platform for the error-free, “lab on a chip” detection of chemical, biological
and radiological agents for hazard materials remediation and threat
detection.  During 2006, we developed a portable, hand held, sensing
device.  We have since developed a second-generation hand held device
and are currently testing the device with the current library of sensing
molecules for identification of a multiplicity of agents, as well as newly
synthesized compounds.





12


In August
2006, we signed a subcontract with the University of Reno, Nevada to act as a
subcontractor under a $1,095,000 grant awarded to them by the Department of
Energy to continue development of nanosensors for the detection of chemical,
biological and radiological agents.  This subcontract provides for
total payments to Altair of $250,000 through May 2008.  This project
is an outgrowth of, and builds on the research initiated with, the Western
Michigan University program.  We generated approximately $174,000 of
revenues over the life of this program through December 31, 2007.  The
overall workscope of this project will focus on homeland security applications
relating to novel fluorescent and electroluminescent receptor
molecules.  Our role in the overall project is intended to be the
synthesis and development of suitable lanthanum and other metal-based
nanoparticles for initiating reactions between target chemical and radiological
agents.  We have demonstrated the viability of lanthanide particles
and complexes for the detection of nerve agents and are currently working on
development of a prototype sensing device with a novel sensing
mechanism.




Hydrogen
Generation using Solar Energy and Water





In
November 2004, we entered into an agreement with the University of Nevada, Las
Vegas Research Foundation to act as a subcontractor under a $3,000,000 grant
awarded to them by the Department of Energy for joint research activities
related to solar hydrogen production at a refilling station under development in
Las Vegas.  The agreement, which was effective through December 31,
2005, provided for payments to Altair of $400,000 for research and development
work utilizing nanotechnology processes for the production and commercialization
of solar-based hydrogen technologies.  In November 2005, we were
notified that we would receive $750,000 under a grant award from the Department
of Energy for collaborative research and development work beginning October 1,
2005 and continuing through December 2006.  This grant was extended
through August 30, 2007 to allow for completion of the research activities with
no adjustment to the original amount awarded.  In March 2007 we
executed a $356,000 subcontract with the UNLVRF for follow-on work related to
the solar hydrogen project being funded by the Department of Energy Phase IV
grant award.  This subcontract expired on December 31, 2007 and no
further extensions will be requested.  Revenues of approximately
$349,000 were recorded in connection with these contracts through December 31,
2007.




The
development work involved, among other tasks, enhancement of the solar cell to
be used at the proposed refilling station.  The solar cell device
converts light and water directly into hydrogen fuel in a highly efficient,
renewable and carbon-free process using photo-catalytic nano-crystalline thin
films to gather photons of incident light and convert them into electrons to
directly split water into its constituent elements.  As a result of
this funding support, we have acquired several state-of-the-art systems for
deposition and evaluation of thin films used to construct hydrogen generating
solar cells.  We studied iron-based oxide materials for solar cell
applications utilizing the aforementioned systems, concentrating on enhancing
film performance through addition of doping elements to the iron oxide films and
exploring deposition methods to obtain the best sunlight-to-hydrogen conversion
efficiencies.  Progress was made in both the use of plasma enhanced
chemical vapor deposition for these films and production of porous electrode
substrates during 2007.  Further Department of Energy funding for this
program has not been received and contract work will be
discontinued.











13


Life
Sciences




RenaZorb®
Products





RenaZorb is a highly active,
lanthanum-based nanomaterial with low intestinal solubility and excellent
in-vitro phosphate binding.  Animal testing of RenaZorb has been
conducted in dogs, cats and rats; however, no human tests have yet been
conducted.  Based upon our initial laboratory and animal testing, we
believe that RenaZorb may offer the following advantages over competing
products:





·
            Lower
      dosage requirements because of better phosphate binding per gram of drug
      compared with existing or currently proposed
  drugs;


·
            Fewer
      and less severe side effects because of less gassing and lower dosage;
      and


·
            Better
      patient compliance because of fewer and smaller
  tablets.





In all
animal testing conducted on RenaZorb, which to date included three separate
testing protocols, no adverse side effects were reported.  In all
testing, RenaZorb was administered to the animals by mixing the drug with the
food they eat.  In no case was there any reduction in the amount of
food the animals consumed when RenaZorb was mixed with the food.  The
drug appears to be tasteless.





Target
Markets





Our
pharmaceutical product RenaZorb was developed to treat elevated phosphate levels
in human patients with chronic kidney disease specifically in patients with
stage five, end stage renal disease.  According to the National Kidney
Foundation web page referenced on March 7, 2008, there are 20 million adults
with chronic kidney disease of which 500,000 are in stage five.  In
November 2007 the Cardiovascular and Renal Drugs Advisory Committee of the
Federal Drug Administration (“FDA”) recommended that phosphate binders be used
to treat hyper-phosphatemia in stage four kidney patients.  According
to the Medline Plus web page supported by the U.S. National Library of Medicine
and the National Institutes of Health referenced on March 7, 2008, an additional
400,000 patients with significant kidney function loss are classified as being
at stage four.




Research, Testing and
Development





In
January 2005, we signed a license agreement with Spectrum Pharmaceuticals, Inc.,
which grants Spectrum exclusive worldwide rights to develop, market and sell
RenaZorb.  Upon signing the license agreement, Spectrum issued to us
100,000 restricted shares of their common stock, purchased 38,314 restricted
shares of our common stock at the then current market value of $2.61 per share,
and also paid us $100,000 in connection with the license
agreement.  In June 2006, Spectrum issued to us 100,000 restricted
shares of their common stock at the then current market value of $3.88 per share
in connection with the first milestone payment due upon demonstration of
satisfactory lanthanum serum levels.  An additional 40,000 shares were
also issued in payment of research and development services provided by us in
2006.  Additional payments by Spectrum are contingent upon the
achievement of various milestones in the testing, regulatory approval and sale
of RenaZorb.  Although work continues to refine and test RenaZorb, no
milestones were achieved in 2007.





Additional,
contingent consideration under the license agreement may include the
following:





·      purchases
of a specified dollar amount of common stock of the Company at a premium above
market price upon the reaching of various milestones representing progress in
the testing and obtaining of regulatory approval for RenaZorb;





14


·      milestone
payments upon obtaining approval from the FDA and similar regulatory agencies in
Europe and Japan to market RenaZorb;





·      milestone
payments as certain annual net sales targets are reached;





·      royalty
payments based upon a percentage of net revenue from sales of RenaZorb in each
country (subject to adjustment for combined products and in other circumstances)
as long as patents applicable to that country remain valid; and





·      technology
usage payments thereafter until generic competition emerges.





RenaZorb
must undergo animal and human testing and receive approval from the FDA in the
U.S. and similar regulatory bodies in other parts of the world before it can be
approved for marketing.  Pre-clinical testing to determine safety and
toxicity will take one to two years and is required before Spectrum can submit
an investigational new drug application to the FDA.  Human testing
typically takes 1 to 2 years and, if merited by the results of human testing,
the process of seeking U.S. regulatory approval typically takes between 3 and 5
years; however, timing for FDA and other regulatory approval of drug candidates
is unpredictable.  Spectrum, with technical assistance from Altair, is
responsible for the clinical testing and other activities necessary to obtain
regulatory approval of RenaZorb.  Spectrum has begun the process of
information and data collection and presentation required to file an
investigational new drug application with the FDA, which is the first stage of
seeking regulatory approval.  The filing is now expected to occur in
early 2009.





Assuming
future testing, development and regulatory approvals of RenaZorb proceed at the
rate we expect, the aggregate value of all the first year payments and all
potential stock premiums, milestone payments and other payments to us over the
first 7-9 years of the license agreement could reasonably range between $9
million and $14 million.  Assuming a drug containing RenaZorb receives
timely regulatory approval, the market for phosphate controlling drugs continues
to grow at projected rates, and the product becomes a leader in the market
place, the total revenues to the Company over the life of the license agreement
could exceed $100 million.





Proprietary
Rights





We have
applied for patent protection for the manufacture of RenaZorb and a wide range
of similar compounds for the application as an orally administered phosphate
binder for patients suffering from end stage renal disease. These patent
applications are “Rare earth metal compounds, methods of making and methods of
using the same,” “Devices for removing phosphate from biological fluids,”
“Processes for making rare earth metal oxycarbonates” and “Rare-earth metal
composites for treating hyperphosphatemia and related methods.”





Competition





Existing
phosphate binders include Tums antacid, which contains calcium carbonate, as
well as aluminum hydroxide-based products such as Gaviscon manufactured by Glaxo
Smith Kline, both of which are available over the counter.  Renagel
manufactured by Genzyme and Phoslo, manufactured by Fresenius Medical Care, are
available only by prescription. In addition, Fosrenol, another lanthanum based
active pharmaceutical agent developed by Shire Pharmaceuticals of the UK, is
available only by prescription.








15


While
over-the-counter phosphate binders are relatively inexpensive, they have several
disadvantages. In high doses, calcium carbonate-containing phosphate binders
such as Tums may cause increased blood pressure and increased risk of
cardiovascular disease and are generally not recommended for long-term use by
dialysis patients. With prolonged use, aluminum hydroxide-based phosphate
binders, such as Gaviscon, may cause toxic neurological effects and are
generally avoided by physicians.  Aluminum dementia has been widely
reported in kidney dialysis patients using these products.





In
October 2007, the FDA granted Genzyme marketing approval for Renvela for
dialysis patients.  Renvala is Genzyme’s next generation version of
Renagel but has lower incidents of gastrointestinal adverse
effects.





Phoslo is
a calcium acetate phosphate binder that produced approximately $40 million in
revenues in 2006.  In October 2006, Nabi Biopharmaceuticals sold
Phoslo, an oral drug used by dialysis patients to reduce phosphorus absorption,
in a deal worth $150 million to Fresenius Medical Care.  In January
2007, Fresenius submitted an application to extend use of Phoslo to stage four
chronic kidney disease patients.





Fosrenol
was introduced in the United States in January 2005 and, according to a Shire
Pharmaceutical Group news release dated February 21, 2008, has increased its
average share of the total US phosphate binding market to 8.6 % in 2007 from 8.5
% in 2006.  Worldwide sales of Fosrenol during 2007 reportedly totaled
$102.2 million, with US sales reportedly being $62.1
million.  Fosrenol is marketed as large chewable tablets with a
proposed dosage of 1.5 to 3.0 grams active drug per day,RenaZorb, which is
nanotechnology based, is expected to be developed in a tablet dosage form with a
projected dosage of 0.6 to 3.0 grams API per day.  Although we have
done no human testing on RenaZorb, we believe RenaZorb has the potential for
fewer side effects, lower cost and better patient compliance.  We base
these possible advantages upon in vitro testing conducted by Altair in which
RenaZorb was compared to lanthanum carbonate tetrahydrate, the API in
Fosrenol.  Our in vitro testing showed that RenaZorb binds 30% more
phosphate per gram of drug than LCTH, therefore requiring a lower
dose.  Lower dose often correlates well with a reduction of observed
side effects in chemically related compounds. No adverse side effects were
reported in all animal testing conducted on RenaZorb, which to date included
three separate testing protocols.  In all testing, RenaZorb was
administered to the animals by mixing the drug with the food they
eat.  In no case was there any reduction in the amount of food the
animals consumed when RenaZorb was mixed with the food.  The drug
appears to be tasteless.




Renalan





Renalan
is a highly active, lanthanum-based nanomaterial with low intestinal solubility
and excellent in-vitro phosphate binding.  Animal testing of Renalan
has been conducted in dogs, cats and rats.  Based upon our initial
laboratory and animal testing, we believe that Renalan may offer the following
benefits:





·
            Specifically
      targeted to address chronic kidney disease in companion
      animals


·
            Palatable
      with normal food intake regime


·
            Can
      be administered in powder form which can be mixed with the pet’s
      food




Target
Markets





Renalan
was developed to treat elevated phosphate levels in animals with chronic kidney
disease. According to information published in the Textbook of Veterinary
Internal Medicine by Stephen J. Ettinger, DVM and Edward C. Feldman, DVM, the
dog chronic kidney disease population is variously estimated at between 0.5% and
7% of population, resulting in a worldwide chronic kidney disease population of
between 0.75 million and 10.5 million dogs. The textbook estimates that the cat
chronic kidney disease population is estimated at between 1.6% and 20% of total
population, resulting in a worldwide chronic kidney disease population of
between 2.8 million and 35 million cats. Using the rest of the data in their
textbook and average life expectancy curves yields a worldwide cat chronic
kidney disease population of approximately 4.2 million and a dog chronic kidney
disease population of about 1.2 million.





16


Research, Development and
Licensing





In May
2006, we entered into a collaborative research, license and commercialization
agreement with the Elanco Animal Health Division of Eli Lilly and Company
(“Elanco”).  Under the terms of the agreement, Elanco has exclusive
rights to develop animal health products using our nanotechnology-based
products.  The agreement gives us specific rights with respect to the
manufacture of these products for Elanco.  Upon successful completion
of proof of concept studies performed by Elanco for each nanotechnology–based
product selected by the joint development committee, a $100,000 fee will be
charged for the exclusive license rights to develop and commercialize each of
these products.  The proof of concept study relating to the first
pharmaceutical product was completed in December 2006, and the related license
fee of $100,000 was received.





Other
payments by Elanco under the contract are contingent upon the achievement of
various milestones in the testing, regulatory approval and sale of each product
selected for development and commercialization.  Additional,
contingent consideration under the license agreement may include the
following:





·      milestone
payments for each product that is submitted for regulatory acceptance in the
United States, with additional fees due upon regulatory approval;





·      sublicense
revenue based on a percentage of all payments and consideration received from
third parties to whom Elanco has granted a sub-license;





·      royalty
payments based upon a percentage of net sales on a product by product, country
by country basis;





·      performance
bonus based on cumulative net sales targets for each product: and





·       manufacturing
royalties for each product that is manufactured by a 3rd party
to be paid for the first three years that the product is sold or
distributed.





In
September 2007, we entered into a stage II development services agreement with
Elanco.  Pursuant to the agreement, over a multi-year period, we will
develop a manufacturing process related to a test-stage active pharmaceutical
ingredient.  This development work will include making certain
regulatory filings, installing related equipment, and providing related
services.  Based on the 2006 collaborative research agreement
discussed above, Elanco has the exclusive right to develop and market this
pharmaceutical ingredient.  Elanco has agreed to fund substantially
all of the development process, at a cost of approximately
$2,500,000.  Revenue under this agreement is recognized on a
percentage of completion basis utilizing costs incurred to date in relation to
total projected costs for the project.  Revenues of approximately
$929,000 were recorded through December 31, 2007 in connection with this
agreement and $1,571,000 of backlog remains to be billed through
2010.








17


The
active pharmaceutical ingredient must undergo animal testing and receive
approval from the FDA in the U.S. and similar regulatory bodies in other parts
of the world before it can be approved for marketing as a drug.  The
FDA approval process for companion animal use is expected to take two to three
years to complete; however timing for FDA and other regulatory approval of drug
candidates is unpredictable.  Elanco, with technical assistance from
us, is responsible for the clinical trials and other activities necessary to
obtain regulatory approval of the active pharmaceutical
ingredient.  Elanco has begun the process of information and data
collection and presentation required to commence in 2008 seeking regulatory
approval.




Proprietary
Rights




We have
filed one U.S. patent application for this product entitled “Compositions and
methods for treating hyperphosphatemia in domestic
animals.”  Additionally, Renalan is a compound very similar to
RenaZorb and is protected by the patent applications discussed under “RenaZorb”
above.





Competition





In late
2005, Vetoquinol, a French animal health company, released Epakitin in the US.
Vetoquinol positions Epakitin as a chitosan-based phosphate binder and uremic
reducer for chronic kidney disease in dogs and cats. The product has not been on
the market long enough to determine its market strength or
effectiveness.





In
October 2006, Bayer HealthCare submitted and application to the European Food
Safety Authority (“EFSA”) for a new food additive for adult cats to restrict
internal phosphorus absorption.  In October 2007, EFSA released a
positive opinion on the safety and efficacy of Lantharenol as a feed additive
for cats to restrict the absorption of phosphorus.  Bayer has not yet
launched Lantharenol.





Other
Nanomaterials Research





In
September 2006, the Nanomaterials characterization program was funded by
$311,000 of the $2.5 million Department of Energy grant.  This
research is conducted in collaboration with the University of California, Santa
Barbara, or UCSB, to investigate the interaction of our nanomaterials with
various non-aqueous environments.  This research focuses on
interaction mechanisms between cells and nanoparticles, with the goal of
understanding how specific chemical, physical, and electrical properties of
these nanoparticles influence that interaction. Our research with UCSB will
examine a range of microbes that have environmental or societal
importance.  The results of this research are expected to provide the
basis for both 1) predicting potential negative impacts of specific nanoparticle
characteristics on the environment and human health and 2) developing novel
antimicrobial agents and surface treatments that could defeat
antibiotic-resistant strains of harmful microbes.  Work on the grant
is continuing with the last characterization of the interaction of the bacteria
and nano particles.  At this time, two publications documenting final
results are in progress.  Revenues of approximately $205,000 have been
recorded through December 31, 2007 relating to this program.





Research
and Development Expenses





Total
research and development expenses were $15,443,703, $10,077,231, and $5,073,478,
for the years ended December 31, 2007, 2006 and 2005, respectively, while
research and development costs funded by customers were $5,050,202, $2,897,859,
and $1,962,162, for the years ended December 31, 2007, 2006 and 2005,
respectively.





18


Dependence
on Significant Customers





During
the year ended December 31, 2007, we recorded revenues from four major
customers, each of which accounted for 10% or more of revenues as
follows:  Phoenix Motorcar, Inc. revenues of $3,047,687 and Department
of Energy revenues of $706,865 in the Power and Energy Group; Revenues from
Western Oil Sands, Inc. of $1,198,525 and Department of Energy revenues of
$499,773 in the Performance Materials Division; and Eli Lilly/Elanco revenues of
$1,088,829 and Department of Energy revenues of $204,801 in the Life Sciences
Division.





The
revenue associated with the backlog of work to be performed in connection with
our significant customers is approximately $1,579,000 for Eli Lilly/Elanco
through 2010 and $249,000 for the Department of Energy through
2008.




Government
Regulation





Most of
our current and proposed activities are subject to a number of federal, state,
and local laws and regulations concerning machine and chemical safety and
environmental protection.  Such laws include, without limitation, the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act,
and the Comprehensive Environmental Response Compensation Liability
Act.  We also subject to laws governing the packaging and shipment of
some of our products, including our  nano lithium Titanate
batteries.  Such laws require that we take steps to, among other
things, maintain air and water quality standards, protect threatened, endangered
and other species of wildlife and vegetation, preserve certain cultural
resources, and reclaim processing sites and package potentially flammable
materials in appropriate ways.





Compliance with federal, state, or
local laws or regulations represents a small part of our present
budget.  If we fail to comply with any such laws or regulations,
however, a government entity may levy a fine on us or require us to take costly
measures to ensure compliance.  Any such fine or expenditure may
adversely affect our development.





We are committed to complying with and,
to our knowledge, are in compliance with, all governmental
regulations.  We cannot predict the extent to which future legislation
and regulation could cause us to incur additional operating expenses, capital
expenditures, and/or restrictions and delays in the development of our products
and properties.





Environmental Regulation and
Liability





Any
proposed processing operation at our main operating facility in Reno, Nevada or
any other property we use will be subject to federal, state, and local
environmental laws.  In addition, our cleanup efforts on the Tennessee
mineral property have been, and will continue to be, subject to such
environmental laws.  Under such laws, we may be jointly and severally
liable with prior property owners for the treatment, cleanup, remediation,
and/or removal of substances discovered at any other property used by us; to the
extent the substances are deemed by the federal and/or state government to be
toxic or hazardous.  Courts or government agencies may impose
liability for, among other things, the improper release, discharge, storage,
use, disposal, or transportation of hazardous substances.  We use
hazardous substances in our testing and operations and, although we employ
reasonable practicable safeguards to prevent any liability under applicable laws
relating to hazardous substances, companies engaged in materials production are
inherently subject to substantial risk that environmental remediation will be
required.











19


Financial
Information about Segments and Foreign Sales





Information
with respect to assets, net sales, loss from operations and depreciation and
amortization for the performance materials, power and energy group, and life
sciences segments is presented in Note 17, Business Segment Information, of
Notes to Consolidated Financial Statements in Part IV.





Information
with respect to foreign and domestic sales and related information is presented
in Note 17, Business Segment Information, of Notes to Consolidated Financial
Statements in Part IV.




Subsidiaries





Altair
Nanotechnologies Inc. was incorporated under the laws of the province of
Ontario, Canada in April 1973 under the name Diversified Mines Limited, which
was subsequently changed to Tex-U.S. Oil & Gas Inc. in February 1981, then
to Orex Resources Ltd. in November 1986, then to Carlin Gold Company Inc. in
July 1988, then to Altair International Gold Inc. in March 1994, then to Altair
International Inc. in November 1996 and then to Altair Nanotechnologies Inc. in
July 2002.  In July 2002, Altair Nanotechnologies Inc. redomesticated
from the Ontario Business Corporations Act to Canada’s federal corporate
statute, the Canada Business Corporations Act.





Altair US
Holdings, Inc. was incorporated by Altair in December 2003 for the purpose of
facilitating a corporate restructuring and consolidation of all U.S.
subsidiaries under a U.S. holding company.  At the completion of the
corporate restructuring, Fine Gold, MRS, and Altairnano, Inc. (f/k/a Altair
Nanomaterials, Inc.) were direct wholly-owned subsidiaries of Altair US
Holdings, Inc., while Tennessee Valley Titanium, Inc. previously a wholly-owned
subsidiary of MRS, has been dissolved.





Altair
acquired Fine Gold in April 1994.  Fine Gold has earned no operating
revenues to date. Fine Gold acquired the intellectual property associated with
the now defunct Altair jig, a fine particle separation device for use in
minerals processing, in 1996.





Mineral Recovery Systems, Inc., or MRS,
was incorporated in April, 1987 and was formerly known as Carlin Gold
Company.  MRS previously has been involved in the exploration for
minerals on unpatented mining claims in Nevada, Oregon and California and the
holding of mineral leases in Tennessee.  Other than a single mineral
lease related to the remediation site in Tennessee, MRS does not continue to
hold any properties or leases.  The wholly-owned subsidiary of MRS,
Tennessee Valley Titanium, which never held any assets or operations, was
dissolved on July 7, 2006.





Altair
Nanomaterials, Inc. was incorporated in 1998 as a wholly-owned subsidiary of MRS
and holds all of our interest in our nanomaterials and titanium dioxide pigment
technology and related assets.  Altair Nanomaterials Inc. was
subsequently renamed Altairnano, Inc. on July 6, 2006.





AlSher
Titania LLC was incorporated in April 2007 as a joint venture company which is
70% owned by Altairnano, Inc.  This company was formed to combine
certain technologies of Altairnano, Inc. with the Sherwin-Williams Company in
order to develop, market, and produce titanium dioxide pigment for use in a
variety of applications.




Corporate
History





Altair
Nanotechnologies Inc. was incorporated under the laws of the Province of
Ontario, Canada in April 1973 for the purpose of acquiring and exploring mineral
properties.  It was redomesticated in July 2002 from the Business
Corporations Act (Ontario) to the Canada Business Corporations Act, a change
that causes Altair to be governed by Canada's federal corporate
statute.  The change reduced the requirement for resident Canadian
directors from 50% to 25% of the board of directors, which gives us greater
flexibility in selecting qualified nominees to our board.





20


During
the period from inception through 1994, we acquired and explored multiple
mineral properties.  In each case, sub-economic mineralization was
encountered and the exploration was abandoned.





Beginning
in 1996, we entered into leases for mineral property near Camden, Tennessee and
owned the rights to the Altair jig.  However, we have terminated our
leases on all of the Tennessee mineral properties except for one and are
limiting our expenditures on our centrifugal jig to patent maintenance
expenses.





