**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, 2005**





[ 
                 ]
            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: None


[X]  Securities
      registered pursuant to Section 12(g) of the Act:





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





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 Form 10-K or any amendment to
      this
      Form 10-K. [   ]








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, 2005, based upon the average bid and asked price of
      the
      common shares on the NASDAQ Capital Market of $2.96 per share on June 30, 2005,
      was approximately $174,009,000. 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 3, 2006, the Registrant had 59,352,519 common
      shares outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Registrant’s Proxy Statement on Schedule 14A for the Registrant’s 2006
      Annual Meeting of Shareholders are incorporated by reference in Part III as
      specified.












ii


**INDEXTO
      FORM 10-K**




**PART
                  I**
              
              1Item
                  1:
              Business
              1Item
                  1A.
              Risk
                  Factors
              23Item
                  1B.
              Unresolved
                  Staff Comments
              28Item
                  2.
              Properties
              29Item
                  3.
              Legal
                  Proceedings
              29Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              30**PART
                  II**
              
              31Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder
                  Matters and Issuer Purchases of Equity Securities
              31Item
                  6.
              Selected
                  Financial Data
              33Item
                  7.
              Management's
                  Discussion and Analysis of Financial Condition
                  and Results of Operations.
              34Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              43Item
                  8.
              Financial
                  Statements and Supplementary
                  Data.
              43Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial Disclosure.
              43Item
                  9A.
              Controls
                  and Procedures
              44Item
                  9B.
              Other
                  Information
              45**PART
                  III**
              
              45Item
                  10.
              Directors
                  and Executive Officers of the
                  Registrant
              45Item
                  11.
              Executive
                  Compensation
              45Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              45Item
                  13.
              Certain
                  Relationships and Related
                  Transactions
              45Item
                  14.
              Principal
                  Accountant Fees and Services
              45**PART
                  IV**
              
              46Item
                  15.
              Exhibits,
                  Financial Statement Schedules and Reports on Form
                  8-K
              46










iii
 Table
          of Contents


**PART
        I**
 
 *This
        Annual Report on Form 10-K for the year ended December 31, 2005 (this
        "* ***Form
        10-K”*** *)
        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 Form 10-K 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
        Form 10-K refer to Altair Nanotechnologies Inc. and all of its subsidiaries.
        Altair currently has one wholly-owned subsidiary, Altair US Holdings, Inc.,
        a
        Nevada corporation. Altair US Holdings, Inc. directly or indirectly wholly-owns
        Altair Nanomaterials, Inc., a Nevada corporation, Mineral Recovery Systems,
        Inc., a Nevada corporation (" **MRS** "),
        Fine
        Gold Recovery Systems, Inc., a Nevada corporation (" **Fine
        Gold** ")
        and
        Tennessee Valley Titanium, Inc., a Nevada corporation.
  ***Item
        1:******Business***
  We
        are a
        Canadian company, with principal assets and operations in the United States,
        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 research,
        development, production, marketing and sales efforts are currently directed
        toward six market applications that utilize our proprietary
        technologies:
 
 ·
              Advanced
                  Materials
 o
              The
                  marketing and licensing of titanium dioxide pigment production
                  technology.
 o
              The
                  marketing and production of nano-structured ceramic powders for
                  thermal
                  spray applications.
 o
              The
                  development of nano-structured ceramic powders for nano-sensor
                  applications.
 o
              The
                  development of titanium dioxide electrode structures in connection
                  with
                  research programs aimed at developing a lower-cost process for
                  producing
                  titanium metals and related alloys. Development of this product
                  is largely
                  inactive as we seek a business
                  partner.
 ·
              Air
                  and Water Treatment
 o
              The
                  development, production and sale of photocatalytic materials for
                  air and
                  water cleansing.
 o
              The
                  marketing****of
                  Nanocheck products for phosphate binding to prevent or reduce algae
                  growth
                  in recreational and industrial
                  water.
 ·
              Alternative
                  Energy
 o
              The
                  development, production and sale of nano-structured lithium titanate
                  spinel, lithium cobaltate and lithium manganate spinel materials
                  for high
                  performance lithium ion batteries.
 o
              The
                  design and development of power lithium ion battery cells, batteries
                  and
                  battery packs as well as related design and test services.
 o
              The
                  development of materials for photovoltaics and transparent electrodes
                  for
                  hydrogen generation and fuel cells.
    1
 Table
            of Contents
  ·
              Lanthanum
                  based Pharmaceutical Products
 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
                  testing of Renalan, a test-stage active pharmaceutical ingredient,
                  which
                  is designed to be useful in the treatment of elevated serum phosphate
                  levels in companion animals suffering from chronic renal
                  disease.
 ·
              Chemical
                  Delivery Products
 o
              The
                  development of TiNano Spheres, which are rigid, hollow, porous,
                  high
                  surface area ceramic micro structures that are derived from Altair’s
                  proprietary process technology for the delivery of chemicals, drugs
                  and
                  biocides.
 ·
              Biocompatible
                  Materials
 o
              The
                  development of nanomaterials for use in various products for dental
                  implants, dental fillings and dental products, as well as biocompatible
                  coatings on implants.
  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, 2005, 2004 and 2003,
        contract services revenues comprised 70%, 99% and 88%, respectively, of our
        operating revenues.
 