In November 1999, we acquired all the
rights of BHP Minerals International, Inc., or BHP, in the nanomaterials and
titanium dioxide pigment technologies and the nanomaterials and titanium dioxide
pigment assets from BHP. We are employing the nanomaterials and titanium dioxide
pigment technology as a platform for the sale of contract services, intellectual
property licenses and for the production and sale of metal oxide nanoparticles
in various applications.





We have experienced an operating loss
in every year of operation.  In the fiscal year ended December 31,
2007, we experienced a net loss of $31,470,621.




Employees





Our
business is currently managed by Mr. Terry Copeland, President, Mr. Edward
Dickinson, Chief Financial Officer, Dr. Bruce Sabacky, Chief Technology Officer,
Mr. Doug Ellsworth, Vice President – Life Sciences, Mr. Steven Balogh, Vice
President – Human Resources, and Mr. Jeffrey McKinney, Vice President and Chief
Patent Counsel.  Dr. Alan J. Gotcher was the President and Chief
Executive Officer of the Company until February 27, 2008.  We have
105 additional regular employees.  Through December 31, 2007, we
have employment agreements with Messrs. Gotcher, Dickinson, Sabacky and
Copeland.  On March 10, 2008, we signed employment agreements with Mr.
McKinney and Mr. Balogh.





During
2008, we may hire between 35 and 45 additional employees, primarily in research
and development and operations.  Such additional hiring, if it occurs,
will be dependent upon business conditions.





Available
Information





We file
annual, quarterly and current reports and other information with the SEC. These
materials can be inspected and copied at the SEC’s Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549. Copies of these materials may also be
obtained by mail at prescribed rates from the SEC’s Public Reference Room at the
above address. Information about the Public Reference Room can be obtained by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of the
SEC’s Internet site is www.sec.gov.




We make
available, free of charge on our Internet website located at www.altairnano.com,
our most recent Annual Report on Form 10-K, our most recent Quarterly Report on
Form 10-Q, any current reports on Form 8-K filed since our most recent Annual
Report on Form 10-K and any amendments to such reports as soon as reasonably
practicable following the electronic filing of such report with the
SEC.  In addition, we provide electronic or paper copies of our
filings free of charge upon request.







21


Enforceability
of Civil Liabilities Against Foreign Persons




We are a
Canadian corporation, and three of our directors and our Canadian legal counsel
are residents of Canada. As a result, investors may be unable to effect service
of process upon such persons within the United States and may be unable to
enforce court judgments against such persons predicated upon civil liability
provisions of the U.S. securities laws. It is uncertain whether Canadian courts
would enforce judgments of U.S. courts obtained against us or such directors,
officers or experts predicated upon the civil liability provisions of U.S.
securities laws or impose liability in original actions against us or our
directors, officers or experts predicated upon U.S. securities
laws.














































22


Forward-Looking
Statements





This Report contains various
forward-looking statements. Such statements can be identified by the use of the
forward-looking words “anticipate,” “estimate,” “project,” “likely,” “believe,”
“intend,” “expect,” or similar words.   These statements discuss
future expectations, contain projections regarding future developments,
operations, or financial conditions, or state other forward-looking
information.  When considering such forward-looking statements, you
should keep in mind the risk factors noted in Item 1A and other cautionary
statements throughout this Report and our other filings with the SEC. You should
also keep in mind that all forward-looking statements are based on management’s
existing beliefs about present and future events outside of management’s control
and on assumptions that may prove to be incorrect.  If one or more
risks identified in this Report or any other applicable filings materializes, or
any other underlying assumptions prove incorrect, our actual results may vary
materially from those anticipated, estimated, projected, or
intended.




Item
1A.  Risk Factors





An
investment in our common shares and related derivative securities involves
significant risks. You should carefully considerthe risks described in this Report
before making an investment decision. Any of these risks could materially and
adversely affect our business, financial condition or results of operations. In
such case, you may lose all or part of your investment. Some factors in this
section are forward-looking statements.




We may continue
to experience significant losses from operations.




We have
experienced a net loss in every fiscal year since our inception. Our losses from
operations were $33,067,474 in 2007, $17,681,415 in 2006 and $10,481,853 in
2005. Even if we do generate operating income in one or more quarters in the
future, subsequent developments in our industry, customer base, business or cost
structure, or an event such as significant litigation or a significant
transaction, may cause us to again experience operating losses. We may never
become profitable for the long-term, or even for any quarter.




Our
quarterly operating results have fluctuated significantly in the past and will
continue to fluctuate in the future, which could cause our stock price to
decline.




Our
quarterly operating results have fluctuated significantly in the past, and we
believe that they will continue to fluctuate in the future, due to a number of
factors, many of which are beyond our control. If in future periods our
operating results do not meet the expectations of investors or analysts who
choose to follow our company, our stock price may fall. Factors that may affect
our quarterly operating results include the following:




•
            fluctuations
      in the size and timing of customer orders from one quarter to the
      next;•
            timing
      of delivery of our services and products;•
            addition
      of new customers or loss of existing customers;•
            positive
      or negative business or financial developments announced by our key
      customers;•
            our
      ability to commercialize and obtain orders for products we are
      developing;•
            costs
      associated with developing our manufacturing
  capabilities;•
            new
      product announcements or introductions by our competitors or potential
      competitors;•
            the
      effect of variations in the market price of our common shares on our
      equity-based compensation expenses;





23





•
            acquisitions
      of businesses or customers;•
            technology
      and intellectual property issues associated with our products;
      and•
            general
      economic trends, including changes in energy prices, or geopolitical
      events such as war or incidents of
terrorism.




A
majority of our revenue has historically been generated from low-margin contract
research services; if we cannot expand revenues from other products and
services, our business will fail.




Historically,
a majority of our revenues has come from contract research services for
businesses and government agencies. During the years ended December 31, 2007,
2006 and 2005, contract services revenues comprised 55%, 67%, and 70%
respectively, of our operating revenues. Contract services revenue is low margin
and unlikely to grow at a rapid pace. Our business plan anticipates revenues
from product sales and licensing, both of which are higher margin than contract
services and have potential for rapid growth, increasing in coming years. If we
are not successful in significantly expanding our revenues from higher margin
products and services, our revenue growth will be slow, and it is unlikely that
we will achieve profitability.




Our
patents and other protective measures may not adequately protect our proprietary
intellectual property, and we may be infringing on the rights of
others.




We regard
our intellectual property, particularly our proprietary rights in our
nanomaterials and titanium dioxide pigment technology, as critical to our
success. We have received various patents, and filed other patent applications,
for various applications and aspects of our nanomaterials and titanium dioxide
pigment technology and other intellectual property. In addition, we generally
enter into confidentiality and invention agreements with our employees and
consultants. Such patents and agreements and various other measures we take to
protect our intellectual property from use by others may not be effective for
various reasons, including the following:






·
            Our
      pending patent applications may not be granted for various reasons,
      including the existence of conflicting patents or defects in our
      applications;·
            The
      patents we have been granted may be challenged, invalidated or
      circumvented because of the pre-existence of similar patented or
      unpatented intellectual property rights or for other
    reasons;·
            Parties
      to the confidentiality and invention agreements may have such agreements
      declared unenforceable or, even if the agreements are enforceable, may
      breach such agreements;·
            The
      costs associated with enforcing patents, confidentiality and invention
      agreements or other intellectual property rights may make aggressive
      enforcement cost prohibitive;·
            Even
      if we enforce our rights aggressively, injunctions, fines and other
      penalties may be insufficient to deter violations of our intellectual
      property rights; and·
            Other
      persons may independently develop proprietary information and techniques
      that, although functionally equivalent or superior to our intellectual
      proprietary information and techniques, do not breach our patented or
      unpatented proprietary rights.





Because
the value of our company and common shares is rooted primarily in our
proprietary intellectual property rights, our inability to protect our
proprietary intellectual property rights or gain a competitive advantage from
such rights could harm our ability to generate revenues and, as a result, our
business and operations.









24


In
addition, we may inadvertently be infringing on the proprietary rights of other
persons and may be required to obtain licenses to certain intellectual property
or other proprietary rights from third parties. Such licenses or proprietary
rights may not be made available under acceptable terms, if at all. If we do not
obtain required licenses or proprietary rights, we could encounter delays in
product development or find that the development or sale of products requiring
such licenses is foreclosed.




Because
our products are generally components of end products, the viability of many or
our products is tied to the success of third parties' existing and potential end
products.




Few of
the existing or potential products being developed with our nanomaterials and
titanium dioxide pigment technology are designed for direct use by the ultimate
end user. Phrased differently, most of our products are components of other
products. For example, our nano-structured LTO battery materials
and  batteries are designed for use in end-user products such as
electric vehicles, hybrid electric vehicles and other potential products. Other
potential products and processes we and our partners are developing using our
technology, such as titanium dioxide pigments, life science materials, air and
water treatment products, and coatings, are similarly expected to be components
of third-party products. As a result, the market for our products is dependent
upon third parties creating or expanding markets for their end-user products
that utilize our products. If such end-user products are not developed, or the
market for such end-user products contracts or fails to develop, the market for
our component products would be expected to similarly contract or collapse. This
would limit our ability to generate revenues and would harm our business and
operations.




The
commercialization of many of our technologies is dependent upon the efforts of
commercial partners and other third parties over which we have no or little
control.




We do not
have the expertise or resources to commercialize all potential applications of
our nanomaterials and titanium dioxide pigment technology. For example, we do
not have the resources necessary to complete the testing of, and obtain FDA
approval for, RenaZorb and other potential life sciences products or to
construct a commercial facility to use our titanium dioxide pigment production
technology. Other potential applications of our technology, such as those
related to our nano-structure LTO electrode materials, coating materials and
dental materials, are likely to be developed in collaboration with third
parties, if at all. With respect to these and substantially all other
applications of our technology, the commercialization of a potential application
of our technology is dependent, in part, upon the expertise, resources and
efforts of our commercial partners. This presents certain risks, including the
following:




•
            we
      may not be able to enter into development, licensing, supply and other
      agreements with commercial partners with appropriate resources, technology
      and expertise on reasonable terms or at
all;




•
            our
      commercial partners may not place the same priority on a project as we do,
      may fail to honor contractual commitments, may not have the level of
      resources, expertise, market strength or other characteristics necessary
      for the success of the project, may dedicate only limited resources to,
      and/or may abandon, a development project for reasons, including reasons,
      such as a shift in corporate focus, unrelated to its
    merits;•
            our
      commercial partners may be in the early stages of development and may not
      have sufficient liquidity to invest in joint development projects, expand
      their businesses and purchase our products as expected or honor
      contractual commitments.







25







•
            our
      commercial partners may terminate joint testing, development or marketing
      projects on the merits of the projects for various reasons, including
      determinations that a project is not feasible, cost-effective or likely to
      lead to a marketable end product;




•
            at
      various stages in the testing, development, marketing or production
      process, we may have disputes with our commercial partners, which may
      inhibit development, lead to an abandonment of the project or have other
      negative consequences; and




•
            even
      if the commercialization and marketing of jointly developed products is
      successful, our revenue share may be limited and may not exceed our
      associated development and operating
costs.




As a
result of the actions or omissions of our commercial partners, or our inability
to identify and enter into suitable arrangements with qualified commercial
partners, we may be unable to commercialize apparently viable products on a
timely and cost-effective basis, or at all. Our business is not dependent upon a
single application of our technology; however, we will not become profitable and
be able to sustain operations in the long run if we fail to commercialize
several of our potential products.




Our
battery business has been harmed by the design issue associated with the Phoenix
battery, and our ability to continue our battery business will be dependent upon
our ability to address related concerns.




As a
result of a risk associated with the battery packs we designed for use in
electric cars produced by Phoenix, we recently agreed to replace 47 of the
first-generation battery packs sold to Phoenix.  This has harmed
our relationship with Phoenix and with other current and potential purchasers of
our battery products and technology.  If the new battery we design and
develop for Phoenix does not address the noted module configuration
issue and is not otherwise safe and effective, we will be unable to
continue our supply arrangement with Phoenix over the long term.  In
addition, the design issues with Phoenix have, and will continue to, create
concerns among other current and potential customers.  Any failure to
address issues associated with the battery packs we supplied to Phoenix will
also harm our ability to attract and retain customer for other applications of
our battery technology.




If
we acquire or invest in other companies, assets or technologies and we are not
able to integrate them with our business, or we do not realize the anticipated
financial and strategic goals for any of these transactions, our financial
performance may be impaired.




As part
of our growth strategy, we routinely consider acquiring or making investments in
companies, assets or technologies that we believe are strategic to our business.
We do not have extensive experience in conducting diligence on, evaluating,
purchasing or integrating new businesses or technologies, and if we do succeed
in acquiring or investing in a company or technology, we will be exposed to a
number of risks, including:




•
            we
      may find that the acquired company or technology does not further our
      business strategy, that we overpaid for the company or technology or that
      the economic conditions underlying our acquisition decision have
      changed;




•
            we
      may have difficulty integrating the assets, technologies, operations or
      personnel of an acquired company, or retaining the key personnel of the
      acquired company;




•
            our
      ongoing business and management's attention may be disrupted or diverted
      by transition or integration issues and the complexity of managing
      geographically or culturally diverse
  enterprises;






26







•
            we
      may encounter difficulty entering and competing in new product or
      geographic markets or increased competition, including price competition
      or intellectual property litigation;
and




•
            we
      may experience significant problems or liabilities associated with product
      quality, technology and legal contingencies relating to the acquired
      business or technology, such as intellectual property or employment
      matters.




In
addition, from time to time we may enter into negotiations for acquisitions or
investments that are not ultimately consummated. These negotiations could result
in significant diversion of management time, as well as substantial
out-of-pocket costs. If we were to proceed with one or more significant
acquisitions or investments in which the consideration included cash, we could
be required to use a substantial portion of our available cash. To the extent we
issue shares of capital stock or other rights to purchase capital stock,
including options and warrants, existing stockholders would be diluted. In
addition, acquisitions and investments may result in the incurrence of debt,
large one-time write-offs, such as acquired in-process research and development
costs, and restructuring charges.




We
intend to expand our operations and increase our expenditures in an effort to
grow our business. If we are unable to achieve or manage significant growth and
expansion, or if our business does not grow as we expect, our operating results
may suffer.




During
the past several years, we have significantly increased our research and
development expenditures in an attempt to accelerate the commercialization of
certain products, particularly our nano-structured LTO electrode materials
and battery systems. Our business plan anticipates continued additional
expenditure on development, manufacturing and other growth initiatives. We may
not achieve significant growth. If achieved, significant growth would place
increased demands on our management, accounting systems, network infrastructure
and systems of financial and internal controls. We may be unable to expand
associated resources and refine associated systems fast enough to keep pace with
expansion, especially as we expand into multiple facilities at distant
locations. If we fail to ensure that our management, control and other systems
keep pace with growth, we may experience a decline in the effectiveness and
focus of our management team, problems with timely or accurate reporting, issues
with costs and quality controls and other problems associated with a failure to
manage rapid growth, all of which would harm our results of
operations.




Our
competitors have more resources than we do, which may give them a competitive
advantage.




We have
limited financial, personnel and other resources and, because of our early stage
of development, have limited access to capital. We compete or may compete
against entities that are much larger than we are, have more extensive resources
than we do and have an established reputation and operating history. Because of
their size, resources, reputation, history and other factors, certain of our
competitors may be able to exploit acquisition, development and joint venture
opportunities more rapidly, easily or thoroughly than we can. In addition,
potential customers may choose to do business with our more established
competitors, without regard to the comparative quality of our products, because
of their perception that our competitors are more stable, are more likely to
complete various projects, are more likely to continue as a going concern and
lend greater credibility to any joint venture.




27


We
will not generate substantial revenues from our life science products unless
proposed products receive FDA approval and achieve substantial market
penetration.




We have
entered into development and license agreements with respect to RenaZorb, a
potential drug candidate for humans with kidney disease, and other life science
products.  Most of the potential life sciences applications of our
technologies are subject to regulation by the FDA and similar regulatory bodies.
In general, license agreements in the life sciences area call for milestone
payments as certain milestones related to the development of the products and
the obtaining of regulatory approval are met; however, the receipt by the
licensor of substantial recurring revenues is generally tied to the receipt of
marketing approval from the FDA and the amount of revenue generated from the
sale of end products. There are substantial risks associated with licensing
arrangements, including the following:






•
            Further
      testing of potential life science products using our technology may
      indicate that such products are less effective than existing products,
      unsafe, have significant side effects or are otherwise not
      viable;




•
            The
      licensees may be unable to obtain FDA or other regulatory approval for
      technical, political or other reasons or, even if it obtains such
      approval, may not obtain such approval on a timely basis;
    and




•
            End
      products for which FDA approval is obtained, if any, may fail to obtain
      significant market share for various reasons, including questions about
      efficacy, need, safety and side effects or because of poor marketing by
      the licensee.




If any of
the foregoing risks, or other risks associated with our life science products
were to occur, we would not receive substantial, recurring revenue from our life
science division, which would adversely affect our overall business, operations
and financial condition.




As
manufacturing becomes a larger part of our operations, we will become exposed to
accompanying risks and liabilities.




We have
not produced any products using our nanomaterials and titanium dioxide pigment
technology and equipment on a sustained commercial basis. In-house or outsourced
manufacturing is becoming an increasingly significant part of our business. As a
result, we are becoming increasingly subject to various risks associated with
the manufacturing and supply of products, including the following:




•
            If
      we fail to supply products in accordance with contractual terms, including
      terms related to time of delivery and performance specifications, we may
      be required to repair or replace defective products and may become liable
      for direct, special, consequential and other damages, even if
      manufacturing or delivery was
outsourced;




•
            Raw
      materials used in the manufacturing process, labor and other key inputs
      may become scarce and expensive, causing our costs to exceed cost
      projections and associated
revenues;




•
            Manufacturing
      processes typically involve large machinery, fuels and chemicals, any or
      all of which may lead to accidents involving bodily harm, destruction of
      facilities and environmental contamination and associated
      liabilities;


28





•
            As
      our manufacturing operations expand, we expect that a significant portion
      of our manufacturing will be done overseas, either by third-party
      contractors or in a plant owned by the company.  Any
      manufacturing done overseas presents risks associated with quality
      control, currency exchange rates, foreign laws and customs, timing and
      loss risks associated with overseas transportation and potential adverse
      changes in the political, legal and social environment in the host county;
      and




•
            We
      may have, and may be required to, make representations as to our right to
      supply and/or license intellectual property and to our compliance with
      laws. Such representations are usually supported by indemnification
      provisions requiring us to defend our customers and otherwise make them
      whole if we license or supply products that infringe on third-party
      technologies or violate government
regulations.




Any
failure to adequately manage risks associated with the manufacture and supply of
materials and products could lead to losses (or small gross profits) from that
segment of our business and/or significant liabilities, which would adversely
affect our business, operations and financial condition.




We
may not be able to raise sufficient capital to meet future
obligations.




As of
December 31, 2007, we had approximately $50.1 million in cash and cash
equivalents.  As we take additional steps to enhance our
commercialization and marketing efforts, or respond to acquisition opportunities
or potential adverse events, our use of working capital may increase
significantly. In any such event, absent a comparatively significant increase in
revenue, we will need to raise additional capital in order to sustain our
ongoing operations, continue unfinished testing and additional development work
and, if certain of our products are commercialized, construct and operate
facilities for the production of those products.




We may
not be able to obtain the amount of additional capital needed or may be forced
to pay an extremely high price for capital. Factors affecting the availability
and price of capital may include the following:




•
            market
      factors affecting the availability and cost of capital
      generally;




•
            the
      price, volatility and trading volume of our common
  shares;




•
            our
      financial results, particularly the amount of revenue we are generating
      from operations;•
            the
      amount of our capital needs;




•
            the
      market's perception of companies in one or more of our lines of
      business;




•
            the
      economics of projects being pursued;
and




•
            the
      market's perception of our ability to execute our business plan and any
      specific projects identified as uses of
  proceeds.




If we are
unable to obtain sufficient capital or are forced to pay a high price for
capital, we may be unable to meet future obligations or adequately exploit
existing or future opportunities.




29






Our
past and future operations may lead to substantial environmental
liability.




Virtually
any prior or future use of our nanomaterials and titanium dioxide pigment
technology is subject to federal, state and local environmental laws. In
addition, we are in the process of reclaiming mineral property that we leased in
Tennessee. Under applicable environmental laws, we may be jointly and severally
liable with prior property owners for the treatment, cleanup, remediation and/or
removal of any hazardous substances discovered at any property we use. In
addition, courts or government agencies may impose liability for, among other
things, the improper release, discharge, storage, use, disposal or
transportation of hazardous substances. If we incur any significant
environmental liabilities, our ability to execute our business plan and our
financial condition would be harmed.




Certain
of our experts and directors reside in Canada and may be able to avoid civil
liability.




We are a
Canadian corporation, and three of our directors and our Canadian legal counsel
are residents of Canada. As a result, investors may be unable to effect service
of process upon such persons within the United States and may be unable to
enforce court judgments against such persons predicated upon civil liability
provisions of the U.S. securities laws. It is uncertain whether Canadian courts
would enforce judgments of U.S. courts obtained against us or such directors,
officers or experts predicated upon the civil liability provisions of U.S.
securities laws or impose liability in original actions against us or our
directors, officers or experts predicated upon U.S. securities
laws.




We
are dependent on key personnel.




Our
continued success will depend to a significant extent on the services of Terry
Copeland, our President, Edward Dickinson, our Chief Financial Officer, and Dr.
Bruce Sabacky, our Chief Technology Officer. We have key man insurance on the
life of Dr. Sabacky. We do not have agreements requiring any of our key
personnel to remain with our company.  The loss or unavailability of
any or all of these individuals would harm our ability to execute our business
plan, maintain important business relationships and complete certain product
development initiatives, which would harm our business.




We
may issue substantial amounts of additional shares without stockholder
approval.




Our
articles of incorporation authorize the issuance of an unlimited number of
common shares that may be issued without any action or approval by our
stockholders. In addition, we have various stock option plans that have
potential for diluting the ownership interests of our stockholders. The issuance
of any additional common shares would further dilute the percentage ownership of
our company held by existing stockholders.




The
market price of our common shares is highly volatile and may increase or
decrease dramatically at any time.




The
market price of our common shares is highly volatile. Our stock price may change
dramatically as the result of announcements of product developments, new
products or innovations by us or our competitors, uncertainty regarding the
viability of our technology or any of our product initiatives, significant
customer contracts, significant litigation or other factors or events that would
be expected to affect our business, financial condition, results of operations
and future prospects.









30


The
market price for our common shares may be affected by various factors not
directly related to our business or future prospects, including the
following:




•
            intentional
      manipulation of our stock price by existing or future shareholders or a
      reaction by investors to trends in our stock rather than the fundamentals
      of our business;•
            a
      single acquisition or disposition, or several related acquisitions or
      dispositions, of a large number of our shares, including by short sellers
      covering their position;•
            the
      interest of the market in our business sector, without regard to our
      financial condition, results of operations or business
      prospects;•
            positive
      or negative statements or projections about our company or our industry,
      by analysts, stock gurus and other persons;•
            the
      adoption of governmental regulations or government grant programs and
      similar developments in the United States or abroad that may enhance or
      detract from our ability to offer our products and services or affect our
      cost structure; and•
            economic
      and other external market factors, such as a general decline in market
      prices due to poor economic indicators or investor
    distrust.







We
have never declared a cash dividend and do not intend to declare a cash dividend
in the foreseeable future.




We have
never declared or paid cash dividends on our common shares. We currently intend
to retain any future earnings, if any, for use in our business and, therefore,
do not anticipate paying dividends on our common shares in the foreseeable
future.




We
are subject to various regulatory regimes, and may be adversely affected by
inquiries, investigations and allegations that we have not complied with
governing rules and laws.




In light
of our status as a public company and our lines of business, we are subject to a
variety of laws and regulatory regimes in addition to those applicable to all
businesses generally.  For example, we are subject to the reporting
requirements applicable to Canadian and United States reporting issuers, such as
the Sarbanes-Oxley Act of 2002, the rules of the NASDAQ Capital Market and
certain state and provincial securities laws. We are also subject to state and
federal environmental, health and safety laws, and rules governing department of
defense contracts. Such laws and rules change frequently and are often
complex.  In connection with such laws, we are subject to periodic audits,
inquiries and investigations.  Any such audits, inquiries and
investigations may divert considerable financial and human resources and
adversely affect the execution of our business plan.




Through
such audits, inquiries and investigations, we or a regulator may determine that
we are out of compliance with one or more governing rules or laws. 
Remedying such non-compliance diverts additional financial and human
resources.  In addition, in the future, we may be subject to a formal
charge or determination that we have materially violated a governing law, rule
or regulation.  We may also be subject to lawsuits as a result of
alleged violation of the securities laws or governing corporate laws.  Any
charge or allegation, and particularly any determination, that we had materially
violated a governing law would harm our ability to enter into business
relationships, recruit qualified officers and employees and raise
capital.







31




Item
1B.        Unresolved Staff
Comments





None




Item
2. Description of
Property





Our corporate headquarters is located
at 204 Edison Way, Reno, Nevada 89502 in a building we purchased in August
2002.  Our nanomaterials and titanium dioxide pigment assets are
located in this building, which contains approximately 100,000 square feet of
production, laboratory, testing and office space.  We have pledged our
corporate headquarters and associated land to secure a promissory note we issued
to BHP Minerals International, Inc. in the amount of $3,000,000, at an interest
rate of 7%. Payments of $600,000 plus accrued interest are due on February 8 of
each of 2009 and 2010.





In July
2007, we signed a new lease agreement effective as of July 1, 2007 for 30,000
square feet of space in the Flagship Business Accelerator Building located at
3019 Enterprise Drive, Anderson, Indiana.  The space is used for the
production of prototype batteries and battery cells.  The lease is for
an initial term of 5 years with a single one-year renewal term.  Total
rent to be paid over the 5 year term including real estate taxes is
$570,625.  The landlord provided the first $110,000 in additional
leasehold improvements at no cost.  We plan to complete the move from
the current office and laboratory space leased in the Flagship Enterprise Center
Building, an aggregate of 8,199 square feet, to the Accelerator Building by late
February 2008.





During
2007, we leased an aggregate 8,199 square feet of office and laboratory space in
the Flagship Enterprise Center Building located at 2701 Enterprise Drive in
Anderson, Indiana under five separate leases.  Total rent for the
combined leased premises, including normal utilities, real estate taxes and
common area fees was approximately $10,364 per month. This rent is net of a
20% rent subsidy offered by local government entities.  In exchange
for that rent subsidy, we have agreed that operations conducted at the leased
premises will remain in Madison County, Indiana for at least three years after
the expiration of the three-year subsidy period.  This commitment will
expire when the rental agreements terminate and the premises is vacated in late
February 2008.  As of December 31, 2007, approximately 1,500 square
feet of office space was still occupied in the Flagship Enterprise
building.





We also
maintain a registered office at 360 Bay Street, Suite 500, Toronto,
Ontario M5H 2V6.  We do not lease any space for, or conduct any
operations out of, the Toronto, Ontario registered office.





We have
terminated the mineral leases on all but the primary lease for our Tennessee
mineral property that is subject to remediation.  Remediation work on
the properties has been completed and reviewed by the applicable regulatory
authorities.  Final inspections and full release is expected to occur
in the fall of 2008.  Future remediation costs are not expected to be
significant.




Item
3.         Legal
Proceedings




We are
not subject to any pending legal proceedings other than ordinary routine
litigation incidental our business.




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





We did not submit any matters to a vote
of security holders during the fourth quarter of the 2007 fiscal
year.


32


PART
II







Item
5.         Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities






Market
Price





Our
common shares are traded on the NASDAQ Capital Market under the symbol
"ALTI."  The following table sets forth, for the periods indicated,
the high and low sales prices for our common shares, as reported on our
principal trading market at the time.





Fiscal
      Year Ended December 31, 2006
            Low
            
            High1st
      Quarter
            $1.98
            
            $3.742nd
      Quarter
            $2.69
            
            $4.213rd
      Quarter
            $2.80
            
            $3.824th
      Quarter
            $2.52
            
            $3.83Fiscal
      Year Ended December 31, 2007
            Low
            
            High1st
      Quarter
            $3.02
            
            $3.102nd
      Quarter
            $3.52
            
            $3.673rd
      Quarter
            $3.20
            
            $3.314th
      Quarter
            $4.10
            
            $4.28





The last
sale price of our common shares, as reported on the NASDAQ Capital Market on
March 10, 2008, was $2.50 per share.




Outstanding
Shares and Number of Shareholders





As of March 10, 2008, the number of
common shares outstanding was 84,356,301 held by approximately 453 holders of
record.  In addition, as of the same date, we have reserved 4,789,581
common shares for issuance upon exercise of options that have been, or may be,
granted under our employee stock option plans and 1,141,706 common shares for
issuance upon exercise of outstanding warrants.




Dividends





We have never declared or paid cash
dividends on our common shares.  Moreover, we currently intend to
retain any future earnings for use in our business and, therefore, do not
anticipate paying any dividends on our common shares in the foreseeable
future.




Securities
Authorized for Issuance under Equity Compensation Plans





We have
stock option plans administered by the Compensation Committee of our Board of
Directors that provide for the granting of options to employees, officers,
directors and other service providers of the Company.  Security
holders have approved all option plans.  The following table sets
forth certain information with respect to compensation plans under which equity
securities are authorized for issuance at December 31, 2007:


33





Number
      of
              securities
      to be
              issued
      upon
              exercise
      of
              outstanding
              options,
      warrants
              and
              rights
            Weighted-
              average
      exercise
              price
      of
              outstanding
              options,
              warrants
      and
              rights
            Number
      of securities
              remaining
      available
              for
      future issuance
              under
      equity
              compensation
      plans
              (excluding
      securities
              reflected
      in column
              (a))Plan
      Category
            (a)
            (b)
            (c)Equity
      compensation plans approved by security holders
            4,166,207
            $2.81
            6,072,330Equity
      compensation plans not approved by security holders
            None
            N/A
            NoneTotal
            4,166,207
            $2.81
            6,072,330




Recent
Sales of Unregistered Securities





Except as
previously reported, we did not sell any securities in transactions that were
not registered under the Securities Act in the quarter ended December 31,
2007.




Transfer
Agent and Registrar




The
Transfer Agent and Registrar for our common shares is Equity Transfer Services,
Inc., Suite 420, 120 Adelaide Street West, Toronto, Ontario, M5H
4C3.




Canadian
Federal Income Tax Considerations





Dividends paid on common shares owned
by non-residents of Canada are subject to Canadian withholding
tax.  The rate of withholding tax on dividends under the Income Tax
Act (Canada) (the “Act”) is 25%.  However, Article X of the reciprocal
tax treaty between Canada and the United States of America (the “Treaty”)
generally limits the rate of withholding tax on dividends paid to United States
residents to 15%.  The Treaty further generally limits the rate of
withholding tax to 5% if the beneficial owner of the dividends is a U.S.
corporation that owns at least 10% of the voting shares of the
Company.





If the beneficial owner of the dividend
carries on business in Canada through a permanent establishment in Canada, or
performs in Canada independent personal services from a fixed base in Canada,
and the shares of stock with respect to which the dividends are paid is
effectively connected with such permanent establishment or fixed base, the
dividends are taxable in Canada as business profits at rates which may exceed
the 5% or 15% rates applicable to dividends that are not so connected with a
Canadian permanent establishment or fixed base.  Under the provisions
of the Treaty, Canada is permitted to apply its domestic law rules for
differentiating dividends from interest and other disbursements.





A capital gain realized on the
disposition of common shares by a person resident in the United States (“a
non-resident”) will be subject to tax under the Act if the shares held by the
non-resident are “taxable Canadian property.”  In general, common
shares will be taxable Canadian property if the particular non-resident used (or
in the case of a non-resident insurer, used or held) the common shares in
carrying on business in Canada or where at any time during the five-year period
immediately preceding the realization of the gain, not less than 25% of the
issued and outstanding shares of any class or series of shares of the Company,
which were listed on a prescribed stock exchange, were owned by the particular
non-resident, by persons with whom the particular non-resident did not deal at
arms' length, or by any combination thereof.  If common shares
constitute taxable Canadian property, relief nevertheless may be available under
the Treaty.  Under the Treaty, gains from the alienation of common
shares owned by a U.S. resident who has never been resident in Canada generally
will be exempt from Canadian capital gains tax if the shares do not relate to a
permanent establishment or fixed base which the non-resident has or had in
Canada, and if not more than 50% of the value of the shares was derived from
real property (which includes rights to explore for or to exploit mineral
deposits) situated in Canada.





34


This summary is of a general nature
only and is not intended to be, nor shall be construed to be, legal or tax
advice to any particular holders of common shares.  Accordingly,
holders of common shares are urged to consult their own tax advisors for advice
with regard to their particular circumstances.




Item
6.         Selected Financial
Data





The following table sets forth selected
consolidated financial information with respect to the Company and its
subsidiaries for the periods indicated.  The data is derived from
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).  The selected
financial data should be read in conjunction with the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements and accompanying notes
included herein.  All amounts are stated in U.S. dollars.





For
      the Year Ended December 31,
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003STATEMENTS OF
      OPERATIONSRevenues
            
            $
            9,108,483
            
            
            $
            4,323,960
            
            
            $
            2,806,535
            
            
            $
            1,151,892
            
            
            $
            72,851Operating
      expenses
            
            $
            (42,175,957
            )
            
            $
            (22,005,375
            )
            
            $
            (13,288,388
            )
            
            $
            (8,056,847
            )
            
            $
            (5,858,061
            )Interest
      expense
            
            $
            (134,254
            )
            
            $
            (171,500
            )
            
            $
            (207,189
            )
            
            $
            (194,180
            )
            
            $
            (454,415
            )Interest
      income
            
            $
            1,101,682
            
            
            $
            654,182
            
            
            $
            750,306
            
            
            $
            96,229
            
            
            $
            1,879Gain
      (Loss) on foreign exchange
            
            $
            (1,292
            )
            
            $
            (1,550
            )
            
            $
            1,524
            
            
            $
            626
            
            
            $
            (193
            )Loss
      on extinguishment of debt
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Loss
      from continuing operations beforeminority
      interests’ share
            
            $
            (32,101,338
            )
            
            $
            (17,200,283
            )
            
            $
            (9,937,212
            )
            
            $
            (7,002,280
            )
            
            $
            (6,237,939
            )Minority
      interests’ share
            
            $
            630,717
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Net
      Loss
            
            $
            (31,470,621
            )
            
            $
            (17,200,283
            )
            
            $
            (9,937,212
            )
            
            $
            (7,002,280
            )
            
            $
            (6,237,939
            )Basic
      and diluted net loss percommon
      share
            
            $
            (0.45
            )
            
            $
            (0.29
            )
            
            $
            (0.17
            )
            
            $
            (0.14
            )
            
            $
            (0.19
            )Cash
      dividends declared percommon
      share
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -BALANCE SHEET
      DATAWorking
      capital
            
            $
            39,573,052
            
            
            $
            25,928,376
            
            
            $
            21,482,766
            
            
            $
            7,663,264
            
            
            $
            3,565,039Total
      assets
            
            $
            73,858,635
            
            
            $
            43,120,573
            
            
            $
            33,464,016
            
            
            $
            15,547,021
            
            
            $
            11,659,754Current
      liabilities
            
            $
            (14,328,781
            )
            
            $
            (3,499,862
            )
            
            $
            (2,427,543
            )
            
            $
            (376,773
            )
            
            $
            (397,141
            )Long-term
      obligations
            
            $
            (1,200,000
            )
            
            $
            (1,800,000
            )
            
            $
            (2,400,000
            )
            
            $
            (2,880,311
            )
            
            $
            (2,686,130
            )Minority
      Interest in Subsidiary
            
            $
            (1,369,283
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Net
      shareholders' equity
            
            $
            (56,960,571
            )
            
            $
            (37,820,711
            )
            
            $
            (28,636,473
            )
            
            $
            (12,289,937
            )
            
            $
            (8,576,483
            )





35




Item
7.Management's Discussion and Analysis of
Financial Condition and Results of Operations.





The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.




Overview





We are a
Canadian corporation, with principal assets and operations in the United States,
whose primary business is developing and commercializing nanomaterial and
titanium dioxide pigment technologies. We are organized into three divisions, a
Power and Energy Group (formally known as the Advanced Materials and Power
Systems Division), a Performance Materials Division, and a Life Sciences
Division.  Our research, development, production and marketing efforts are
currently directed toward three primary market applications that utilize
our proprietary technologies:





·
            Power
      and Energy Group


o
            The
      design, development, and production of our nano lithium Titanate battery
      cells, batteries, and battery packs as well as related design and test
      services.


o
            The
      development, production and sale for testing purposes of electrode
      materials for use in a new class of high performance lithium ion batteries
      called nano lithium Titanate
batteries.


·
            Performance
      Materials Division


o
            Through
      AlSher Titania, the development and production of high quality titanium
      dioxide pigment for use in paint and coatings, and nano titanium dioxide
      materials for use in a variety of applications including those related to
      removing contaminants from air and
water.


o
            The
      testing, development,  marketing and/or licensing of
      nano-structured ceramic powders for use in various application, such as
      advanced performance coatings, air and water purification systems, and
      nano-sensor applications.


·
            Life
      Sciences Division


o
            The
      co-development of RenaZorb, a test-stage active pharmaceutical ingredient,
      which is designed to be useful in the treatment of elevated serum
      phosphate levels in patients undergoing kidney
  dialysis.


o
            The
      development of a manufacturing process related to a test-stage active
      pharmaceutical ingredient, which is designed to be useful in the treatment
      of companion animals.





We also
provide contract research services on select projects where we can utilize our
resources to develop intellectual property and/or new products and
technology.  In the near term, as we continue to develop and market
our products and technology, contract services will continue to be a substantial
component of our operating revenues.  During the years ended December
31, 2007, 2006 and 2005, contract services revenues comprised 55%, 67%, and 70%,
respectively, of our operating revenues. In the summary of our business below,
we describe our various research products in connection with our description of
the business segment to which each relates.





Our
revenues have been, and we expect them to continue to be, generated by license
fees, product sales, commercial collaborations and contracts and
grants.  We currently have agreements in place to (1) produce battery
packs for the transportation market, (2) provide research to further develop
battery electrode materials, nanosensors, and nanomaterials characterization,
(3) to participate in a joint venture combining the technologies of the partners
in order to develop and produce titanium dioxide pigment for use in a variety of
applications, (4) to develop a suite of energy storage solutions for the
stationary power market and (5) to develop battery backup power systems for
Naval applications.  In addition, we have entered into a licensing
agreement for RenaZorb, our pharmaceutical candidate for treatment of chronic
renal failure in humans, and have licensed all potential pharmaceutical products
for animal applications.  We have made product sales consisting
principally of battery packs and nano lithium Titanate.  Future
revenues will depend on the success of our contracted projects, the results of
our other research and development work, the success of the RenaZorb and animal
applicationlicensees
in obtaining regulatory approval for the drugs, or other products, and the
success of our marketing efforts with respect to both product sales and
technology licenses.


36


General
Outlook





We have
generated net losses in each fiscal year since
incorporation.  Revenues from product sales, commercial collaborations
and contracts and grants increased significantly in 2007 but operating expenses
also increased as we added employees and committed additional funds to our
customer contracts, battery initiative, and pigment process
technology.  Our gross profit margins on customer contracts for
research and development work are very low, and in order that we may be
profitable in the long run, our business plan focuses on the development of
products and technologies that we expect will eventually bring a substantial
amount of higher-margin revenues from licensing, manufacturing, product sales
and other sources. We expect our  nano lithium Titanate batteries and
battery materials to be a source of such higher-margin
revenues.  Consequently, during 2007, we continued to expand the scope
of our Power and Energy Group by (1) hiring additional staff and increasing
temporary personnel to handle production demand (2) leasing additional
laboratory and production space in Indiana, and (3) acquiring test and
production equipment.  Also in our Performance Materials and Life
Sciences Divisions, the level of staffing and production equipment was increased
to expand our manufacturing capabilities for titanium dioxide pigment and
pharmaceutical products for animal applications.





As we
attempt to significantly expand our revenues from licensing, manufacturing,
sales and other sources, some of the key near-term events that will affect our
long-term success prospects include the following:




·
            In
      July 2007, we entered into a multi-year development and equipment purchase
      agreement with AES Energy Storage, LLC, a subsidiary of global power
      leader The AES Corporation.  Under the terms of the deal, we are
      working jointly with AES to develop a suite of energy storage solutions
      specifically for AES.  The first two 1 megawatt prototype
      stationary battery packs were manufactured at our Indiana facility and
      were completed according to the delivery schedule in December
      2007.  These packs have been connected to the electrical grid
      and full testing has commenced.  Assuming the successful testing
      of these packs, we expect for our development relationship with AES to
      continue through 2008.




·
            In
      January 2007, we entered into a multi-year purchase and supply agreement
      with Phoenix for lithium nano lithium Titanate battery packs to be used in
      electric vehicles produced by Phoenix.  Due to a slow down in
      production relating primarily to delays in Phoenix obtaining funding,
      projected orders for 2007 were not achieved.  In 2008, after
      becoming aware of a potential module configuration problem in the
      first-generation Phoenix battery packs manufactured in 2007, we agreed to
      replace 47 of the packs of the existing packs sold to Phoenix by means of
      a credit against re-designed second-generation battery packs and related
      engineering services.  Modeling and design of the modules for
      the second-generation battery packs is substantially
      complete.  Once testing and computer modeling confirm that the
      revised design resolves the potential overheating issue, we expect to
      commence delivery of the second-generation battery packs to
      Phoenix.  We are currently negotiating a development and supply
      agreement with Phoenix.




37




·
            Spectrum
      must begin the testing and application processes necessary to receive FDA
      approval of  RenaZorb and related products.  Spectrum
      has begun the process of information and data collection and presentation
      required to file an investigational new drug application with the FDA,
      which is a condition precedent to commencing human testing and the first
      stage of seeking regulatory approval.  We do not expect the
      application to be filed until early 2009.  In order for RenaZorb
      to be successful in the foreseeable future, it is important that Spectrum,
      with our assistance, submit its investigation new drug application by
      early 2009 and continue with
testing.




·
            We
      have formed the AlSher Titania joint venture with The Sherwin-Williams
      Company to develop and produce titanium dioxide pigment for use in paint
      and coatings.  The 100 ton per annum pilot plant is now
      producing pigment material for evaluation and to provide engineering data
      to complete a cost study by mid 2008 relating to the anticipated scale up
      to a 5000 ton per anum demonstration plant.  The success of this
      joint venture and initial pilot plant trials is integral to continuing
      development and the ultimate commercialization of
  AHP.






Although
it is not essential that all of these projects be successful in order to permit
substantial long-term revenue growth, we believe that full commercialization of
several of our technologies will be necessary in order to expand our revenues
enough to create a likelihood of our becoming profitable in the long
term.  We are optimistic with respect to our current key projects, as
well as others we are pursuing, but recognize that, with respect to each, there
are development, marketing, partnering and other risks to be
overcome.




Liquidity
and Capital Resources




Current
and Expected Liquidity





Our cash
and short-term investments increased from $27,220,357 at December 31, 2006 to
$50,146,117 at December 31, 2007.  During 2007 we sold 895,523 and
11,428,572 of our common shares in two separate private placements for net
proceeds to us of approximately $40.5 million.  Exercises of stock
options and warrants and other cash inflows increased cash by $8.8
million.  These increases were offset by cash used to fund operations
and purchased fixed assets of approximately $22 million, and by a $3.9 million
reclassification of auction rate notes from short term investments to long term
(refer to Financial Statement Footnote 3) during 2007.





We intend
to use these funds for working capital, capital expenditures, research and
development activities and the acquisition of other technologies.  Net
cash used in operations was $17,888,368 in 2007, and we expect to increase
funding of operations by approximately $15 million to approximately $33 million
in 2008, net of anticipated revenues, based upon budgeted revenue growth and
expansion of our production capabilities in 2008.  We expect to
substantially increase revenues by entering into new contracts and increasing
product sales.  However, this increase in revenues will be dependent
on our ability to secure customer contracts and successfully market our
products, particularly our nano lithium Titanate batteries, our energy storage
products and nano-structured LTO.  During 2007, we continued making
significant expenditures for our battery initiative, added staff and equipment
for the manufacture of nanoparticle products, increased the capital investment
in plant equipment relating to pigment process development and increased our
sales and marketing efforts.  In 2008, we intend to increase spending
for the battery initiative, manufacturing of the potential drug candidates, and
pigment process development.  We estimate that our current cash and
short-term investments balance is sufficient to support our operations through
the end of 2009 based on budgeted cashflow projections.





38


Historically,
we have financed operations primarily through the issuance of equity securities
(common shares, convertible debentures, stock options and warrants) and by the
issuance of debt.  In light of our 2007 strategic private placements
of securities, we do not presently have any plans to pursue additional debt or
equity financing during 2008 but reserve the right to do so if deemed necessary
in connection with an unexpected business opportunity or need.  We do
not have any commitments with respect to future financing and may, or may not,
be able to obtain such financing on reasonable terms, or at all.  We
have a single note payable in the original principal amount of $3,000,000 that
does not contain any restrictive covenants with respect to the issuance of
additional debt or equity securities by Altair.  The first three
payments of $600,000 of principal plus accrued interest were due and paid on
February 8, 2006, 2007, and 2008.  Future payments of principal and
interest are due annually on February 8, 2009 and 2010.





Capital
Commitments and Expenditures





The
following table discloses aggregate information about our contractual
obligations and the periods in which payments are due as of December 31,
2007:





Less
      Than
            
            
            
            
            
            
            
            
            AfterContractual
      Obligations
            
            Total
            
            
            1
      Year
            
            
            1-3
      Years
            
            
            4-5
      Years
            
            
            5
      YearsNotes
      Payable
            
            $
            1,800,000
            
            
            $
            600,000
            
            
            $
            1,200,000
            
            
            $
            -
            
            
            $
            -Interest
      on Notes Payable
            
            
            252,000
            
            
            
            126,000
            
            
            
            126,000
            
            
            
            -
            
            
            
            -Contractual
      Service Agreements
            
            
            1,636,778
            
            
            
            1,570,778
            
            
            
            66,000
            
            
            
            -
            
            
            
            -Facilities
      and Property Leases
            
            
            662,250
            
            
            
            218,768
            
            
            
            252,232
            
            
            
            191,250
            
            
            
            -Unfulfilled
      Purchase Orders
            
            
            3,253,949
            
            
            
            3,253,949
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      Contractual Obligations
            
            $
            7,604,977
            
            
            $
            5,769,494
            
            
            $
            1,644,232
            
            
            $
            191,250
            
            
            $
            -





In
connection with the formation of the AlSher Titania joint venture, we committed
to complete our pigment processing pilot plant and commissioned the plant
by the end of February 2008.  Total capital expenditures, labor and
development costs associated with this effort are expected to total
approximately $3.9 million.  Through December 31, 2007, approximately
$3.3 million of costs associated with the pigment processing pilot plant
have been incurred.





A total
of approximately $4.8 million was anticipated to be spent on labor, equipment
and building improvements and other implementation expenses related to
preparations to manufacture our pharmaceutical products in 2007.  Of
this amount, approximately $706,000 was incurred through December 31,
2007.