  **Our
        Nanomaterials and Titanium Dioxide Pigment Business**
  **Background
        and Description of 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 six 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, photocatalytic oxidation products, catalyst
        structures, protective thermal spray powders, algae control 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 dioxide  crystals.
        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, lanthanum products and stabilized
        zirconia nanomaterials. The technology also enables the production of customized
        products for catalyst support structures, thermal barrier coating materials
        and
        porous titanium oxide electrode structures for titanium metal production.
  
 2
 Table
            of Contents
 Our
        nanomaterials and titanium dioxide pigment technology is fundamentally different
        from current commercial processing techniques. Other processes are based
        on
        either a precipitation of materials from a solution or the formation of
        crystallites from molten droplets of titanium oxide generated in high
        temperature flame reactors. Our process is a dense-phase crystal growth
        technique which controls crystal formation using a combination of mechanical,
        fluid dynamics, chemical and thermal control. Our process permits exceptional
        control over particle size, shape, and crystalline form. Our titanium dioxide
        processing technology produces discrete anatase crystals in nanometer sizes
        and
        may be doped to be thermally stable up to 800 degrees centigrade. By remaining
        stable in high-temperature processing, nanomaterials produced by our titanium
        dioxide pigment processing technology retain the desired nanomaterials size
        and
        crystalline phase. In addition, our technology is designed to minimize process
        effluents needing environmental remediation and to accept a wide variety
        of
        low-cost, naturally occurring titanium feed stocks.
 
 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.
        The following sections describe the research and development services we
        provide
        and the principal projects we are using our nanomaterials and titanium dioxide
        pigment technology to develop.
 
 **Contract
        Research Services**
 
 In
        addition to doing research and development work for our own benefit, we provide
        these services to others, principally in commercial collaboration arrangements
        and under government grants. During 2006, we expect to utilize our nanomaterials
        and titanium dioxide pigment technology under the following:
 
 ·
              a
                  contract with Western Oil Sands, Inc. for the production of titanium
                  dioxide pigment and pigment-related products from oil sands. We
                  have
                  constructed a pilot separation plant for Western Oil Sands, Inc.
                  in our
                  Reno, Nevada facility that we are using under contract to develop
                  the
                  process for recovering titanium dioxide from oil sands. At December
                  31,
                  2005 and 2004, we had approximately $642,000 and $200,000, respectively,
                  of work remaining to be done on existing
                  contracts;
 
 ·
              a
                  contract with Western Michigan University to develop nanosensors
                  for the
                  detection of chemical, biological and radiological agents. At December
                  31,
                  2005 and 2004, we had approximately $16,000 and $500,000, respectively,
                  of
                  work to be done under existing contracts. We expect to continue
                  the
                  project under an announced federal earmark grant that is estimated
                  to
                  provide $1,000,000 to us over approximately one
                  year;
 
 ·
              a
                  grant awarded by the National Science Foundation to fund joint
                  development
                  work on next generation lithium ion power sources. At December
                  31, 2005
                  and 2004, we had approximately $349,000 and $33,000, respectively,
                  of work
                  remaining to be done on existing contracts. The work to be done
                  under the
                  contract backlog at December 31, 2005 is expected to run through
                  June 30,
                  2007;and
 
 ·
              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
                  U.S. Department of Energy for joint research activities related
                  to solar
                  hydrogen production.At
                  December 31, 2005 and 2004, we hadapproximately
                  $623,000 and $400,000, respectively, of work to be done under the
                  agreement.
 