In July
2007, we signed a new lease agreement for 30,000 square feet of space in the
Flagship Business Accelerator Building located at 3019 Enterprise Drive,
Anderson, Indiana.  The move from the current office and laboratory
space leased in the Flagship Enterprise Center Building, an aggregate of 8,199
square feet, to the Accelerator Building was completed by late February
2008.  We have spent approximately $273,000 on build-out and leasehold
improvements, net of the $110,000 credit received from the landlord through
December 31, 2007.





We
purchased equipment for our Reno, Nevada facility for use in the development and
expansion of our current advanced battery materials production
capabilities.  Through December 31, 2007, approximately $1,200,000 was
expended on production equipment.





In 2008,
we plan to spend approximately $11.2 million, including outstanding commitments
at December 31, 2007 of approximately $103,047, on production and tooling
equipment associated with our Power and Energy Systems Group and continuing the
expansion of our Life Sciences manufacturing capabilities.





39


In 2008,
after becoming aware of a module configuration problem in the
first-generation Phoenix battery packs manufactured in 2007, we agreed to
replace 47 of the packs by means of a credit against re-designed
second-generation battery packs and related engineering services and recorded a
warranty liability of $2,856,902 in the December 31, 2007 financial
statements.  It is anticipated that we will fulfill this warranty
obligation in 2008 by providing replacement deliverables of
second-generation battery packs and related engineering
services.





Critical
Accounting Policies and Estimates





Management
based the following discussion and analysis of our financial condition and
results of operations on our consolidated financial statements. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities.  On an
on-going basis, we evaluate our critical accounting policies and estimates,
including those related to long-lived assets, share-based compensation, revenue
recognition, overhead allocation, allowance for doubtful accounts, inventory,
and deferred income tax.   We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.





We
believe the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our consolidated financial
statements. These judgments and estimates affect the reported amounts of assets
and liabilities and the reported amounts of revenues and expenses during the
reporting periods. Changes to these judgments and estimates could adversely
affect the Company’s future results of operations and cash flows.





·
            Long-Lived
      Assets.  Our long-lived assets consist principally of the
      nanomaterials and titanium dioxide pigment assets, the intellectual
      property (patents and patent applications) associated with them, and a
      building.  Included in these long-lived assets are those that
      relate to our research and development process.  These assets are
      initially evaluated for capitalization based on Statement of Financial
      Accounting Standards (“SFAS”) No. 2, Accounting for Research and
      Development Costs.  If the assets have alternative future uses
      (in research and development projects or otherwise), they are capitalized
      when acquired or constructed; if they do not have alternative future uses,
      they are expensed as incurred. At December 31, 2007, the carrying
      value of these assets was $13,606,904, or 18% of total
      assets.  We evaluate the carrying value of long-lived assets
      when events or circumstances indicate that an impairment may
      exist.  In our evaluation, we estimate the net undiscounted cash
      flows expected to be generated by the assets, and recognize impairment
      when such cash flows will be less than the carrying
      values.  Events or circumstances that could indicate the
      existence of a possible impairment include obsolescence of the technology,
      an absence of market demand for the product, and/or the partial or
      complete lapse of technology rights
protection.





·
            Share-Based
      Compensation.  We have a stock incentive plan that provides for
      the issuance of stock options, restricted stock and other awards to
      employees and service providers.  We calculate compensation
      expense under SFAS 123R using a Black-Scholes Merton option pricing
      model.  In so doing, we estimate certain key assumptions used in
      the model.  We believe the estimates we use, which are presented
      in Note 11 of Notes to the Consolidated Financial Statements, are
      appropriate and reasonable.


40


·
            Revenue
      Recognition.  We recognize revenue when persuasive evidence of
      an arrangement exists, delivery has occurred or service has been
      performed, the fee is fixed and determinable, and collectability is
      probable.  During 2007, our revenues were derived from three sources:
      product sales, commercial collaborations, and contract research and
      development.  License fees are recognized when the agreement is
      signed, we have performed all material obligations related to the
      particular milestone payment or other revenue component and the earnings
      process is complete.  Revenue for product sales is recognized
      upon delivery of the product, unless specific contractual terms dictate
      otherwise.  Based on the specific terms and conditions of each
      contract/grant, revenues are recognized on a time and materials basis, a
      percentage of completion basis and/or a completed contract
      basis.  Revenue under contracts based on time and materials is
      recognized at contractually billable rates as labor hours and expenses are
      incurred.  Revenue under contracts based on a fixed fee
      arrangement is recognized based on various performance measures, such as
      stipulated milestones.  As these milestones are achieved, revenue is
      recognized.  From time to time, facts develop that may require us to
      revise our estimated total costs or revenues expected.  The
      cumulative effect of revised estimates is recorded in the period in which
      the facts requiring revisions become known.  The full amount of
      anticipated losses on any type of contract is recognized in the period in
      which it becomes known.  Payments received in advance relating
      to future performance of services or delivery of products are deferred
      until the performance of the service is complete or the product is
      shipped.  Upfront payments received in connection with certain
      rights granted in contractual arrangements are deferred and amortized over
      the related time period over which the benefits are
      received.  Based on specific customer bill and hold agreements,
      revenue is recognized when the inventory is shipped to a third party
      storage warehouse, the inventory is segregated and marked as sold, the
      customer takes the full rights of ownership and title to the inventory
      upon shipment to the warehouse per the bill and hold
      agreement.  When contract terms include multiple components that
      are considered separate units of accounting, the revenue is attributed to
      each component and revenue recognition may occur at different points in
      time for product shipment, installation, and service contracts based on
      substantial completion of the earnings
process.





·
            Accrued
      Warranty.We
      provide a limited warranty for battery packs and energy storage
      systems.  A liability is recorded for estimated warranty
      obligations at the date products are sold.  Since these are new
      products, the estimated cost of warranty coverage is based on cell and
      module life cycle testing and compared for reasonableness to warranty
      rates on competing battery products.  As sufficient actual
      historical data is collected on the new product, the estimated cost of
      warranty coverage will be adjusted accordingly.  The liability
      for estimated warranty obligations may also be adjusted based on specific
      warranty issues identified.





·
            Overhead
      Allocation.  Facilities overheads, which are comprised primarily
      of occupancy and related expenses, and fringe benefit expenses, are
      initially recorded in general and administrative expenses and then
      allocated monthly to research and development expense based on labor
      costs.  Facilities overheads and fringe benefits allocated to
      research and development projects may be chargeable when invoicing
      customers under certain research and development
  contracts.





·
            Allowance
      for Doubtful Accounts.  The allowance for doubtful accounts is
      based on our assessment of the collectability of specific customer
      accounts and the aging of accounts receivable.  We analyze historical
      bad debts, the aging of customer accounts, customer concentrations,
      customer credit-worthiness, current economic trends and changes in our
      customer payment patterns when evaluating the adequacy of the allowance
      for doubtful accounts.  From period to period, differences in
      judgments or estimates utilized may result in material differences in the
      amount and timing of our bad debt
expenses.


41





·
            Inventory.  The
      Company values its inventories generally at the lower of cost (first-in,
      first-out method) or market.  We employ a full absorption
      procedure using standard cost techniques.  The standards are
      customarily reviewed and adjusted annually.  Overhead rates are
      recorded to inventory based on normal capacity.  Any idle
      facility costs or excessive spoilage are recorded as current period
      charges.





·
            Deferred
      Income Tax.  Income taxes are accounted for using the asset and
      liability method.  Deferred income tax assets and liabilities are
      recognized for the future tax consequences attributable to differences
      between the financial statement carrying amounts of existing assets and
      liabilities and their respective tax bases and operating loss and tax
      credit carryforwards.  Deferred income tax assets and liabilities are
      measured using enacted tax rates expected to apply to taxable income in
      the years in which those temporary differences are expected to
      be recovered or settled.  The effect on deferred income tax
      assets and liabilities of a change in tax rates is recognized in income in
      the period that includes the enactment date.  Future tax benefits are
      subject to a valuation allowance when management is unable to conclude
      that its deferred income tax assets will more likely than not be realized
      from the results of operations.  We have recorded a valuation
      allowance to reflect the estimated amount of deferred income tax assets
      that may not be realized. The ultimate realization of deferred income tax
      assets is dependent upon generation of future taxable income during the
      periods in which those temporary differences become deductible. Management
      considers projected future taxable income and tax planning strategies in
      making this assessment. Based on the historical taxable income and
      projections for future taxable income over the periods in which the
      deferred income tax assets become deductible, management believes it more
      likely than not that the Company will not realize benefits of these
      deductible differences as of December 31, 2007.  Management has,
      therefore, established a full valuation allowance against its net deferred
      income tax assets as of December 31, 2007.  Due to the
      significant increase in common shares issued and outstanding from
      2005 through 2007, Section 382 of the Internal Revenue Code may
      provide significant limitations on the utilization of our net operating
      loss carry forwards.  As a result of these limitations, a
      portion of these loss and credit carryovers may expire without being
      utilized.





Results
of Operations





Fiscal
Year 2007 vs. 2006





Revenues
increased by $4,784,523 from $4,323,960 in 2006 to $9,108,483 in 2007, while
operating expenses increased by $20,170,582, from $22,005,375 in 2006 to
$42,175,957 in 2007.  As a result, our loss from operations increased
by $15,067,474, from $17,681,415 in 2006 to $33,067,474 in 2007.





Product
sales increased from $961,380 in 2006 to $4,058,281 in 2007.  The
volume of battery packs sold to Phoenix Motorcars Inc. grew from 11 in 2006 to
50 in 2007 resulting in a $2,293,329 increase in product sales.  The
remaining increase of $803,572 reflects a higher level of sales volume for
prototype battery cells, battery modules, nano lithium Titanate, and other
nanomaterial products.  Based on Phoenix’s request, we continue to
segregate and hold 47 of the 50 packs in a storage facility pending receipt of
their new Generation II vehicle design specifications.  Three of the
packs were shipped to Phoenix.





License
fees decreased by $464,720 from 2006 to 2007.  In 2006, license fees
of $464,720 associated with the Spectrum Pharmaceutical and Elanco Animal Health
contracts was recorded.  In 2007, no additional milestones were
achieved under these contracts.





42


Commercial
collaborations revenues increased from $1,420,151 in 2006 to $2,909,650 in 2007
primarily due to $1,662,033 of increased billings associated with new contacts
signed in 2007 with AES, the second phase of Elanco Animal Health development
contract, and PPG.  This increase was offset by $172,534 of
non-recurring collaborations that were finalized in 2006.





Contract
and grant revenues increased from $1,477,709 in 2006 to $2,140,552 in 2007,
principally as a result of billings of $649,725 under the $2.5 million
Department of Energy Earmark relating to the momentum gained in the project that
was originally effective in September 2006, billings of $121,916 under our
subcontract with PPG signed in July 2007 and billings of $140,731 under the
University of Reno Nanosensors subcontract effective in January
2007.  This increase was partially offset by a reduction in revenues
of $249,528 primarily relating to the subcontract with the University of Nevada,
Las Vegas Research Foundation and the National Science Foundation grant that
were coming to completion in 2007.





Cost
of sales - product increased by $4,129,556, from $1,034,431 in 2006 to
$12,007,330 in 2007.  This increase is driven by the increase in
battery pack sales and other changes in product sales discussed
above.  Positive margins have not yet been achieved associated with
the sale of battery packs due to scaling issues, and a portion of the revenues
relating to the battery packs is dependent upon the receipt of Zero Emission
Credits.  Through December 31, 2007, no ZEV credits have been sold by
Phoenix Motorcars, Inc.  As higher production volumes and cost
reduction efforts are achieved and ZEV credits are paid, the margin on battery
pack sales is expected to become positive.




Cost of
sales - warranty and inventory reserves increased by $6,843,343 in 2007 from
2006.  $3,927,353 of this increase relates to a write-off of all inventory
balances on hand at December 31, 2007 of $2,529,938 relating to battery cells
and modules, and a $1,397,415 write-off of cells ordered in 2007 for delivery in
2008.  The remaining increase of $2,915,990 relates to warranty
reserves of $59,088 and $2,856,902 recorded based upon 2007 battery product
sales to AES and Phoenix, respectively.  The write off of inventory
associated with the Phoenix battery packs and the warranty recorded in
connection with Phoenix resulted from our decision to replace 47 of the Phoenix
packs manufactured in 2007 under warranty provisions and the proposal of a new
prototype battery that utilizes a different module configuration and cell format
(refer to the Key Business Developments in Power and Energy section under Item 1
– Business for further discussion).





Research
and development, or R&D expense increased by $5,366,472, from $10,077,231 in
2006 to $15,443,703 in 2007.  Research and development payroll costs
increased by $2,602,663 including fringe benefits expenses due to an increase in
headcount of 24.  Temporary labor costs also increased by $572,597
primarily due to the growth in battery pack production and construction/testing
of the pigment pilot plant.  Excluding labor, research and development
expenses in the Power and Energy Systems Group increased by $1,474,013 primarily
due to the AES development agreement signed in 2007 and an increased focus on
developing potential new battery products.  Excluding labor, research
and development expenses in the Life Sciences Division increased by $394,160
primarily due to work billed to us under our subcontract with the University of
California Santa Barbara relating to the Department of Energy grant and signing
of the second phase of the development contract with Elanco Animal Health in
2007.  Excluding labor, research and development expenses increased by
$298,758 in the Performance Materials Division primarily due to the construction
and testing of the pigment pilot plant (increase of $353,947), increased
spending on  existing and new billable contracts (increase of
$209,260), offset by non-recurring collaborations and subcontracts completed in
2006 (decrease of $264,449).  The remaining increase relates to other
internal research and development.





43


General
and administrative expenses increased by $3,275,069, from $7,495,180 in 2006 to
$10,770,249 in 2007.  Stock based compensation expense, a non-cash
item, increased by $1,876,880 due to a higher level of new employees eligible
for and receiving option grants, as well as an overall higher level of employees
who received retention grants in January 2007; payroll costs including fringe
expense increased by $669,130 due to expansion of the executive team as well as
other related increases in recruiting, relocation, and travel of $511,219;
fringe benefit expenses allocable to all general and administrative personnel
increased by $479,949 primarily due to a higher level of bonus earned in 2007;
and accounting fees increased by $227,824 primarily due to tax reviews and
re-filing of tax returns undertaken in 2007 in response to new accounting
pronouncements.  These increases were partially offset by $401,484 of
expenses associated with a flood at our headquarters in Reno, Nevada in January
2006 and a decrease of $88,449 in other general and administrative
expenses.





Interest
income increased by $447,500 from $654,182 in 2006 to $1,101,682 in
2007.   On average a higher level of cash was available for
investment in 2007, $16 million in 2007 versus $10 million in 2006.





Fiscal
Year 2006 vs. 2005





Revenues
increased by $1,517,425 from $2,806,535 in 2005 to $4,323,960 in 2006, while
operating expenses increased by $8,716,987, from $13,288,388 in 2005 to
$22,005,375 in 2006.  As a result, our loss from operations increased
by $7,199,562, from $10,481,853 in 2005 to $17,681,415 in 2006.





Product
sales increased from $149,373 in 2005 to $961,380 in 2006 due to our first sales
of battery packs to Phoenix Motorcars, Inc.  Of the 11 battery packs
ordered, four were shipped and seven were billed and held by us based upon the
written request of Phoenix, which complied with the revenue recognition criteria
described in the Securities and Exchange Commission “Staff Accounting Bulletin
No. 104 – Revenue Recognition in Financial Statements”.  The remaining
seven packs were shipped according to instructions from Phoenix by the end of
January 2007.





Commercial
collaborations revenues increased from $825,723 in 2005 to $1,420,151 in 2006
primarily due to $495,182 of increased billings to Western Oil Sands resulting
from an amendment to their license and development agreement signed in October
2005 and an increase of $115,848 in RenaZorb development revenues paid by
Spectrum Pharmaceuticals.





Contract
and grant revenues increased from $1,136,439 in 2005 to $1,477,709 in 2006,
principally as a result of billings of $746,438 under the $2.5 million
Department of Energy Earmark that was effective in September 2006 and $66,266
under the $250,000 Indiana Advanced Energy Technologies Program grant awarded in
November 2005.  This increase was partially offset by a reduction in
the revenues of $466,200 for the August 2004 subcontract with Western Michigan
University that was fully expended in February 2006.





Research
and development, or R&D, expense increased by $5,003,753, from $5,073,478 in
2005 to $10,077,231 in 2006.  During 2006, the battery initiative,
which was initially staffed in the fourth quarter of 2005, was expanded over the
year to include three new employees and performance of the research to develop
and improve our nano-structured LTO and cell design utilized in the nano lithium
Titanate batteries.   As a result, expenditures for the battery
initiative increased by $2,707,214 in 2006.  In addition,
pre-production and commercialization costs relating to nano-structured LTO
increased by $992,038.  We also increased our commitment to pigment
process technology in 2006 by hiring a full time General Manager and developing
a pilot plant, with a resulting increase in expenditures of
$830,398.  Expenditures for contract and grant work increased by
$588,329 primarily as a result of the new $2.5 million Department of Energy
earmark effective in September 2006.  These increases were partially
offset by decreases in other research and development
activities.


44


Sales and
marketing expenses increased by $339,018 from $1,539,765 in 2005 to $1,878,783
in 2006.  Excluding the payment of a $500,000 fee in 2005 to RBC
Capital Markets in connection with the RenaZorb licensing agreement, sales and
marketing expenses increased by $839,018 in 2006.  This increase
reflects the addition of two positions on the sales team to focus on the Life
Sciences Division and Power and Energy Group of $218,247, and expenses incurred
of $620,771 to promote our nano lithium Titanate batteries installed in our
prototype all electric vehicle and the expansion of general corporate marketing
activities.





General
and administrative expenses increased by $1,923,726, from $5,571,454 in 2005 to
$7,495,180 in 2006.  Stock based compensation expense, a non-cash
item, increased by $1,539,788 as a result of implementing FAS 123 (R); we
incurred approximately $401,484 of expenses associated with a flood at our
headquarters in Reno, Nevada in January 2006; legal fees associated with patent
work increased by $328,807; and payroll expense increased by approximately
$140,700 due mainly to staff additions.  These increases were
partially offset by a decrease of $509,082 in Sarbanes Oxley compliance costs
from 2005, the first year of implementation.





Interest
income decreased by $96,124, from $750,306 in 2005 to $654,182 in
2006.   On average a higher level of cash was available for
investment in 2005.




Item
7A.                      Quantitative
and Qualitative Disclosures About Market Risk





Not Applicable.




Item
8.                      Financial
Statements and Supplementary Data.





Supplementary
Data





The
following Supplementary Financial Information for the fiscal quarters ended
March 31, June 30, September 30 and December 31 in each of the years 2007 and
2006 was derived from our unaudited quarterly consolidated financial statements
filed by us with the SEC in our Quarterly Reports on Form 10-Q with respect to
such periods (except for 4th quarter data).





Supplementary
      Financial Information by Quarter, 2007 and 2006(Unaudited)Quarter
      Ended
            
            
            Quarter
      Ended
            
            
            Quarter
      Ended
            
            
            Quarter
      EndedMarch
      31
            
            
            June
      30
            
            
            September
      30
            
            
            December
      31Year
      Ended December 31, 2007:Revenues
            
            $
            1,140,932
            
            
            $
            3,065,868
            
            
            $
            3,370,134
            
            
            $
            1,531,549Operating
      Expenses
            
            $
            6,630,398
            
            
            $
            8,915,384
            
            
            $
            9,619,193
            
            
            $
            16,710,982Net
      Loss
            
            $
            (5,181,467
            )
            
            $
            (5,430,583
            )
            
            $
            (6,130,210
            )
            
            $
            (14,728,362
            )Loss
      per Common Share: (1)Basic
      and Diluted
            
            $
            (0.07
            )
            
            $
            (0.08
            )
            
            $
            (0.09
            )
            
            $
            (0.20
            )


45





Year
      Ended December 31, 2006:Revenues
            
            $
            545,296
            
            
            $
            1,056,828
            
            
            $
            749,898
            
            
            $
            1,971,938Operating
      Expenses
            
            $
            5,270,989
            
            
            $
            4,985,237
            
            
            $
            4,908,681
            
            
            $
            6,840,468Net
      Loss
            
            $
            (4,560,064
            )
            
            $
            (3,789,018
            )
            
            $
            (4,054,686
            )
            
            $
            (4,796,513
            )Loss
      per Common Share: (1)Basic
      and Diluted
            
            $
            (0.08
            )
            
            $
            (0.06
            )
            
            $
            (0.07
            )
            
            $
            (0.08
            )(1) Loss
      per common share is computed independently for each of the quarters
      presented. Therefore, the sum of the quarterly loss per common share
      amounts does not necessarily equal the total for the year.





Financial
Statements





The
financial statements required by this Item appear on pages F-4 through F-35 of
this Report.




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





Not applicable.




Item
9A.        Controls and
Procedures





Disclosure Controls and
Procedures.  Under the supervision and with the participation
of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December
31, 2007.   Based upon this evaluation, our chief executive
officer and our chief financial officer have concluded that, as of December 31,
2007, our disclosure controls and procedures were effective in ensuring that
information required to be disclosed by the Company in reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
the time periods required by governing rules and forms.





Internal Control Over
Financial Reporting. Our management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) under the Securities Exchange Act of 1934, as
amended.  Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of
America.  Internal control over financial reporting includes those
written policies and procedures that:





·
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;


·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of
    America;


·
            provide
      reasonable assurance that our receipts and expenditures are being made
      only in accordance with authorization of our management;
    and


·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of assets that could have a
      material effect on our consolidated financial
  statements.





46


Internal
control over financial reporting includes the controls themselves, monitoring
and internal auditing practices and actions taken to correct deficiencies as
identified.





Our
management assessed the effectiveness our internal control over financial
reporting as of December 31, 2007.  Our management’s assessment was
based on criteria for effective internal control over financial reporting
described in “Internal Control – “Integrated Framework” issued by the Committee
of Sponsoring Organizations of the Treadway Commission.  Our
management’s assessment included an evaluation of the design of our internal
control over financial reporting and testing of the operational effectiveness of
our internal control over financial reporting.  Our management
reviewed the results of its assessment with the Audit Committee of our Board of
Directors.  Based on this assessment, our management determined that,
as of December 31, 2007, we maintained effective internal control over financial
reporting.





Perry-Smith
LLP, independent registered public accounting firm, who audited and reported on
our consolidated financial statements included in this report, has issued an
attestation report on management’s assessment of internal control over financial
reporting.  This attestation report appears on pages F-2 and F-3 of
this report.





Changes In Internal Control
Over Financial Reporting.  There were no significant changes
(including corrective actions with regard to significant deficiencies or
material weaknesses) in our internal controls over financial reporting that
occurred during the fourth quarter of fiscal 2007 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.




Item
9B.        Other Information





On
January 29, 2008, we signed a contract with the United States Navy for
$2,488,859 directed towards the development of battery backup power systems
in naval applications.  Under the terms of the contract which runs
through November 30, 2008, we will develop an optimized battery cell employing
nano-sized lithium titanate electrode materials and then demonstrate the
performance and safety attributes of the cell.  We will also develop
and demonstrate a modular system design for utilization of the product
technology in multiple military applications, including energy and power storage
for naval applications.





On
February 11, 2008, we signed a contract with Melpar BVBA, a company incorporated
under Belgian law to provide services relating to defining and implementing
sales and marketing strategies in Europe.  At the same time, we
entered into an agreement with Rik Dobbelaere, the owner of Melpar, under which
he will serve as the President of our European operations and report to our
President.  Total annual compensation is a monthly payment in US
dollars of approximately $40,000 to Melpar under its agreement and an annual
target bonus under our incentive bonus plan equal to up to 60% of base
compensation to Melpar under its agreement.  In addition, Mr.
Dobbelaere is entitled under his agreement to receive 100,000 stock options
under our stock incentive plan.





The term
of both agreements is indefinite unless cancelled by either party with three
months notice.  If we terminate the Melpar agreement, we will be
required to pay a cancellation fee of three months contract value (approximately
U.S. $120,000) if the termination occurs during the first three months, a
cancellation fee of six months contract value (approximately U.S. $240,000) if
the termination occurs between 6 and 12 months after commencement of the term, a
cancellation fee of 12 months contract value (approximately U.S. $480,000) if
the termination occurs between 12 and 24 months after commencement of the term
and a cancellation fee of 18 months contract value (approximately U.S. $720,000
if the termination occurs more than 24 months after the end of the
term.





47


Our
Compensation and Nominations Committee may make discretionary bonuses from time
to time if it determines, after considering the total base salary, annual
incentive bonus and equity-based compensation to the executive, that the total
compensation otherwise earned by the executive underrepresented the value or
contribution of the executive during the year.  In connection with the
2007 bonus plan, the Compensation and Nominations Committee determined on
January 3, 2008 to grant Alan Gotcher a total bonus of $428,600 in cash and
75,591 common shares (valued at $347,718 based upon a closing price of $4.60 per
share on January 2, 2008).  Of the total bonus, $253,661 in cash and
44,737 common shares represented a discretionary bonus above that determined
pursuant to the terms of the Company’s incentive plan.





On March 10, 2008 we entered into
employment agreements with Jeffrey A. McKinney, Vice President and Chief Patent
Counsel, and Stephen Balogh, Vice President Human Resources.  Under
the employment agreement, Mr. McKinney and Mr. Balogh are entitled to a annual
base salary in an amount not less than $215,000 and $193,800,
respectively.  In addition, each is entitled to an annual bonus target
opportunity equal to 60% of his base salary upon achievement of certain
performance measures, and standard health and other benefits.  The
employment agreement also include terms related to the assignment of inventions
to the Company, protection of confidential information, and 12-month
non-competition and non-solicitation covenants.




Under
each of the employment agreements, if the employee’s employment is terminated by
themselves for good reason, which includes, among other things, (a) the Company
requiring the employee to relocate his place of employment without his consent,
or (b) a material adverse change in the employee’s title, position, and/or
duties 90 days before or within one year after a change of control, the employee
is entitled to a severance benefit equal to his base salary and health benefits
for one year.  The one-year base salary severance benefit will be
extended to 16 months if either (a) the employee terminates for good reason on
or before March 10, 2010 on account of a relocation that is more than 50 miles
from his initial place of employment, or (b) the employee consents to a
relocation of his employment, but subsequently terminates his employment
with the Company for good reason on or before the two-year anniversary of such
relocation.
 
 If either employee’s employment is
terminated by the Company without cause, each is entitled to a severance benefit
equal to his base salary for one year, health benefits for 18 months, and a lump
sum bonus payment equal to 60% of his base salary paid for the year in which his
termination occurred.  The one-year base salary severance benefit will
be extended to 16 months if either (a) the employee terminates for good reason
on or before March 10, 2010 on account of a relocation that is more than 50
miles from his initial place of employment, or (b) the employee consents to a
relocation of his employment, but his employment is subsequently terminated
by the Company without cause on or before the two-year anniversary of such
relocation.  Neither employee is entitled to any severance if his
employment is terminated at any time by the Company with cause or by the
employee without good reason.


48


PART
III




Item
10.        Directors and Executive Officers
of the Registrant





The
information required by this Item is incorporated by reference to the section
entitled “Election of Directors” in the Company’s definitive proxy statement to
be filed with the SEC.




Item
11.         Executive
Compensation





The
information required by this Item is incorporated by reference to the section
entitled “Executive Compensation” in the Company’s definitive proxy statement to
be filed with the SEC.




Item
12.         Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters





The
information required by this Item is incorporated by reference to the section
entitled “Security Ownership of Certain Beneficial Owners and Management” in the
Company’s definitive proxy statement to be filed with the SEC.




Item
13.          Certain Relationships
and Related Transactions





The
information required by this Item is incorporated by reference to the section
entitled “Certain Relationships and Related Transactions” in the Company’s
definitive proxy statement to be filed with the SEC.




Item
14.  Principal Accountant Fees and Services





The
information required by this Item is incorporated by reference to the section
entitled “Principal Accounting Fees and Services” in the Company’s definitive
proxy statement to be filed with the SEC.


49


PART
IV







Item
15.                      Exhibits,
Financial Statement Schedules and Reports on Form 8–K





(a)           Documents
Filed





1.           Financial
Statements.  The following Consolidated Financial Statements of
the Company and Auditors’ Report are filed as part of this Annual Report on Form
10-K:





·
            Report
      of Independent Registered Public Accounting
Firm





·
            Report
      of Independent Registered Public Accounting Firm on Internal Control over
      Financial Reporting





·
            Consolidated
      Balance Sheets, December 31, 2007 and
2006





·
            Consolidated
      Statements of Operations for Each of the Three
  Years


in
      the Period Ended December 31, 2007





·
            Consolidated
      Statements of Shareholders’ Equity and Comprehensive Loss for Each of the
      Three Years in the Period Ended December 31,
  2007





·
            Consolidated
      Statements of Cash Flows for Each of the Three Years in the Period Ended
      December 31, 2007





·
            Notes
      to Consolidated Financial
Statements








2.           Financial Statement
Schedule.  Not applicable.





Exhibit List.





See the
Exhibit Index following the signature page hereof.





50


SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on March 13, 2008.





ALTAIR
      NANOTECHNOLOGIES INC.By:/s/Terry
      CopelandTerry
      Copeland,
              PresidentDate:
      March 13, 2008





POWER
OF ATTORNEY AND ADDITIONAL SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the following
persons in the capacities and on the dates indicated have signed this
Report.  Each person whose signature to this Report appears below
hereby constitutes and appoints Terry Copeland and Edward Dickinson, and each of
them, as his true and lawful attorney-in-fact and agent, with full power of
substitution, to sign on his behalf individually and in the capacity stated
below and to perform any acts necessary to be done in order to file all
amendments and post-effective amendments to this Report, and any and all
instruments or documents filed as part of or in connection with this Form Report
or the amendments thereto and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue hereof.





Signature
            
            Title
            
            Date/s/ Terry Copeland
              
              Terry
      Copeland
            
            President,
      (Principal Executive Officer)
            
            March
      13, 2008/s/ Edward Dickinson
              
              Edward
      Dickinson
            
            Chief
      Financial Officer and Secretary (Principal Financial and Accounting
      Officer)
            
            March
      13, 2008/s/ Alan J. Gotcher
              
              Alan
      J. Gotcher
            
            Director
            
            March
      13, 2008/s/Michel
      Bazinet
              
              Michel
      Bazinet
            
            Director
            
            March
      13, 2008


51






/s/ Jon N. Bengtson
                
                Jon
      N. Bengtson
              
              Director
              
              March
      13, 2008


/s/ George Hartman
              
              George
      Hartman
            
            Director
            
            March
      13, 2008/s/ Robert Hemphill II
              
              Robert
      Hemphill II
            
            Director
            
            March
      13, 2008/s/ Pierre Lortie
              
              Pierre
      Lortie
            
            Director
            
            March
      13, 2008













52


Exhibit
Index








Exhibit
      No.
            
            Description
            
            Incorporated
      by Reference/
              Filed
      Herewith (and Sequential Page #)3.1
            
            Articles
      of Continuance
            
            Incorporated
      by reference to the Current Report on Form 8-K filed with the SEC on July
      18, 2002.**3.2
            
            Bylaws
            
            Incorporated
      by reference to the Amendment No. 1 to Annual Report on Form 10-K/A filed
      with the SEC on March 10, 2005. **4.1
            
            Form
      of Common Stock Certificate
            
            Incorporated
      by reference to Registration Statement on Form 10–SB filed with the SEC on
      November 25, 1996. **4.2
            
            Amended
      and Restated Shareholder Rights Plan dated
      October  15,  1999,  with Equity Transfer
      Services, Inc.
            
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed with the
      SEC on November 19, 1999. **10.1
            
            Altair
      International Inc. Stock Option Plan (1996)
            
            Incorporated
      by reference to the Company's Registration Statement on Form S-8, File No.
      333-33481 filed with the SEC on July 11, 1997.10.2
            
            1998
      Altair International Inc. Stock Option Plan
            
            Incorporated
      by reference to the Company’s Definitive Proxy Statement on Form 14A filed
      with the SEC on May 12, 1998. **10.3
            
            Altair
      Nanotechnologies Inc. 2005 Stock Incentive Plan (Amended and
      Restated)
            
            Filed
      herewith10.4
            
            Standard
      Form of Stock Option Agreement under 2005 Stock Incentive
Plan10.5
            
            Standard
      Form of Restricted Stock Agreement under 2005 Stock Incentive
      Plan
            
            Filed
      herewith10.6
            
            Installment
      Note dated August 8, 2002 (re Edison Way property) in favor of BHP
      Minerals International, Inc.
            
            Incorporated
      by reference to the Company’s Amendment No. 1 to Registration Statement on
      Form S-2, File No. 333-102592, filed with the SEC on February 7,
      2003.10.7
            
            Trust
      Deed dated August 8, 2002 (re Edison Way property) with BHP Minerals
      International, Inc.
            
            Incorporated
      by reference to the Company’s Amendment No. 1 to Registration Statement on
      Form S-2, File No. 333-102592, filed with the SEC on February 7,
      2003.


53





10.8
            
            Employment
      Agreement dated December 17, 2006 with Edward Dickinson
            
            Incorporated
      by reference to the Company’s  Current Report on Form 8-K filed
      with the SEC on February 21, 2006. **10.9
            
            Employment
      Agreement dated December 17, 2006 with Alan J. Gotcher,
    Ph.D.
            
            Incorporated
      by reference to the Company’s  Current Report on Form 8-K filed
      with the SEC on February 21, 2006.**10.10
            
            License
      Agreement dated January 28, 2005 with Spectrum Pharmaceuticals,
      Inc.*
            
            Incorporated
      by reference from the Company’s Current Report on Form 8-K filed with the
      SEC on February 4, 2005.**10.11
            
            Lease
      dated October 1, 2005 (Main Indiana Office) with Flagship Enterprise
      Center
            
            Incorporated
      by reference to the Company’s  Quarterly Report on Form 10-Q
      filed with the SEC November 14, 2005. **10.12
            
            Lease
      dated August 1, 2006 (Indiana Office Additional Space) with Flagship
      Enterprise Center
            
            Incorporated
      by reference to the Annual Report on Form 10-K filed with the SEC on March
      13, 2007.**10.13
            
            Placement
      Agent Agreement dated December 13, 2006 with Cowen and Company,
      LLC
            
            Incorporated
      by reference to the Company’s  Current Report on Form 8-K filed
      with the SEC on December 13, 2006. **10.14
            
            Purchase
      and Supply Agreement dated January 8, 2007 with Phoenix Motorcars,
      Inc.*
            
            Incorporated
      by reference to the Company’s  Current Report on Form 8-K filed
      with the SEC on January 12, 2007. **10.15
            
            Department
      of Energy Grant Agreement dated September 9, 2006 with the U.S. Department
      of Energy
            
            Incorporated
      by reference to the Annual Report on Form 10-K filed with the SEC on March
      13, 2007.**10.16
            
            2007
      Annual Executive Incentive Bonus Plan *
            
            Incorporated
      by reference to the Annual Report on Form 10-K filed with the SEC on March
      13, 2007. **10.17
            
            Subcontract
      dated March 6, 2007 with U.N.L.V.
            
            Incorporated
      by reference to the Company’s  Quarterly Report on Form 10-Q
      filed with the SEC May 10, 2007. **10.18
            
            Contribution
      Agreement dated April 24, 2007 with the Sherwin-Williams Company and
      AlSher Titania*
            
            Incorporated
      by reference to the Current Report on Form 8-K filed with the SEC on April
      30, 2007. **10.19
            
            License
      Agreement dated April 24, 2007 with the Sherwin-Williams Company and
      AlSher Titania
            
            Incorporated
      by reference to the Current Report on Form 8-K filed with the SEC on April
      30, 2007. **


54





10.20
            
            Flagship
      Business Accelerator Tenant Lease dated July 1, 2007 with the Flagship
      Enterprise Center, Inc.
            
            Incorporated
      by reference to the Company’s  Quarterly Report on Form 10-Q
      filed with the SEC August 9, 2007. **10.21
            
            Amendment
      dated August 17, 2007 to Altair Executive Employment Agreement between the
      Company and Alan Gotcher
            
            Incorporated
      by reference to the Current Report on Form 8-K filed with the SEC on
      August 17, 2007, File No. 001-1249710.22
            
            Amendment
      dated August 17, 2007 to Altair Executive Employment Agreement between the
      Company and Edward Dickinson
            
            Incorporated
      by reference to the Current Report on Form 8-K filed with the SEC on
      August 17, 2007, File No. 001-1249710.23
            
            Amendment
      dated August 17, 2007 to Altair Executive Employment Agreement between the
      Company and Bruce Sabacky
            
            Incorporated
      by reference to the Current Report on Form 8-K filed with the SEC on
      August 17, 2007, File No. 001-1249710.24
            
            Development
      Services Agreement executed on September 25, 2007 between the Company and
      Elanco Animal Health*
            
            Incorporated
      by reference to the Current Report on Form 8-K filed with the SEC on
      September 27, 2007, File No. 001-1249710.25
            
            Employment
      Agreement dated November 13, 2007 with Terry Copeland
            
            Incorporated
      by reference to the Company’s  Current Report on Form 8-K filed
      with the SEC on November 16, 2007.**10.26
            
            Registration
      Rights Agreement dated November 29, 2007 with Al Yousuf
LLC
            
            Incorporated
      by reference to the Company’s  Current Report on Form 8-K filed
      with the SEC on November 30, 2007.**10.27
            
            Letter
      agreement dated April 21, 2006 with JP Morgan Securities,
    Inc.
            
            Incorporated
      by reference to the Company’s  Current Report on Form 8-K filed
      with the SEC on  November 30, 2007.**10.28
            
            Letter
      agreement dated September 24, 2007 with JPMorgan Securities,
      Inc.
            
            Incorporated
      by reference to the Company’s  Current Report on Form 8-K filed
      with the SEC on  November 30, 2007.**10.29
            
            Employment
      Agreement dated December 7, 2007 with Bruce Sabacky
            
            Incorporated
      by reference to the Company’s  Current Report on Form 8-K filed
      with the SEC on December 7, 2007.**10.30
            
            Subcontract
      dated January 29, 2008 with the Office of Naval Research
            
            Filed
      herewith.10.31
            
            Service
      Agreement dated February 11, 2008 with Melpar BVBP
            
            Filed
      herewith.10.32
            
            Mandate
      & Contractorship Agreement dated February 11, 2008 with Rik
      Dobbelaere
            
            Filed
      herewith10.33
            
            Employment
      Agreement dated March 10, 2008 with Jeffrey A. McKinney.
            
            Filed
      herewith10.34
            
            Employment
      Agreement dated March 10, 2008 with Stephen Balogh
            
            Filed
      herewith


55





21
            
            List
      of Subsidiaries
            
            Incorporated
      by reference from Item 1 of this report.23.1
            
            Consent
      of Perry-Smith LLP
            
            Filed
      herewith.24
            
            Powers
      of Attorney
            
            Included
      in the Signature Page hereof.31.1
            
            Rule
      13-14(a)/15d-14a Certification of Chief Executive Officer
            
            Filed
      herewith31.2
            
            Rule
      13-14(a)/15d-15a Certification of Chief Financial Officer
            
            Filed
      herewith32.1
            
            Section
      1350 Certification of Chief Executive Officer
            
            Filed
      herewith32.2
            
            Section
      1350 Certification of Chief Financial Officer
            
            Filed
      herewith





*Portions
of this Exhibit have been omitted pursuant to Rule 24b-2, are filed
separately with the SEC and are subject to a confidential treatment
request.





**
SEC File No.
1-12497.


56







Altair Nanotechnologies
      Inc.
              and
      Subsidiaries
              
              Consolidated
      Financial Statements as of December 31, 2007 and 2006 and for Each of the
      Three Years in the Period Ended December 31, 2007 and Reports of the
      Independent Registered Public Accounting Firm





















ALTAIR
NANOTECHNOLOGIES INC. AND SUBSIDIARIES







TABLE
OF CONTENTS


PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F-1REPORT OF
      INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
      OVER FINANCIAL REPORTING
            F-2-F-3FINANCIAL
      STATEMENTS:Consolidated
      Balance Sheets, December 31, 2007 and 2006
            F-4Consolidated
      Statements of Operations for Each of the Three Yearsin
      the Period Ended December 31, 2007
            F-5Consolidated
      Statements of Stockholders’ Equity and Comprehensive Lossfor
      Each of the Three Years  in the Period Ended December 31,
      2007
            F-6-F-7Consolidated
      Statements of Cash Flows for Each of the Three Years inthe
      Period Ended December 31, 2007
            F-8-F-9Notes
      to Consolidated Financial Statements
            F-10-F-32










REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








The
Shareholders and Board of Directors


Altair
Nanotechnologies, Inc. and Subsidiaries





We have audited the consolidated
balance sheets of Altair Nanotechnologies, Inc. and subsidiaries (the "Company")
as of December 31, 2007 and 2006 and the related consolidated statements of
operations, changes in stockholders' equity and comprehensive gain (loss) and
cash flows for each of the three years in the period ended December 31,
2007.  These consolidated financial statements are the responsibility
of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of December 31, 2007 and 2006 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2007, in conformity with U.S. generally accepted accounting
principles.





We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), Altair Nanotechnologies, Inc. and subsidiaries' internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 11, 2008 expressed an unqualified
opinion on the effectiveness of the Company's internal control over financial
reporting.





/s/
Perry-Smith LLP














Sacramento,
California


March 11,
2008









F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL OVER
FINANCIAL REPORTING











The
Shareholders and Board of Directors


Altair
Nanotechnologies, Inc. and Subsidiaries





We have
audited Altair Nanotechnologies, Inc. and subsidiaries' (the "Company") internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal
Control—Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (the "COSO criteria").  The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting.  Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our
audit also included performing such other procedures as we considered necessary
in the circumstances.  We believe that our audit provides a reasonable
basis for our opinion.





A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America.  A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.





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





F-2


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL OVER
FINANCIAL REPORTING


(Continued)








In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the COSO
criteria.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of the Company
as of December 31, 2007, and the related consolidated statements of operations,
changes in shareholders' equity and comprehensive gain (loss), and cash flows
for the year then ended and our report dated March 11, 2008 expressed an
unqualified opinion.









/s/
Perry-Smith LLP











Sacramento,
California


March 11,
2008


























F-3




PART
      I - FINANCIAL INFORMATIONItem
      1. Financial StatementsALTAIR
      NANOTECHNOLOGIES INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS(Expressed
      in United States Dollars)




December
      31,
            
            
            December
      31,2007
            
            
            2006ASSETSCurrent
      AssetsCash
      and cash equivalents
            
            $
            50,146,117
            
            
            $
            12,679,254Investment
      in available for sale securities
            
            
            -
            
            
            
            14,541,103Accounts
      receivable, net
            
            
            1,317,819
            
            
            
            1,129,825Accounts
      receivable from related party, net
            
            
            -
            
            
            
            495,000Notes
      receivable from related party, current portion
            
            
            1,638,510
            
            
            
            -Product
      inventories
            
            
            -
            
            
            
            169,666Prepaid
      expenses and other current assets
            
            
            799,387
            
            
            
            413,390Total
      current assets
            
            
            53,901,833
            
            
            
            29,428,238Investment
      in Available for Sale Securities
            
            
            4,564,814
            
            
            
            1,306,420Property,
      Plant and Equipment, net
            
            
            14,548,837
            
            
            
            11,229,406Patents,
      net
            
            
            720,433
            
            
            
            805,248Notes
      Receivable from related party
            
            
            -
            
            
            
            330,000Other
      Assets
            
            
            122,718
            
            
            
            21,261Total
      Assets
            
            $
            73,858,635
            
            
            $
            43,120,573LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesTrade
      accounts payable
            
            $
            7,814,037
            
            
            $
            1,533,047Accrued
      salaries and benefits
            
            
            2,239,110
            
            
            
            840,219Accrued
      warranty
            
            
            2,915,990
            
            
            
            -Accrued
      liabilities
            
            
            759,664
            
            
            
            526,596Note
      payable, current portion
            
            
            600,000
            
            
            
            600,000Total
      current liabilities
            
            
            14,328,781
            
            
            
            3,499,862Note
      Payable, Long-Term Portion
            
            
            1,200,000
            
            
            
            1,800,000Minority
      Interest in Subsidiary
            
            
            1,369,283Total
      Liabilities
            
            
            16,898,064
            
            
            
            5,299,862Commitments
      and ContingenciesStockholders'
      EquityCommon
      stock, no par value, unlimited shares authorized;84,068,377
      and 69,079,270 shares issued andoutstanding
      at December 31, 2007 and December 31, 2006
            
            
            163,780,176
            
            
            
            115,989,879Additional
      paid in capital
            
            
            5,489,604
            
            
            
            2,002,220Accumulated
      deficit
            
            
            (111,823,809
            )
            
            
            (80,353,188
            )Accumulated
      other comprehensive (loss)/gain
            
            
            (485,400
            )
            
            
            181,800Total
      Stockholders' Equity
            
            
            56,960,571
            
            
            
            37,820,711Total
      Liabilities and Stockholders' Equity
            
            $
            73,858,635
            
            
            $
            43,120,573




See
      notes to the consolidated financial statements.


F-4




ALTAIR
      NANOTECHNOLOGIES INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(Expressed
      in United States Dollars)Year
      Ended December 31,2007
            
            
            2006
            
            
            2005RevenuesProduct
      sales
            
            $
            4,058,281
            
            
            $
            961,380
            
            
            $
            149,373License
      fees
            
            
            -
            
            
            
            464,720
            
            
            
            695,000Commercial
      collaborations
            
            
            2,909,650
            
            
            
            1,420,151
            
            
            
            825,723Contracts
      and grants
            
            
            2,140,552
            
            
            
            1,477,709
            
            
            
            1,136,439Total
      revenues
            
            
            9,108,483
            
            
            
            4,323,960
            
            
            
            2,806,535Operating
      ExpensesCost
      of sales - product
            
            
            5,163,987
            
            
            
            1,034,431
            
            
            
            69,489Cost
      of sales - warranty and inventory reserves
            
            
            6,843,343
            
            
            
            -
            
            
            
            -Research
      and development
            
            
            15,443,703
            
            
            
            10,077,231
            
            
            
            5,073,478Sales
      and marketing
            
            
            2,000,799
            
            
            
            1,878,783
            
            
            
            1,539,765General
      and administrative
            
            
            10,770,249
            
            
            
            7,495,180
            
            
            
            5,571,454Depreciation
      and amortization
            
            
            1,953,876
            
            
            
            1,519,750
            
            
            
            1,034,202Total
      operating expenses
            
            
            42,175,957
            
            
            
            22,005,375
            
            
            
            13,288,388Loss
      from Operations
            
            
            (33,067,474
            )
            
            
            (17,681,415
            )
            
            
            (10,481,853
            )Other
      Income (Expense)Interest
      expense
            
            
            (134,254
            )
            
            
            (171,500
            )
            
            
            (207,189
            )Interest
      income
            
            
            1,101,682
            
            
            
            654,182
            
            
            
            750,306(Loss)/gain
      on foreign exchange
            
            
            (1,292
            )
            
            
            (1,550
            )
            
            
            1,524Total
      other income (expense), net
            
            
            966,136
            
            
            
            481,132
            
            
            
            544,641Loss
      from continuing operations before minorityInterests’share
            
            
            (32,101,338
            )
            
            
            (17,200,283
            )
            
            
            (9,937,212
            )Less:  Minority
      interests’ share
            
            
            630,717
            
            
            
            -
            
            
            
            -Net
      Loss
            
            $
            (31,470,621
            )
            
            $
            (17,200,283
            )
            
            $
            (9,937,212
            )Loss
      per common share - Basic and diluted
            
            $
            (0.45
            )
            
            $
            (0.29
            )
            
            $
            (0.17
            )Weighted
      average shares - Basic and diluted
            
            
            71,008,505
            
            
            
            59,709,487
            
            
            
            57,766,557See
      notes to the consolidated financial statements.






F-5




ALTAIR
      NANOTECHNOLOGIES INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS(Expressed
      in United States Dollars)




AccumulatedDeferred
            
            
            OtherAdditional
            
            
            
            
            
            Compen-
            
            
            Compre-Common
      Stock
            
            
            Paid
      In
            
            
            Accumulated
            
            
            sation
            
            
            hensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            Expense
            
            
            Gain
      (Loss)
            
            
            TotalBALANCE,  JANUARY
      1, 2005
            
            
            49,775,694
            
            
            $
            65,505,630
            
            
            
            -
            
            
            $
            (53,215,693
            )
            
            
            -
            
            
            
            -
            
            
            $
            12,289,937Comprehensive
      loss:Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (9,937,212
            )
            
            
            -
            
            
            
            -
            
            
            
            (9,937,212
            )Other
      comprehensive loss,net
      of taxes of $0
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            (172,000
            )
            
            
            (172,000
            )Comprehensive
      loss:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10,109,212
            )Modification
      of stock optionsissued
      to employees
            
            
            -
            
            
            
            56,060
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            56,060Variable
      accounting on stockoptions
            
            
            -
            
            
            
            297,138
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            297,138Exercise
      of stock options
            
            
            1,204,500
            
            
            
            1,828,900
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,828,900Exercise
      of warrants
            
            
            3,201,511
            
            
            
            4,828,567
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,828,567Issuance
      of restricted stock
            
            
            96,500
            
            
            
            272,155
            
            
            
            -
            
            
            
            -
            
            
            $
            (272,155
            )
            
            
            -
            
            
            
            -Amortization
      of deferredcompensation
      expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            106,819
            
            
            
            -
            
            
            
            106,819Common
      stock issued, net ofissuance
      costs of $1,676,959
            
            
            5,038,314
            
            
            
            19,338,264
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            19,338,264BALANCE,  DECEMBER
      31, 2005
            
            
            59,316,519
            
            
            
            92,126,714
            
            
            
            -
            
            
            
            63,152,905
            )
            
            
            (165,336
            )
            
            
            (172,000
            )
            
            
            28,636,473Comprehensive
      loss:Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (17,200,283
            )
            
            
            -
            
            
            
            -
            
            
            
            (17,200,283
            )Other
      comprehensive income,net
      of taxes of $0
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            353,800
            
            
            
            353,800Comprehensive
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (16,846,483
            )Share-based
      compensation
            
            
            -
            
            
            
            281,514
            
            
            $
            2,002,220
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,283,734Exercise
      of stock options
            
            
            189,449
            
            
            
            347,653
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            347,653Exercise
      of warrants
            
            
            236,168
            
            
            
            455,670
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            455,670Issuance
      of restricted stock
            
            
            77,875
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Elimination
      of deferredcompensation
      expense (uponadoption
      of new accountingstandard)
            
            
            -
            
            
            
            (165,336
            )
            
            
            -
            
            
            
            -
            
            
            
            165,336
            
            
            
            -
            
            
            
            -Common
      stock issued, net ofissuance
      costs of $2,056,336
            
            
            9,259,259
            
            
            
            22,943,664
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22,943,664BALANCE,  DECEMBER
      31, 2006
            
            
            69,079,270
            
            
            $
            115,989,879
            
            
            $
            2,002,220
            
            
            $
            (80,353,188
            )
            
            $
            -
            
            
            $
            181,800
            
            
            $
            37,820,711(continued)


F-6






ALTAIR
      NANOTECHNOLOGIES INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS(Expressed
      in United States Dollars)(Unaudited)AccumulatedDeferred
            
            
            OtherAdditional
            
            
            
            
            
            Compen-
            
            
            Compre-Common
      Stock
            
            
            Paid
      In
            
            
            Accumulated
            
            
            sation
            
            
            hensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            Expense
            
            
            Gain
      (Loss)
            
            
            TotalBALANCE,  DECEMBER
      31, 2006
            
            
            69,079,270
            
            
            $
            115,989,879
            
            
            $
            2,002,220
            
            
            $
            (80,353,188
            )
            
            $
            -
            
            
            $
            181,800
            
            
            $
            37,820,711Comprehensive
      loss:Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (31,470,621
            )
            
            
            -
            
            
            
            -
            
            
            
            (31,470,621
            )Other
      comprehensive loss,net
      of taxes of $0
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (667,200
            )
            
            
            (667,200
            )Comprehensive
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (32,137,821
            )Share-based
      compensation
            
            
            -
            
            
            
            397,767
            
            
            
            3,487,384
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,885,151Exercise
      of stock options
            
            
            280,914
            
            
            
            625,603
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            625,603Exercise
      of warrants
            
            
            2,314,189
            
            
            
            6,248,314
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,248,314Issuance
      of restricted stock
            
            
            69,909
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Common
      stock issued, net ofissuance
      costs of $2,504,558
            
            
            12,324,095
            
            
            
            40,518,612
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            40,518,612BALANCE,  DECEMBER
      31, 2007
            
            
            84,068,377
            
            
            $
            163,780,176
            
            
            $
            5,489,604
            
            
            $
            (111,823,809
            )
            
            $
            -
            
            
            $
            (485,400
            )
            
            $
            56,960,571(concluded)See
      notes to the consolidated financial statements.







F-7






ALTAIR
      NANOTECHNOLOGIES INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Expressed
      in United States Dollars)Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      loss
            
            $
            (31,470,621
            )
            
            $
            (17,200,283
            )
            
            $
            (9,937,212
            )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
            
            
            1,953,876
            
            
            
            1,519,750
            
            
            
            1,034,202Minority
      interest in operations
            
            
            (630,717
            )
            
            
            -
            
            
            
            -Variable
      accounting on stock options
            
            
            -
            
            
            
            -
            
            
            
            297,138Securities
      received in payment of license fees
            
            
            (13,580
            )
            
            
            (529,620
            )
            
            
            (595,000
            )Amortization
      of discount on note payable
            
            
            -
            
            
            
            -
            
            
            
            119,689Share-based
      compensation
            
            
            3,885,151
            
            
            
            2,283,734
            
            
            
            162,880Shares
      issued for services
            
            
            -
            
            
            
            -
            
            
            
            -Loss
      on disposal of fixed assets
            
            
            -
            
            
            
            107,276
            
            
            
            81,203Accrued
      interest on notes receivable
            
            
            (89,435
            )
            
            
            -
            
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable, net
            
            
            (187,994
            )
            
            
            (527,657
            )
            
            
            (102,569
            )Accounts
      receivable from related party, net
            
            
            495,000
            
            
            
            (495,000
            )
            
            
            -Notes
      receivable from related party, net
            
            
            (1,219,075
            )
            
            
            (330,000
            )
            
            
            -Product
      inventories
            
            
            230,887
            
            
            
            (169,666
            )
            
            
            -Prepaid
      expenses and other current assets
            
            
            (385,997
            )
            
            
            (159,323
            )
            
            
            (71,472
            )Other
      assets
            
            
            (101,457
            )
            
            
            49,939
            
            
            
            (53,000
            )Trade
      accounts payable
            
            
            5,097,665
            
            
            
            664,890
            
            
            
            507,978Accrued
      salaries and benefits
            
            
            1,398,891
            
            
            
            130,870
            
            
            
            554,791Accrued
      warranty
            
            
            2,915,990
            
            
            
            -
            
            
            
            -Accrued
      liabilities
            
            
            233,048
            
            
            
            217,307
            
            
            
            168,104Net
      cash used in operating activities
            
            
            (17,888,368
            )
            
            
            (14,437,783
            )
            
            
            (7,833,268
            )Cash
      flows from investing activities:Sale
      of available for sale securities
            
            
            33,675,001
            
            
            
            30,150,000
            
            
            
            6,300,000Purchase
      of available for sale securities
            
            
            (23,045,912
            )
            
            
            (23,901,446
            )
            
            
            (27,089,656
            )Purchase
      of property and equipment
            
            
            (4,066,388
            )
            
            
            (4,542,921
            )
            
            
            (2,466,230
            )Net
      cash provided by (used in) investing activities
            
            
            6,562,701
            
            
            
            1,705,633
            
            
            
            (23,255,886
            )(continued)







F-8




ALTAIR
      NANOTECHNOLOGIES INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Expressed
      in United States Dollars)




Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Cash
      flows from financing activities:Issuance
      of common shares for cash, net ofissuance
      costs
            
            $
            40,518,612
            
            
            $
            22,943,663
            
            
            $
            19,338,262Proceeds
      from exercise of stock options
            
            
            625,603
            
            
            
            347,653
            
            
            
            1,828,900Proceeds
      from exercise of warrants
            
            
            6,248,314
            
            
            
            455,670
            
            
            
            4,828,567Payment
      of notes payable
            
            
            (600,000
            )
            
            
            (600,000
            )
            
            
            -Minority
      interest
            
            
            2,000,000Net
      cash provided by financing activities
            
            
            48,792,530
            
            
            
            23,146,986
            
            
            
            25,995,729Net
      increase (decrease) in cash and cash equivalents
            
            
            37,466,863
            
            
            
            10,414,836
            
            
            
            (5,093,425
            )Cash
      and cash equivalents, beginning of period
            
            
            12,679,254
            
            
            
            2,264,418
            
            
            
            7,357,843Cash
      and cash equivalents, end of period
            
            $
            50,146,117
            
            
            $
            12,679,254
            
            
            $
            2,264,418Supplemental
      disclosures:Cash
      paid for interest
            
            $
            105,000
            
            
            $
            105,000
            
            
            NoneCash
      paid for income taxes
            
            None
            
            
            None
            
            
            None





Supplemental
      schedule of non-cash investing and financing activities:For
      the year ended December 31, 2007:- 
      We received 1,000,000 shares of common stock valued at $106,518 in
      connection with the Phoenix Motorcar, Inc. January
      2007 purchase agreement.  The investment was recorded with an
      offset to deferred revenue.- 
      We issued 75,575 shares of restricted stock to employees and directors
      having a fair value of approximately $236,538
      for which no cash will be received.- 
      We made property and equipment purchases of $1,183,235 which are included
      in trade accounts payable at December 31, 2007.- 
      We had  an unrealized loss on available for sale securities of
      $667,200.For
      the year ended December 31, 2006:- 
      We issued 77,875 shares of restricted stock to employees and directors
      having a fair value of approximately $281,000 for which no cash will be
      received.-  We
      made property and equipment purchases of $59,252 which are included in
      trade accounts payable at December 31, 2006.-  We
      had an unrealized gain on available for sale securities of
      $353,800.For
      the year ended December 31, 2005:- 
      We made property and equipment purchases of $219,897 which are included in
      trade accounts payable at December 31, 2005.-  We
      issued 96,500 shares of restricted stock to employees and directors having
      a fair value of $272,155 for which no cash will
      be received.- 
      We had an unrealized loss on available for sale securities of
      $172,000.See
      notes to the consolidated financial
statements.







F-9







ALTAIR
NANOTECHNOLOGIES INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
 (Expressed
in United States Dollars)


1.
            DESCRIPTION
      OF BUSINESS AND BASIS OF
PRESENTATION




Description of
Business — We are a Canadian company, with principal assets and
operations in the United States of America, whose primary business is developing
and commercializing nanomaterial and titanium dioxide pigment
technologies.  We also provide contract research services on select
projects where we can utilize our resources to develop intellectual property
and/or new products and technology.  Our primary facilities are
located in Reno, Nevada, of approximately 100,000 square feet, and in Anderson,
Indiana, of approximately 30,000 square feet.





Principles of
Consolidation —The consolidated financial statements include the
accounts of Altair Nanotechnologies Inc. and its subsidiaries which include (1)
Altair US Holdings, Inc., (2) Mineral Recovery Systems, Inc. (“MRS”), (3) Fine
Gold Recovery Systems, Inc. (“FGRS”), and (4) Altairnano, Inc. (“ANI”),
(collectively referred to as the “Company”), all of which are 100% owned and (5)
AlSher Titania LLC, which is 70% owned by ANI. All of the subsidiaries are
incorporated in the United States of America. Inter-company transactions and
balances have been eliminated in consolidation.





Basis of
Presentation —The accompanying consolidated financial statements have
been prepared on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the consolidated financial statements for the years ended December 31,
2007, 2006 and 2005, we incurred net losses of $31,470,621, $17,200,283, and
$9,937,212, respectively.  At December 31, 2007 and 2006, we had
stockholders’ equity of $56,960,571 and $37,820,711, respectively.





The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to
continue as a going concern. Our continuation as a going concern is dependent
upon our ability to generate sufficient cash flow to meet our obligations on a
timely basis, to obtain additional financing or refinancing as may be required,
to develop commercially viable products and processes, and ultimately to
establish profitable operations.  We have financed operations through
operating revenues and through the issuance of equity securities (common stock,
convertible debentures, stock options and warrants), and debt (term notes).
Until we are able to generate positive operating cash flows, additional funds
will be required to support operations. We believe that current working capital,
cash receipts from anticipated sales and funding through anticipated option and
warrant exercises will be sufficient to enable us to continue as a going concern
through 2009.





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




Use of Estimates
—The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires that we make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.





F-10


Cash, Cash
Equivalents and Investment in Available forSaleSecurities
(short-term)—Cash, cash equivalents
andinvestment in
available for sale securities (short-term) consist principally of bank deposits,
institutional money market funds and corporate notes.  Short-term
investments that are highly liquid and have insignificant interest rate risk and
maturities of 90 days or less are classified as cash and cash
equivalents.  Investments that do not meet the definition of cash
equivalents are classified as held-to-maturity or
available-for-sale.





Our cash
balances are maintained in bank accounts that are insured by the Federal Deposit
Insurance Corporation (“FDIC”) up to a maximum of $100,000.  At
December 31, 2007 and 2006, we had cash deposits of approximately $8.7 million
and $3.0 million, respectively, in excess of FDIC insurance limits.





Investment in
Available for Sale Securities (long-term)—Investments acquired
with the intent to hold for more than one year are classified as long-term
investments.  Available for sale securities (long-term)includes publicly-traded
equity investments which are classified as available for sale and recorded at
market value using the specific identification method.  Unrealized
gains and losses (except for other than temporary impairments) are recorded in
other comprehensive income (loss), which is reported as a component of
stockholders’ equity.  We evaluate our investments on a quarterly
basis to determine if a potential other than temporary impairment
exists.  Our evaluation considers the investees’ specific business
conditions as well as general industry and market conditions.





Accounts
Receivable —Accounts receivable consists of amounts due from customers
for services and product sales, net of an allowance for losses.  We
determine the allowance for doubtful accounts by reviewing each customer account
and specifically identifying any potential for loss.  The allowance
for doubtful accounts at December 31, 2006 was $62,185.  As of
December 31, 2007 and 2005, Management determined that all amounts due were
fully collectible accordingly; no allowance was recorded.  Actual
losses related to collection of accounts receivable for the years ended December
31, 2007, 2006 and 2005 were insignificant.





Inventory
–The
Company values its inventories generally at the lower of cost (first-in,
first-out method) or market.  We employ a full absorption procedure
using standard cost techniques.  The standards are customarily
reviewed and adjusted annually.  Overhead rates are recorded to
inventory based on normal capacity.  Any idle facility costs or
excessive spoilage are recorded as current period charges.





Property, Plant
and Equipment —Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is recorded using the straight-line
method over the following useful lives:





Furniture
      and office equipment
            
            3–7
      yearsVehicles
            
            5
      yearsNanoparticle
      production equipment
            
            5–10
      yearsBuilding
      and improvements
            
            30
      years








Patents —Patents related to the nanoparticle production technology are carried at
cost and amortized on a straight-line basis over their estimated useful lives,
which range from 14 to 17 years.





F-11


Notes
Receivable  –Notes receivable consists of amounts due from
customers for services and product sales, net of an allowance on notes
receivable.  We determine an allowance on notes receivable based on a
review of the customer’s financial status performed on a bi-annual
basis.  Notes receivable are also reviewed to determine if discounts
are required to be booked for notes that are not issued at prevailing market
rates.  At December 31, 2007, no allowance or discounts were required
to be recorded.  Interest income is calculated and recognized
according to the contractual terms of the notes receivable.  In the
event an allowance on notes receivable is required or the note is in default,
the accrual of interest income will be discontinued.  The accrual of
interest income resumes if the customer’s financial status indicates that
collection is likely or the default is cured.





Research and
Development Expenditures — The costs of materials, equipment, or
facilities that are acquired or constructed for a particular research and
development project and that have no alternative future uses (in other research
and development projects or otherwise) are expensed as research and development
costs at the time the costs are incurred.  Research and development
expenditures related to materials and equipment or facilities that are acquired
or constructed for research and development activities and that have alternative
future uses (in research and development projects or otherwise) are capitalized
when acquired or constructed.  Research and development expenditures, which
include the cost of materials consumed in research and development activities,
salaries, wages and other costs of personnel engaged in research and
development, costs of services performed by others for research and development
on behalf of the company and indirect costs are expensed as research and
development costs when incurred.





Foreign Currency
Translation —Asset and liability accounts, which are originally recorded
in the appropriate local currencies, are translated into U.S. dollars at
year-end exchange rates. Revenue and expense accounts are translated at the
average exchange rates for the period. Transaction gains and losses are included
in the accompanying consolidated statements of operations. Substantially all of
our assets are located in the United States of America.





Stock-Based
Compensation —As of January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 123 (R), Accounting for Stock-Based
Compensation. Under the provisions of SFAS 123 (R), we are required to
measure the cost of services received in exchange for an award of equity
instruments based on the grant-date fair value of the award.  That
cost is recognized over the period during which services are provided in
exchange for the award, known as the requisite service period (usually the
vesting period).  Prior to January 1, 2006, the Company accounted for
those plans under the recognition and measurement provisions of APB “Opinion”
No. 25, Accounting for Stock
Issued to Employees, and related Interpretations, as permitted by FASB
Statement No 123, Accounting
for Stock-Based Compensation.





We have
made the transition to SFAS 123 (R) using the modified prospective
method.  Under the modified prospective method, SFAS 123 (R) is
applied to new awards and to awards modified, repurchased, or cancelled after
January 1, 2006.  Additionally, compensation cost for the portion of awards
for which the requisite service has not been rendered (such as unvested options)
that are outstanding as of January 1, 2006 are being recognized over the period
that the remaining requisite services are rendered.  The compensation cost
relating to unvested awards at January 1, 2006 is based on the grant-date fair
value of those awards.  Under this method of implementation, no
restatement of prior periods has been made.





F-12


As a
result of adopting Statement 123 (R) on January 1, 2006, the Company’s net loss
for the year ended December 31, 2006 is $1,907,711 higher than if it had
continued to account for share-based compensation under Opinion
25.  Basic and diluted loss per share for the year ended December 31,
2006 would have been $(0.26), if the Company had not adopted Statement 123 (R),
compared to reported basic and diluted earnings per share of
$(0.29).  We have not recorded income tax benefits related to
equity-based compensation expense as deferred tax assets are fully offset by a
valuation allowance.  As a result, the implementation of SFAS 123 (R)
did not impact the Statement of Cash Flows for the year ended December 31,
2006.





The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement 123 to
options granted under the company’s stock option plans for the year ended
December 31, 2005.  For purposes of this pro forma disclosure, the
value of the options is estimated using a Black-Scholes option-pricing model and
amortized to expense over the options’ vesting periods.





December
      31,2005Net
      loss, as reported
            
            $
            (9,937,212
            )Deduct:
      stock-based employee compensationexpense
      included in reported net loss, netof
      $0 related tax effects
            
            
            353,198(Add):
      total stock-based employee compensationexpense
      determined under fair value basedmethod
      for all awards, net of $0 related tax effects
            
            
            (1,502,731
            )Pro
      forma net loss
            
            $
            (11,086,745
            )Loss
      per common share (basic and diluted):As
      reported
            
            $
            (0.17
            )Pro
      forma
            
            $
            (0.19
            )





Long-Lived Assets
—We evaluate the carrying value of long-term assets, including
intangibles, when events or circumstance indicate the existence of a possible
impairment, based on projected undiscounted cash flows, and recognize impairment
when such cash flows will be less than the carrying values. Measurement of the
amounts of impairments, if any, is based upon the difference between carrying
value and fair value. Events or circumstances that could indicate the existence
of a possible impairment include obsolescence of the technology, an absence of
market demand for the product, and/or continuing technology rights
protection.





Revenue
Recognition— We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred or service has been performed, the fee
is fixed and determinable, and collectibility is probable.  Our revenues
are derived from license fees, product sales, commercial collaborations and
contracts and grants.  License fees are recognized when the agreement is
signed, we have performed all material obligations related to the particular
milestone payment or other revenue component and the earnings process is
complete.  Revenue for product sales is recognized upon delivery of
the product, unless specific contractual terms dictate
otherwise.  Based on the specific terms and conditions of each
contract/grant, revenues are recognized on a time and materials basis, a
percentage of completion basis and/or a completed contract
basis.  Revenue under contracts based on time and materials is
recognized at contractually billable rates as labor hours and expenses are
incurred.  Revenue under contracts based on a fixed fee arrangement is
recognized based on various performance measures, such as stipulated
milestones.  As these milestones are achieved, revenue is recognized. 
From time to time, facts develop that may require us to revise our estimated
total costs or revenues expected.  The cumulative effect of revised
estimates is recorded in the period in which the facts requiring revisions
become known.  The full amount of anticipated losses on any type of
contract is recognized in the period in which it becomes
known.  Payments received in advance relating to the future
performance of services or delivery of products are deferred until the
performance of the service is complete or the product is
shipped.  Upfront payments received in connection with certain rights
granted in contractual arrangements are deferred and amortized over the related
time period over which the benefits are received.  Based on specific
customer bill and hold agreements, revenue is recognized when the inventory is
shipped to a third party storage warehouse, the inventory is segregated and
marked as sold, the customer takes the full rights of ownership and title to the
inventory upon shipment to the warehouse per the bill and hold
agreement.  When contract terms include multiple components that are
considered separate units of accounting, the revenue is attributed to each
component and revenue recognition may occur at different points in time for
product shipment, installation, and service contracts based on substantial
completion of the earnings process.





F-13


Accrued Warranty— We provide a limited warranty for battery packs and energy storage
systems.  A liability is recorded for estimated warranty obligations
at the date products are sold.  Since these are new products, the
estimated cost of warranty coverage is based on cell and module life cycle
testing and compared for reasonableness to warranty rates on competing battery
products.  As sufficient actual historical data is collected on the
new product, the estimated cost of warranty coverage will be adjusted
accordingly.  The liability for estimated warranty obligations may
also be adjusted based on specific warranty issues identified.





Minority Interest— In April 2007, the Company and The Sherwin-Williams Company
(“Sherwin”) entered into an agreement to form AlSher Titania LLC, a Delaware
limited liability company (“AlSher”).  AlSher is a joint venture
combining certain technologies of the Company and Sherwin in order to develop
and produce titanium dioxide pigment for use in paint and coatings and nano
titanium dioxide materials for use in a variety of applications, including those
related to removing contaminants from air and water.  Pursuant to a
Contribution Agreement dated April 24, 2007 among Altairnano, Sherwin, and
AlSher, Altairnano contributed to AlSher an exclusive license to use
Altairnano’s technology (including its hydrochloride pigment process) for the
production of titanium dioxide pigment and other titanium containing materials
(other than battery or nanoelectrode materials) and certain pilot plants assets
with a net book value of $3,110,000.  Altairnano received no
consideration for the license granted to AlSher other than its ownership
interest in AlSher.  Sherwin agreed to contribute to AlSher cash and a
license agreement related to technology for the manufacture of titanium
dioxide.  As a condition to enter into the second phase of the joint
venture, we agreed to complete the pigment pilot processing plant and related
development activities by January 2008.  The costs associated with
this effort are expected to be partially reimbursed by
AlSher.  Altairnano contributes any work in process and fixed assets
associated with completion of the pigment pilot processing plant to the AlSher
joint venture.  For each reporting period, AlSher is consolidated with
the Company’s subsidiaries because the Company has a controlling interest in
AlSher and any inter-company transactions are eliminated (refer to Note 1 –
Basis of Preparation of Consolidated Financial Statements).  The
minority shareholder’s interest in the net assets and net income or loss of
AlSher are reported as minority interest in subsidiary on the condensed
consolidated balance sheet and as minority interest share in the condensed
consolidated statement of operations, respectively





F-14


Overhead
Allocation— Facilities overhead, which is comprised primarily of
occupancy and related expenses, and fringe benefit expenses are initially
recorded in general and administrative expenses and then allocated to research
and development and product inventories based on relative labor
costs.





Net Loss per
Common Share — Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period.  Diluted
earnings per share is computed using the weighted average number of common and
potentially dilutive shares outstanding during the period.  Potentially
dilutive shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants.  Potentially dilutive shares are
excluded from the computation if their effect is antidilutive.  We had a
net loss for all periods presented herein; therefore, none of the stock options
and warrants outstanding during each of the periods presented, as discussed in
Notes 11 and 12, were included in the computation of diluted loss per share as
they were anti-dilutive.  Stock options and warrants to purchase a total of
5,307,913, 6,534,747, and 4,097,756 shares of common stock were excluded from
the calculations of diluted loss per share for the years ended December 31,
2007, 2006 and 2005, respectively.





Accumulated Other
Comprehensive Gain/(Loss)—Accumulated other
comprehensive gain/(loss) consists entirely of unrealized gain/(loss) on the
investment in available for sale securities.  The components of
comprehensive loss for the years ended December 31, 2007, 2006 and 2005 are as
follows:





Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Net
      loss
            
            $
            (31,470,621
            )
            
            $
            (17,200,283
            )
            
            $
            (9,937,212
            )Unrealized
      gain (loss) on investmentin
      available for sale securities,net
      of taxes of $0
            
            
            (667,200
            )
            
            
            353,800
            
            
            
            (172,000
            )Comprehensive
      loss
            
            $
            (32,137,821
            )
            
            $
            (16,846,483
            )
            
            $
            (10,109,212
            )





Deferred Income
Taxes —We use the asset and liability approach for financial accounting
and reporting for income taxes. Deferred income taxes are provided for temporary
differences in the bases of assets and liabilities as reported for financial
statement purposes and income tax purposes.  We accrue interest and
penalties on underpayment of income taxes related to unrecognized tax benefits
as a component of income tax expense in our consolidated statements of
operations.  We have recorded a valuation allowance against all net
deferred income tax assets.  The valuation allowance reduces deferred
income tax assets to an amount that represents management’s best estimate of the
amount of such deferred income tax assets that more likely than not will be
realized.





Fair Value of
Financial Instruments —Our financial instruments such as cash and cash
equivalents and long-term debt, when valued using market interest rates, would
not be materially different from the amounts presented in the consolidated
financial statements.





Recent Accounting
Pronouncements—In May 2007 the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No. FIN48-1 “Definition of Settlement in FASB Interpretation No.
48”.  This staff position provides guidance on how an enterprise
should determine whether a tax position is effectively settled for the purpose
of recognizing previously unrecognized tax benefits.  This guidance is
effective upon the initial adoption of Interpretation 48, which we implemented
as of January 1, 2007, as discussed below.  The adoption of this staff
position did not impact our cash flows or financial results.


F-15




In June
2006, the FASB issued FASB interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109.   FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes.  FIN 48 also prescribes a recognition threshold and
measurement standard for the financial statement recognition and measurement of
an income tax position taken or expected to be taken in a tax
return.  In addition, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. Only tax positions that meet the
more-likely-than-not recognition threshold at the effective date may be
recognized or continue to be recognized upon adoption.




We
adopted the provisions of FIN 48 on January 1, 2007.  Upon adoption we
had no uncertain tax positions.  We did not recognize any increase in
the liability for unrecognized tax benefits as a result of the implementation of
FIN 48.  Our results of operations and cash flows were not impacted by
the adoption of this interpretation.





We accrue
interest and penalties on underpayment of income taxes related to unrecognized
tax benefits as a component of income tax expense in our consolidated statements
of operations. No amounts were recognized for interest and penalties upon
adoption of FIN 48.




In April 2007, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”), which will
become effective for the first fiscal year that begins after November 15,
2007.  This statement permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value.  Any unrealized gains
and losses associated with the instruments or other balances for which the fair
value option has been elected are reported in earnings at each subsequent
reporting date.  We did not elect to fair value any of our financial
assets or liabilities.




In
December 2006, the Financial Accounting Standards Board (“FASB”) released
Statement of Financial Accounting Standards No. 157 – Fair Value
Measurements.  This statement defines fair value in generally
accepted accounting principles (“GAAP”), and expands disclosures about fair
value measurements.  This standard applies under other accounting
pronouncements that require or permit fair value measurements and is intended to
increase consistency and comparability.  This statement shall be
effective for financial statements issued for fiscal years beginning after
November 15, 2007.  The adoption of FASB 157 is not expected to have a
material impact on our financial position, results of operations or cash
flows.





In June
2007, the FASB ratified EITF Issue No. 07-3, “Accounting for Nonrefundable
Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities” (EITF 07-3). EITF 07-3 requires non-refundable
advance payments for goods and services to be used in future research and
development (R&D) activities to be recorded as assets and the payments to be
expensed when the R&D activities are performed. EITF 07-3 applies
prospectively for new contractual arrangements entered into beginning in the
first quarter of fiscal year 2008. Prior to adoption, we recognized these
non-refundable advance payments in excess of $5,000 as assets and expensed
amounts less than $5,000 upon payment. The adoption of EITF 07-3 is not
expected to have a significant impact on our consolidated financial
statements.





F-16


In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS No. 141(R)). Under SFAS No. 141(R), an
entity is required to recognize the assets acquired, liabilities assumed,
contractual contingencies, and contingent consideration at their fair value on
the acquisition date. It further requires that acquisition-related costs be
recognized separately from the acquisition and expensed as incurred,
restructuring costs generally be expensed in periods subsequent to the
acquisition date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement period
impact income tax expense. In addition, acquired in-process research and
development (IPR&D) is capitalized as an intangible asset and amortized over
its estimated useful life. The adoption of SFAS No. 141(R) will change
our accounting treatment for business combinations on a prospective basis
beginning in the first quarter of fiscal year 2009.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements—an amendment of ARB No. 51”
(SFAS No. 160). SFAS No. 160 changes the accounting and
reporting for minority interests, which will be recharacterized as
non-controlling interests and classified as a component of equity.
SFAS No. 160 is effective for us on a prospective basis for business
combinations with an acquisition date beginning in the first quarter of fiscal
year 2009. The adoption of SFAS No. 160 will not significantly impact
our consolidated financial statements.





In
December 2007, the U.S. Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 110 (SAB 110) to amend the SEC’s views
discussed in Staff Accounting Bulletin 107 (SAB 107) regarding
the use of the simplified method in developing an estimate of expected life of
share options in accordance with SFAS No. 123(R). SAB 110 is
effective for us beginning in the first quarter of fiscal year
2008.   Since we have never utilized the simplified method in
developing an estimate of expected live of share options, the adoption of SAB
110 will not impact our consolidated financial statements.





Reclassifications
—Certain reclassifications have been made to prior period amounts to
conform to classifications adopted in the current year.





3.
            INVESTMENT
      IN AVAILABLE FOR SALE SECURITIES





Investments
in available for sale securities (long-term) consists of auction rate corporate
notes and investments in common stock as discussed below.





The
auction rate corporate notes are long-term instruments with expiration dates
through 2017.  Through the third quarter of 2007, the interest was
settled and the rate reset every 7 to 28 days and historically these investments
were classified as short-term investments.  However, in the fourth
quarter of 2007 due to a change in the liquidity of the auction rate market,
sell orders have exceeded bid orders in that market, and the interest relating
to these investments was reset to a contractual rate of London Interbank
Offering Rate plus 50 basis points, which is not a market rate.  Based
on this change in the liquidity, these investments were evaluated to determine
if there was impairment at December 31, 2007.  Our evaluation included
consultation with our investment advisors, assessment of the strength of the
financial institution paying the interest on these investments, and a
probability-weighted discounted cash flow analysis.  Based on our
evaluation and our ability and intent to hold the investment for a reasonable
period of time sufficient for an expected recovery of fair value, we do not
consider this investment to be impaired at December 31, 2007.  Since
the auction rate markets have not recovered and the outlook for recovery is not
certain, the $3,912,014 book value of these investments was reclassified from
short-term to long term investments as of December 31, 2007.





F-17


Investment in available for sale
securities (long-term) consists of 240,000 shares of Spectrum Pharmaceuticals,
Inc. (“Spectrum”) common stock.  Although the Spectrum shares are
eligible for resale under Rule 144, the Company currently intends to hold them
indefinitely.  The shares were received as payment of licensing and
product improvement fees in connection with a license agreement for
RenaZorb.  Upon receipt, the shares were recorded at their market
value as measured by their closing price on the NASDAQ Capital Market, resulting
in a recorded basis of $1,138,200.  At December 31, 2007, their fair
value was approximately $652,800 representing an unrealized holding loss of
approximately $485,400.  We evaluated this investment to determine if
there is an other than temporary impairment at December 31, 2007.  Our
evaluation took into consideration published investment analysis, status of drug
candidates in development, analysts recommendations, insider trading activity,
and other factors.  Based on our evaluation and our ability and intent
to hold the investment for a reasonable period of time sufficient for an
expected recovery of fair value, we do not consider this investment to be other
than temporarily impaired at December 31, 2007.





4.
              PRODUCT
      INVENTORIES




Product
Inventories consisted of the following at December 31, 2007 and
2006:





2007
            
            
            2006Raw
      Materials
            
            $
            -
            
            
            $
            -Work
      in Process
            
            
            -
            
            
            
            112,500Finished
      Goods
            
            
            -Demonstration
      Units
            
            
            -
            
            
            
            57,165Total
      product inventories
            
            $
            -
            
            
            $
            169,666





As products reach the commercialization
stage, the related inventory is recorded.  The costs associated with
products undergoing research and development are expensed as
incurred.  As of December 31, 2006 inventory consisted primarily of
battery modules in various stages of the manufacturing process.





Due to
uncertainties regarding saleability of our inventory resulting from our decision
to replace 47 of the Phoenix battery packs manufactured in 2007 due to a
potential module configuration problem and the related proposal to utilize a new
prototype battery for future production, all inventory on hand at December 31
2007 targeted for the future manufacture of Phoenix battery packs of $2,529,939
was charged to cost of sales in the consolidated statement of
operations.





F-18





5.
            PROPERTY,
      PLANT AND EQUIPMENT




Property,
plant and equipment consisted of the following as of December 31, 2007 and
2006:





2007
            
            
            2006Machinery
      and equipment
            
            $
            14,265,125
            
            
            $
            13,198,410Building
      and improvements
            
            
            3,926,754
            
            
            
            3,319,806Furniture,
      office equipment & other
            
            
            560,215
            
            
            
            548,368Total
            
            
            18,752,094
            
            
            
            17,066,584Less
      accumulated depreciation
            
            
            (4,203,257
            )
            
            
            (5,837,178
            )Total
      property and equipment
            
            $
            14,548,837
            
            
            $
            11,229,406





Depreciation
expense for the years ended December 31, 2007, 2006, and 2005 totaled
$1,869,061, $1,434,935, and $949,387, respectively.





6.
            PATENTS




Patents
consisted of the following at December 31, 2007 and 2006:





2007
            
            
            2006Patents
      and patent applications
            
            $
            1,517,736
            
            
            $
            1,517,736Less
      accumulated amortization
            
            
            (797,303
            )
            
            
            (712,488
            )Total
      patents and patent applications
            
            $
            720,433
            
            
            $
            805,248





All
patents are being amortized on a straight-line basis over their useful lives
with a weighted average amortization period of approximately 16.5 years.
Amortization expense was $84,815, for each of the years ended December 31, 2007,
2006 and 2005, respectively.  For each of the next five years,
amortization expense relating to intangibles is expected to be approximately
$85,000 per year.




7.
            ACCOUNTS
      RECEIVABLE AND NOTES RECEIVABLE FROM RELATED
  PARTY




Related
Party Accounts Receivable activity consisted of the following at December 31,
2007 and 2006:





2007
            
            
            2006Beginning
      Balance - January
            
            $
            495,000
            
            
            $
            -Additions
            
            
            1,851,894
            
            
            
            495,000Less
      cash collected
            
            
            (2,346,894
            )
            
            
            -Ending
      Balance  - December
            
            $
            -
            
            
            $
            495,000





Based on battery pack orders fulfilled
in the fourth quarter of 2006 for Phoenix Motorcars, Inc. (“Phoenix”), a total
of $825,000 was recorded as revenue of which 60% - $495,000 was reflected in
accounts receivable due in 30 days and 40% - $330,000 was recorded as a note
receivable per terms of the 2006 orders (refer to notes receivable activity
below).





F-19


Payment terms based on the January 2007
Purchase and Supply Agreement with Phoenix are as follows:  33% of the
release order value is due upon placement of the order, 27% is due within 30
days of the receipt of the invoice by Phoenix, and 40% is due in the form of a
note payable as described below.  Through December 31, 2007,
$2,346,894 of cash was received from Phoenix, of which $1,072,500 was prepaid
against release orders.  Of the prepaid balance, $1,005,737 was
applied to accounts receivable and $66,763 is recorded in deferred
revenue.





Related
Party Notes Receivable activity consisted of the following at December 31, 2007
and 2006:




2007
            
            
            2006Beginning
      Balance - January
            
            $
            330,000
            
            
            $
            -Additions
            
            
            1,219,075
            
            
            
            330,000Plus
      interest earned
            
            
            89,435
            
            
            
            -Ending
      Balance
            
            
            1,638,510
            
            
            
            300,000Less
      current portion
            
            
            1,638,510
            
            
            
            -Long
      term portion
            
            $
            -
            
            
            $
            330,000





On
December 31, 2006, we received a $330,000 unsecured note receivable from Phoenix
Motorcars, Inc. in connection with the sale of battery packs, which bears
interest at 10.5%.  The principal and interest are due by December 30,
2008 with no pre-payment penalty.  Notes receivable issued in 2007
carry interest at prime plus 1% as set forth in the Wall Street Journal and are
due within 360 days of the delivery date based on the terms of the January 2007
Phoenix Motorcars, Inc. supply agreement.  The due date of these notes
is accelerated if Phoenix sells the Zero Emission credits associated with the
sales of motorcars containing our battery packs.





8.
            ACCRUED
      WARRANTY




Accrued
warranty consisted of the following at December 31, 2007 and 2006:





2007
            
            
            2006Beginning
      Balance – January
            
            $
            -
            
            
            $
            -Additions
            
            
            2,915,990
            
            
            
            -Ending
      Balance – December
            
            $
            2,915,990
            
            
            $
            -





We
provided a limited warranty for battery products sold under the January 2007
purchase and supply agreement with Phoenix and the July 2007 AES development
agreement.  Additions of $59,088 and $2,856,902 were recorded in
connection with the 2007 AES and Phoenix purchases, respectively.  The
warranty amount recorded relating to the Phoenix battery packs resulted from our
decision to replace 47 of the Phoenix battery packs manufactured in 2007 due to
a potential module configuration problem that could result in
overheating.








F-20





9.
            ACCRUED
      LIABILITIES




Accrued
liabilities consisted of the following at December 31, 2007 and
2006:





2007
            
            
            2006Accrued
      interest
            
            $
            115,500
            
            
            $
            154,000Accrued
      use tax
            
            
            48,630
            
            
            
            13,209Accrued
      property tax
            
            
            40,220
            
            
            
            36,057Accrued
      mineral lease payments
            
            
            66,022
            
            
            
            62,372Accrued
      reclamation costs
            
            
            11,166
            
            
            
            14,410Accrued
      straight line rent
            
            
            61,998
            
            
            
            42,143Deferred
      revenue
            
            
            413,270
            
            
            
            194,391Other
            
            
            2,838
            
            
            
            10,014$
            759,644
            
            
            $
            526,596








10.
            NOTES
      PAYABLE




Notes
payable consisted of the following at December 31, 2007 and 2006:





2007
            
            
            2006Note
      payable to BHP MineralsInternational,
      Inc.
            
            $
            1,800,000
            
            
            $
            2,400,000Less
      current portion
            
            
            (600,000
            )
            
            
            (600,000
            )Long-term
      portion of notes payable
            
            $
            1,200,000
            
            
            $
            1,800,000





On August
8, 2002, we entered into a purchase and sale agreement with BHP Minerals
International, Inc. (“BHP”), wherein we purchased the land, building and
fixtures in Reno, Nevada where our titanium processing assets are located. In
connection with this transaction, BHP also agreed to terminate our obligation to
pay royalties associated with the sale or use of the titanium processing
technology. In return, we issued to BHP a note in the amount of $3,000,000, at
an interest rate of 7%, secured by the property we acquired. Interest did not
begin to accrue until August 8, 2005. As a result, we imputed interest and
reduced the face amount of the note payable by $566,763, which was then
amortized to interest expense from inception of the note through August 8, 2005.
Payments are due in February of each year beginning in 2006.  All
payments have been made through February 8, 2008.  Additional payments
of $600,000 plus accrued interest are due annually on February 8, 2009 and
2010.





11.
            STOCK
      BASED COMPENSATION




At
December 31, 2007, we have a stock incentive plan, administered by the Board of
Directors, which provides for the granting of options and restricted shares to
employees, officers, directors and other service providers of the
Company.  This plan is described in more detail below.  The
compensation cost that has been charged against income for this plan was
$3,885,151 and $2,008,271 for the year ended 2007 and 2006,
respectively.  Of this amount, $802,863 and $433,763 was recognized in
connection with restricted stock and options granted to non-employees for the
year ended 2007 and 2006, respectively.





F-21


In 2005,
we followed the measurement provisions of SFAS 123 for stock options issued to
non-employees utilizing a Black-Scholes Merton option-pricing
model.  No stock options were granted to non-employees for the year
ended December 31, 2005.  The amount of expense related to restricted
stock, included in the consolidated statements of operations under the
provisions of APB Opinion No. 25, at December 31, 2005 was
$106,819.  During the year ended 2005, the variable accounting method
to record expense associated with modifications of stock options was utilized in
accordance with APB 25.  Variable accounting requires that changes in
the intrinsic value of such modifications be recorded as periodic income or
expense.  We recorded compensation expense of $353,198 related to
modified stock options for the year ended December 31, 2005.





Stock
Options





The total number of shares
authorized to be granted under the 2005 stock plan was increased from 3,000,000
to an aggregate of 9,000,000 based on the proposal approved at the annual and
special meeting of shareholders on May 30, 2007.  Prior stock option
plans, under which we may not make future grants, authorized a total of
6,600,000 shares, of which options for 5,745,500 were granted and options for
1,358,300 are outstanding and unexercised at December 31, 2007. Options granted
under the plans generally are granted with an exercise price equal to the market
value of a common share at the date of grant, have five- or ten-year terms and
typically vest over periods ranging from immediately to three years from the
date of grant.  The estimated fair value of equity-based awards, less
expected forfeitures, is amortized over the awards’ vesting period utilizing the
graded vesting method.  Under this method, unvested amounts begin
amortizing at the beginning of the month in which the options are
granted.





In
calculating compensation recorded related to stock option grants for the years
ended December 31, 2007 and 2006, the fair value of each stock option is
estimated on the date of grant using the Black-Scholes option-pricing model and
the following weighted average assumptions:





2007
            
            2006Dividend
      yield
            None
            
            NoneExpected
      volatility
            85%
            
            94%Risk-free
      interest rate
            4.60%
            
            4.80%Expected
      life (years)
            4.85
            
            4.61





The
computation of expected volatility used in the Black-Scholes Merton
option-pricing model is based on the historical volatility of our share
price.  The expected term is estimated based on a review of historical
and future expectations of employee exercise behavior.  No stock
options were granted to non-employees for the year ended December 31,
2005.


F-22


A summary
of option activity under our equity-based compensation plans as of December 31,
2007, and changes during the year then ended is presented below:





WeightedWeighted
            
            
            AverageAverage
            
            
            Remaining
            
            
            AggregateExercise
            
            
            Contractual
            
            
            IntrinsicShares
            
            
            Price
            
            
            Term
      (Years)
            
            
            ValueOutstanding
      at January 1, 2007
            
            
            3,278,222
            
            
            $
            3.06
            
            
            
            5.9
            
            
            $
            1,366,105Granted
            
            
            1,924,882
            
            
            
            2.85Exercised
            
            
            (280,914
            )
            
            
            2.25Forfeited/Expired
            
            
            (755,983
            )
            
            
            4.24Outstanding
      at December 31, 2007
            
            
            4,166,207
            
            
            $
            2.81
            
            
            
            7.0
            
            
            $
            6
      ,024,389Exercisable
      at December 31, 2007
            
            
            2,597,487
            
            
            $
            2.71
            
            
            
            5.9
            
            
            $
            4,030,311





Shares
issued to non-employees reflected in the table above include 605,000 shares
outstanding at January 1, 2007, 151,000 shares granted, and 110,000 shares
exercised during the year ended December 31, 2007, resulting in 646,000 shares
outstanding and 490,334 exercisable at December 31, 2007.





The
weighted-average grant-date fair value of options granted during 2007 and 2006
was $2.05 and $2.29, respectively.  The weighted-average grant-date
fair value of options calculated in accordance with FAS 123 granted during 2005
was $2.11.  The total intrinsic value of options exercised during the
years ended December 31, 2007, 2006, and 2005 was $510,745, $314,010, and
$3,103,587, respectively.





A summary
of the status of non-vested shares at December 31, 2007 and changes during the
year then ended, is presented below:




WeightedAverageGrant
      DateShares
            
            
            Fair
      ValueNon-vested
      shares at January 1, 2007
            
            
            877,542
            
            
            $
            2.97Granted
            
            
            1,924,882
            
            
            
            2.85Vested
            
            
            (966,494
            )
            
            
            2.95Forfeited/Expired
            
            
            (267,210
            )
            
            
            2.26Non-vested
      shares at December 31, 2007
            
            
            1,568,720
            
            
            $
            2.96





Non-vested
shares relating to non-employees reflected in the table above include 97,500
shares outstanding at January 1, 2007, 151,000 shares granted and 92,834 shares
exercised during the year ended December 31, 2007, resulting in 155,666
non-vested shares outstanding at December 31, 2007.








F-23


As of
December 31, 2007, there was $1,142,280 of total unrecognized compensation cost
related to non-vested options granted under the plans.  That cost is
expected to be recognized over a weighted average period of one
year.  The total fair value of options vested during the year ended
December 31, 2007 was $1,969,070.





Cash
received from warrant and stock option exercises for the years ended December
31, 2007, 2006, and 2005 was $6,873,917, $803,323, and $6,657,467,
respectively.





Restricted
Stock





Our stock
incentive plan provides for the granting of other incentive awards in addition
to stock options.  During the year ended December 31, 2007, the Board
of Directors approved grants of 75,575 shares of restricted stock under the plan
with a weighted average fair value of $3.13 per
share.    Restricted shares have the same voting and
dividend rights as the Company’s unrestricted common shares, vest over a
two-year period and are subject to the employee’s continued service to the
Company.  Prior to the implementation of FAS 123 (R), we recorded the
issuance of restricted stock with an offsetting entry to a contra-equity account
and amortized the balance over the vesting period.  Effective January
1, 2006, we changed our accounting method to comply with FAS 123 (R) and
eliminated the contra-equity account.  Compensation cost for
restricted stock is now recognized in the financial statements on a pro rata
basis over the vesting period.





A summary
of the changes in restricted stock outstanding during the year ended December
31, 2007 is presented below:





WeightedAverageGrant
      DateShares
            
            
            Fair
      ValueNon-vested
      shares at January 1, 2007
            
            
            120,207
            
            
            $
            2.96Granted
            
            
            75,575
            
            
            
            3.13Vested
            
            
            (102,259
            )
            
            
            3.01Forfeited/Expired
            
            
            (5,666
            )
            
            
            2.65Non-vested
      shares at December 31, 2007
            
            
            87,857
            
            
            $
            3.07





Non-vested
shares relating to non-employees reflected in the table above include 81,875
shares outstanding at January 1, 2007, 75,575 shares granted and 85,926 shares
vested during the year ended December 31, 2007, resulting in 71,524 non-vested
shares outstanding at December 31, 2007.





As of
December 31, 2007, we had $269,559 of total unrecognized compensation expense,
net of estimated forfeitures, related to restricted stock which will be
recognized over the weighted average period of 1.8 years.


F-24





12.
            WARRANTS




Warrants —Warrant activity for the years ended December 31, 2007, 2006, and 2005 is
summarized as follows:





2007
            
            
            2006
            
            
            2005Weighted
            
            
            
            
            
            Weighted
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            Average
            
            
            
            
            
            AverageExercise
            
            
            
            
            
            Exercise
            
            
            
            
            
            ExerciseWarrants
            
            
            Price
            
            
            Warrants
            
            
            Price
            
            
            Warrants
            
            
            PriceOutstanding
      at beginning of year
            
            
            3,256,525
            
            
            $
            2.84
            
            
            
            1,518,556
            
            
            $
            3.17
            
            
            
            4,571,731
            
            
            $
            1.90Issued
            
            
            296,407
            
            
            
            3.29
            
            
            
            2,546,301
            
            
            
            2.76
            
            
            
            250,000
            
            
            
            5.27Expired
            
            
            (97,037
            )
            
            
            2.58
            
            
            
            (572,164
            )
            
            
            3.63
            
            
            
            (101,667
            )
            
            
            3.41Exercised
            
            
            (2,314,189
            )
            
            
            2.70
            
            
            
            (236,168
            )
            
            
            1.93
            
            
            
            (3,201,508
            )
            
            
            1.51Outstanding
      at end of year
            
            
            1,141,706
            
            
            $
            3.26
            
            
            
            3,256,525
            
            
            $
            2.84
            
            
            
            1,518,556
            
            
            $
            3.17Currently
      exercisable
            
            
            1,141,706
            
            
            $
            3.26
            
            
            
            3,256,525
            
            
            $
            2.84
            
            
            
            1,518,556
            
            
            $
            3.17





The
following table summarizes information about warrants outstanding at December
31, 2007:





Warrants
      Outstanding and ExercisableWeightedAverage
            
            
            WeightedRemaining
            
            
            AverageRange
      of
            
            
            
            
            
            Contractual
            
            
            ExerciseExercise Prices
            
            
            Warrants
            
            
            Life (Years)
            
            
            Price$1.00
      to $2.49
            
            
            
            400,224
            
            
            
            0.7
            
            
            $
            1.88$2.50
      to $3.49
            
            
            
            291,482
            
            
            
            3.3
            
            
            
            3.19$3.50
      to $5.265
            
            
            
            450,000
            
            
            
            2.2
            
            
            
            4.541,141,706
            
            
            
            2.0
            
            
            $
            3.26





Except as
noted below, the warrants were issued in conjunction with debt and equity
offerings.  The warrants expire on various dates ranging from May 2008
to December 2011.





Warrants Issued in Payment
of Services





The cost
associated with warrants issued as payment for outside services is estimated on
the date of issuance using the Black-Scholes option-pricing model.





For
the year ending December 31, 2007, 200,000 warrants were issued in connection
with the Joint Development and Equipment Purchase Agreement with AES Energy
Storage, LLC and the related Warrant Issuance Agreement signed on July 20,
2007.  Pursuant to this agreement, an initial warrant to purchase
200,000 common shares of the Company at $3.64 per share was
issued.  Since the Initial Warrant did not became exercisable until
December 31, 2007, the fair value of the warrants was estimated at the issuance
date and adjusted using variable accounting until the final vesting date
occurred.   Based on the following assumptions at the vesting
date of expected life of 1.83 years, volatility of 43.7 %, annual rate of
quarterly dividends of $0 and the risk free interest rate of 3.5 %, a total of
$261,000 was recorded in stock compensation expense.  All of these
warrants are outstanding at December 31, 2007.


For the
year ending December 31, 2006, 231,482 warrants were issued in connection with
the December 18, 2006 common stock offering at a strike price of 125% of the
stock price on the issuance date, as a result, no intrinsic value existed at the
issuance date.  The following assumptions were used to value the
warrant cost of $275,464, recorded as common stock issuance
cost:  expected life of 2.57 years, volatility of 79%, annual rate of
quarterly dividends of $0 and risk free interest rate of 5.01%.  All
of these warrants are outstanding at December 31, 2007.





F-25


For the
year ending December 31, 2005, 250,000 warrants were issued in connection with
the February 14, 2005 common stock offering at a strike price of approximately
106% of the stock price on the issuance date, as a result, no intrinsic value
existed at the issuance date.  The following assumptions were used to
value the warrant cost of $639,459, recorded as common stock issuance
cost:  expected life of 1.72 years, volatility of 107%, annual rate of
quarterly dividends of $0 and risk free interest rate of 3.07%.  All
of these warrants are outstanding at December 31, 2007.





13.
            OTHER
      TRANSACTIONS




On
November 29, 2007 we entered into a Purchase Agreement with Al Yousuf, LLC, a
United Arab Emerites limited liability company (“Investor”) relating to the
purchase by the Investor of 11,428,572 common shares (the “Shares”) of the
Company at a purchase price of $3.50 per share, for an aggregate purchase price
of $40,000,000.  The purchase closed in two stages, with a closing of
10,000,000 in shares on November 29, 2007 and a closing for the remaining shares
on December 10, 2007.  Total commission and expenses of $2,373,618
were paid to the placement agent in connection with this
transaction.  We also executed a Registration Rights Agreement with
the Investor pursuant to which we are required to cause a registration statement
registering the re-sale of the Shares to be effective on the two-year
anniversary of closing, to the extent the Shares are not at such time eligible
for resale without restriction under Rule 144 under the Securities
Act.  The Investor also has the right to demand a one-time
underwritten registration of the Shares at any time during a six-year period
beginning at the expiration of the initial two-year lockup
period.  The Registration Rights Agreement includes customary
provisions related to indemnification of Investor and continued effectiveness of
the registration statement.





In March
2007, The AES Corporation (“AES”) privately purchased 895,523 unregistered
common shares of the Company at a price of $3.35 per share.  Total
proceeds received relating to the purchase were $3,000,000.  No
underwriting commission was paid in connection with this
transaction.  The Company agreed to prepare and file a registration
statement to register the shares within 30 days of the closing date of the
transaction, which was effective on March 5, 2007.  Due to additional
time required by AES to review the registration statement and prepare related
documents, the registration statement was not filed until April 10, 2007 and
became effective on May 30, 2007.





On
December 18, 2006, we sold 9,259,259 common shares to institutional
investors.  The sales were made at $2.70 per share with net proceeds
to the Company, after expenses, of $22,943,664.  Warrants with a one
year expiration were also issued as a component of this offering to purchase
2,314,819 shares of stock at a price of $2.70 per share.  The
placement agent also received a warrant to purchase 231,482 shares of our common
stock at $3.38 per share.  The warrant has a five-year
term.  Using a Black-Scholes pricing model, we estimated that the
warrant has a value of $275,464; this amount was recorded as common stock
issuance costs.





F-26


On
February 14, 2005, we sold 5,000,000 common shares to institutional
investors.  The sales were made at $4.05 per share with net proceeds
to the Company, after expenses, of approximately $19.3 million.  The
placement agent also received a warrant to purchase 250,000 shares of our common
stock at $5.27 per share.  The warrant has a four-year
term.  Using a Black-Scholes pricing model, we estimated that the
warrant has a value of $639,459; this amount was recorded as common stock
issuance costs.





14.
            LEASES




Operating Leases
—We lease certain premises for office space and other corporate
purposes.  Operating lease commitments at December 31, 2007
were:





Year
ending December 31:


2008
            
            $
            151,5962009
            
            
            127,9542010
            
            
            124,2782011
            
            
            127,500Thereafter
            
            
            63,750Total
            
            $
            595,078





Lease
expense for the years ended December 31, 2007, 2006, and 2005 totaled $167,071,
$116,146, and $181,549, respectively.





15.
            INCOME
      TAXES




Losses
before income taxes include profits relating to non-U.S. operations of
$6,260,000 in the year ended December 31, 2007, losses relating to non-U.S.
operations of $259,000 in the year ended December 31, 2006, and profits relating
to non-U.S. operations of $2,404,000 in the year ended December 31,
2005.





Because
of the net operating losses and a valuation allowance on deferred tax assets,
there was no provision for income taxes recorded in the accompanying
consolidated financial statements for each of the three years ended December 31,
2007, 2006, and 2005.





A
reconciliation of the federal statutory income tax rate (35%) and our effective
income tax rates is as follows:





Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Federal
      statutory income taxes (benefit)
            
            $
            (10,958,655
            )
            
            $
            (6,020,099
            )
            
            $
            (3,478,025
            )Expiration
      of net operating loss carryforwards
            
            
            367,600
            
            
            
            96,350
            
            
            
            (61,123
            )Other,
      net
            
            
            (95,137
            )
            
            
            259,940
            
            
            
            91,109True
      up to prior tax returns
            
            
            1,558,238
            
            
            
            (1,771,202
            )
            
            
            -Exercise
      of incentive stock options
            
            
            1,098,378
            
            
            
            483,092
            
            
            
            -Valuation
      allowance
            
            
            8,029,576
            
            
            
            6,951,919
            
            
            
            3,448,039Total
            
            $
            -
            
            
            $
            -
            
            
            $
            -





F-27


The
components of the deferred tax assets consisted of the following as of December
31, 2007 and 2006:





2007
            
            
            2006Deferred
      tax assets:Net
      operating loss carry forwards
            
            $
            25,150,494
            
            
            $
            20,631,046Basis
      difference in intangible assets
            
            
            1,079,580
            
            
            
            1,207,112Accruals
            
            
            3,713,872
            
            
            
            246,452Tax
      credits
            
            
            715,207
            
            
            
            -Other,
      net
            
            
            133,673
            
            
            
            -Total
      deferred tax assets
            
            
            30,792,826
            
            
            
            22,084,611Deferred
      tax liabilities:Basis
      difference in property, plant,and
      equipment
            
            
            (394,091
            )
            
            
            (790,361
            )Total
      deferred tax liabilities
            
            
            (394,091
            )
            
            
            (790,361
            )Valuation
      allowance
            
            
            (30,398,735
            )
            
            
            (21,294,250
            )Net
      deferred tax assets
            
            $
            -
            
            
            $
            -





As a
result of certain realization requirements of SFAS 123(R), the table of deferred
tax assets shown above does not include certain deferred tax assets at December
31, 2007 and 2006 that arose directly from tax deductions related to equity
compensation in excess of compensation recognized for financial reporting.
  Equity will be increased by approximately $75,000 if and when such
deferred tax assets are ultimately realized.  The Company uses tax law
ordering for purposes of determining when excess tax benefits have been
realized.





Our
operating loss carry-forwards include losses generated in the United States and
in Canada.  The net operating loss carry-forwards total approximately
$71,800,000 as of December 31, 2007 and will expire at various dates as
follows:





2008-2011
            
            
            $
            1,500,0002012-2016
            
            
            
            1,400,0002017-2021
            
            
            
            4,800,0002022-2027
            
            
            
            64,100,000





Due to
the significant increase in common stock issued and outstanding from 2005
through 2007, Section 382 of the Internal Revenue Code may provide significant
limitations on the utilization of net operating loss carry-forwards of the
Company.  As a result of these limitations, a portion of these loss
and credit carryovers may expire without being utilized.





The
Company is subject to taxation in the U.S., Canada and various states. We record
liabilities for income tax contingencies based on our best estimate of the
underlying exposures. We have not been audited by any jurisdiction since
our inception in 1998. We are open for audit by the U.S. Internal Revenue
Service, the Canada Revenue Agency and U.S. state tax jurisdictions from our
inception in 1998 to 2006.


F-28





16.
            COMMITMENTS
      AND CONTINGENCIES




Contingencies— The
Company is subject to claims in the normal course of business.  Management,
after consultation with legal counsel, believes that liabilities, if any,
resulting from such claims will not materially effect the Company’s financial
position or results of operations.





Litigation —We are currently not aware of any investigations, claims, or lawsuits
that we believe could have a material adverse effect on our consolidated
financial position or on our consolidated results of operations.





17.
            RELATED
      PARTY TRANSACTIONS




In
January 2007, we entered into a multi-year purchase and supply agreement with
Phoenix Motorcars, Inc. (“Phoenix”) for up to 500 battery pack
systems.  Two release orders were placed pursuant to this agreement in
January 2007 and in May 2007 with a value of $1,040,000 and $2,210,000,
respectively.  For the year ending December 31, 2007, revenue of
$3,047,687 has been recorded in connection with these orders.  (Also refer
to Note 4 and Note 8).





Total
notes receivable including accrued interest (see Note 7) due from Phoenix at
December 31, 2007 totaled $1,638,510.  All outstanding accounts
receivable balances were fully paid at December 31, 2007.  Total
deferred revenue of $114,691 at December 31, 2007, primarily reflects
pre-payment for battery purchase orders and the unamortized balance of the
investment described below.





Additionally,
Phoenix issued 1,000,000 shares of its common stock in consideration for the
three-year exclusivity agreement within the United States of America included in
the contract.  Phoenix must meet minimum battery pack purchases,
annually, to maintain the limited exclusivity agreement through its expiration
in December 2009.  The common stock shares received represented a
16.6% ownership interest in Phoenix.  The investment was recorded at
$106,518 with the offset to deferred revenue, which is recognized on a
straight-line basis over the three year term of the exclusivity
period.





On July
20, 2007, we entered into a multi-year Joint Development and Equipment Purchase
Agreement with AES.  A member of the executive management team of AES
also serves on our board of directors.  Under the terms of the
agreement we will work jointly with AES to develop a suite of energy storage
solutions for purchase by AES and potentially third parties.  On
August 3, 2007, we received an initial $1,000,000 order, of which $500,000 was
prepaid, in connection with the AES Joint Development and Equipment Purchase
Agreement for a 500 kilowatt-hour energy storage product.  This
product was designed and manufactured at our Indiana facility, and was completed
in December 2007.  Through December 31, 2007, $500,000 of revenue has
been recorded in connection with this purchase order on a time and materials
basis.


F-29





18.
            BUSINESS
      SEGMENT INFORMATION




Management views the Company as
operating in three business segments:  Performance Materials, Life
Sciences, and Power and Energy Group, previously known as Advanced Materials and
Power Systems (“AMPS”).  In the third quarter of 2007, the Altair
Hydrochloride Pigment Process Division (“AHP”), which includes the AlSher
Titania joint venture, was combined with Performance Materials in order to
leverage and manage their inter-related operations.  For all quarters
presented, the activity relating to the former AHP Division has been
reclassified to Performance Materials.





The
Performance Materials segment produces advanced materials for coatings, sensors,
alternative energy devices and markets and licenses our titanium dioxide pigment
production technology.  Beginning in the third quarter of 2007, sales
of nano-structured lithium titanate spinel (“LTO”) were moved from Performance
Materials to the Power and Energy segment.  All previous activity has
been re-classified accordingly.  The Life Sciences segment produces
pharmaceutical products, drug delivery products and dental
materials.  The Power and Energy Group develops, produces, and sells
nano-structured LTO, nano lithium Titanate, battery cells, battery packs,
and provides related design and test services.





The
accounting policies of these business segments are the same as described in Note
2 to the consolidated financial statements.  Reportable segment data
reconciled to the consolidated financial statements as of and for the fiscal
years ended December 31, 2007, 2006, and 2005 is as follows:





(Gain)/Loss
            
            
            DepreciationFrom
            
            
            andNet
      Sales
            
            
            Operations
            
            
            Amortization
            
            
            Assets2007:Performance
      Materials
            
            $
            2,527,369
            
            
            $
            2,786,661
            
            
            $
            933,419
            
            
            $
            6,055,345Power
      and Energy Group
            
            
            5,282,149
            
            
            
            17,295,099
            
            
            
            856,808
            
            
            
            8,267,611Life
      Sciences
            
            
            1,298,965
            
            
            
            (192,311
            )
            
            
            30,435
            
            
            
            1,879,994Corporate
            
            
            -
            
            
            
            13,178,025
            
            
            
            133,214
            
            
            
            57,655,685Consolidated
      Total
            
            $
            9,108,483
            
            
            $
            33,067,474
            
            
            $
            1,953,876
            
            
            $
            73,858,6352006:Performance
      Materials
            
            $
            2,195,470
            
            
            $
            2,052,596
            
            
            $
            1,083,207
            
            
            $
            7,546,096Power
      and Energy Group
            
            
            1,513,650
            
            
            
            5,324,403
            
            
            
            305,743.
            
            
            
            3,651,917Life
      Sciences
            
            
            614,840
            
            
            
            (117,724
            )
            
            
            11,691
            
            
            
            1,473,793Corporate
            
            
            -
            
            
            
            10,422,140
            
            
            
            119,109
            
            
            
            30,448,767Consolidated
      Total
            
            $
            4,323,960
            
            
            $
            17,681,415
            
            
            $
            1,519,750
            
            
            $
            43,120,5732005:Performance
      Materials
            
            $
            1,856,042
            
            
            $
            4,272,529
            
            
            $
            932,390
            
            
            $
            5,762,517Power
      and Energy Group
            
            
            225,722
            
            
            
            146,383
            
            
            
            883
            
            
            
            1,361,597Life
      Sciences
            
            
            724,771
            
            
            
            191,149
            
            
            
            5,506
            
            
            
            543,059Corporate
            
            
            -
            
            
            
            5,871,792
            
            
            
            95,423
            
            
            
            25,796,843Consolidated
      Total
            
            $
            2,806,535
            
            
            $
            10,481,853
            
            
            $
            1,034,202
            
            
            $
            33,464,016





In the
table above, corporate and other expense in the Loss From Operations column
includes such expenses as business consulting, general legal expense, accounting
and audit, general insurance expense, stock-based compensation expense,
shareholder information expense, investor relations, and general office
expense.





F-30





For the
year ended December 31, 2007, we had sales to four major customers, each of
which accounted for 10% or more of revenues. Total sales to these customers for
the year ended December 31, 2007 and the balance of their accounts receivable at
December 31, 2007 were as follows:





Accounts
      Receivable andSales
      - Year
              Ended
            
            
            Notes
              Receivable
      atCustomer
            
            December
      31, 2007
            
            
            December
      31, 2007Performance Materials
      Division:Western
      Oil Sands
            
            $
            1,198,525
            
            
            $
            203,929Department
      of Energy
            
            $
            499,773
            
            
            $
            8,872Power and Energy
      Group:Department
      of Energy
            
            $
            706,865
            
            
            $
            19,454Phoenix
      Motorcars, Inc.
            
            $
            3,047,687
            
            
            $
            1,638,510Life Sciences
      Division:Department
      of Energy
            
            $
            204,801
            
            
            $
            26,866Elanco
      Animal Health/Eli Lilly
            
            $
            1,088,829
            
            
            $
            361,200




For the
year ended December 31, 2006, we had sales to five major customers, each of
which accounted for 10% or more of revenues.  Total sales to these
customers for the year ended December 31, 2006 and the balance of their accounts
receivable at December 31, 2006 were as follows:





Accounts
              Receivable
      andSales
      - Year
              Ended
            
            
            Notes
              Receivable
      atCustomer
            
            December
      31,
              2006
            
            
            December
      31,
              2006Performance Materials
      Division:Western
      Oil Sands
            
            $
            1,111,697
            
            
            $
            313,415UNLV
      Research Foundation
            
            $
            416,687
            
            
            $
            28,369Department
      of Energy
            
            $
            398,533
            
            
            $
            284,049Power and Energy
      Group:Phoenix
      Motorcars, Inc.
            
            $
            825,000
            
            
            $
            495,000Department
      of Energy
            
            $
            347,904
            
            
            $
            270,692Life Sciences
      Division:Spectrum
      Pharmaceuticals, Inc.
            
            $
            514,840
            
            
            $
            -




F-31




For the
year ended December 31, 2005, we had sales to four major customers, each of
which accounted for 10% or more of revenues.  Total sales to these
customers for the year ended December 31, 2005 and the balance of their accounts
receivable at December 31, 2005 were as follows:





Sales
      - Year
              Ended
            
            
            Accounts
              Receivable
      atCustomer
            
            December
      31,
              2005
            
            
            December
      31,
              005Performance Materials
      Division:Western
      Oil Sands
            
            $
            616,515
            
            
            $
            166,031UNLV
      Research Foundation
            
            $
            492,818
            
            
            $
            160,053Western
      Michigan University
            
            $
            481,519
            
            
            $
            118,478Life Sciences
      Division:Spectrum
      Pharmaceuticals, Inc.
            
            $
            729,271
            
            
            $
            30,881





Revenues
for the years ended December 31, 2007, 2006 and 2005 by geographic area were as
follows:


Geographic
      information (a):
            
            2007
            
            
            2006
            
            
            2005United
      States
            
            $
            7,274,960
            
            
            $
            3,101,481
            
            
            $
            2,101,552Canada
            
            
            1,240,671
            
            
            
            1,114,869
            
            
            
            641,515Other
      foreign countries
            
            
            592,852
            
            
            
            107,610
            
            
            
            63,468Total
            
            $
            9,108,483
            
            
            $
            4,323,960
            
            
            $
            2,806,535(a) 
      Revenues are attributed to countries based on location of
      customer.








19.
            SUBSEQUENT
      EVENTS




On
January 29, 2008, we signed a contract with the United States Navy of $2,488,859
for the development of battery backup power systems in naval
applications.  Under the terms of the contract which runs through
November 31, 2008, we will develop an optimized battery cell employing
nano-sized lithium titanate electrode materials and then demonstrate the
performance and safety attributes of the cell.  We will also develop
and demonstrate a modular system design for utilization of the product
technology in multiple military applications, including energy and power storage
for naval applications.





On
February 11, 2008, we signed a contract with Melpar BVBA, a company incorporated
under Belgian law to provide services relating to defining and implementing
sales and marketing strategies in Europe.  At the same time, we
entered into an agreement with Rik Dobbelaere, the owner of Melpar, under which
he will serve as the President of our European operations and report to our
President.  Total annual compensation is a monthly payment in US
dollars of approximately $40,000 to Melpar under its agreement and an annual
target bonus under our incentive bonus plan equal to up to 60% of base
compensation to Melpar under its agreement.  In addition, Mr.
Dobbelaere is entitled under his agreement to receive 100,000 stock options
under our stock incentive plan.





The term
of both agreements is indefinite unless cancelled by either party with three
months notice.  If we terminate the Melpar agreement, we will be
required to pay a cancellation fee of three months contract value (approximately
U.S. $120,000) if the termination occurs during the first three months, a
cancellation fee of six months contract value (approximately U.S. $240,000) if
the termination occurs between 6 and 12 months after commencement of the term, a
cancellation fee of 12 months contract value (approximately U.S. $480,000) if
the termination occurs between 12 and 24 months after commencement of the term
and a cancellation fee of 18 months contract value (approximately U.S. $720,000
if the termination occurs more than 24 months after the end of the
term.