 We
        expect
        that contract research services will be a significant portion of our revenues
        in
        the short-term but will decline in significance if we are successful in bringing
        nanoparticle and other products to market and license our technologies. Total
        research and development expenses were $5,073,478, $2,189,150 and $1,961,744
        for
        the years ended December 31, 2005, 2004 and 2003, respectively, while research
        and development costs funded by customers were $1,962,162, $1,144,389 and
        $64,249 for the years ended December 31, 2005, 2004 and 2003, respectively.
   3
 Table
            of Contents
 During
        the year ended December 31, 2005, we recorded revenues from four major
        customers, each of which accounted for 10% or more of revenues. Revenues
        from
        Western Michigan University were $481,519; revenues from Western Oil Sands,
        Inc.
        were $616,515, and revenues from the UNLV Research Foundation were $492,818.
        All
        of these customers are in the performance materials business segment. Revenues
        from Spectrum Pharmaceuticals, Inc., a life sciences segment customer, were
        $729,271.
 
 **Trademarks**
 
 We
        have
        registered or are in the process of registering the following trademarks:
        Altair
        Nanotechnologies®, Altair Nanomaterials®, AltairnanoTM, TiNano®, NanocheckTM and
        RenaZorb®.
 
 **The
        Performance Materials Division**
  **Primary
        Products**
  **The
        Altair Hydrochloride Pigment Process (AHPP)**
  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 Pigment **** Process
        (AHPP). 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.
  Key
        Features
  The
        AHPP
        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.
        The
        AHPP uses a
        dense-phase crystal growth technique which controls crystal formation using
        a
        combination of mechanical, fluid dynamics, chemical and thermal control. A
        third
        party engineering study suggests that cost 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.
  Target
        Markets and Marketing Plans/Efforts
  We
        intend
        to benefit from the AHPP through technology license agreements with large
        materials companies under which we would receive royalties and other payments.
        We do not anticipate being a manufacturer of pigments or competing directly
        in
        the pigment market. Our market approach has been to target chemical
        manufacturing and mining companies who are addressing the market for high
        grade
        titanium dioxide pigment. In general, European and North American companies
        have
        substantial investment in traditional chloride- and sulfate-based methods
        of
        producing pigment and so will be slow to adopt new technology like our AHPP.
        However, companies and governments in the developing world have stated that
        they
        see substantial value in being self-sufficient in titanium dioxide production
        both from an economic as well as a political viewpoint. These geographies
        are
        also swifter to adopt new technology as they have less infrastructure and
        investment tied to traditional methods of pigment production.
  4
 Table
            of Contents
 In
        April
        2005, we signed a memorandum of understanding with Bateman Engineering NV
        (“Bateman”) to form a joint venture combining our hydrochloride pigment process
        technology with Bateman’s engineering, design and construction expertise. We
        expect that the joint venture, Altair-Bateman Titania, Inc. (“ABT”), will offer
        customers an integrated resource for technology development, engineering,
        design
        and construction of pigment processing projects. We expect that the joint
        venture will be funded entirely by Altair and Bateman, with each having equal
        shareholding and Altair having voting control. We expect the joint venture
        to
        help in marketing the AHPP, particularly in developing countries which have
        little or no local production capacity.
 
 In
        marketing the process, the first step is detailed analysis of the ore to
        be
        processed to ensure it can produce the quality of titanium dioxide required.
        Assuming positive results, this is followed by a process designed to demonstrate
        the feasibility of the overall manufacturing process with a small pilot plant,
        and then, if successful, a larger scale plant. This is the normal course
        for
        establishing a new chemical plant that can ultimately produce in excess of
        100,000 tons of pigment per year. During each of these phases, we expect
        to
        receive consulting and engineering study fees through the ABT joint venture.
        If
        a full plant is constructed, we would expect to begin receiving royalty
        payments.
  Research,
        Testing, Development and Licensing Status
  The
        AHPP
        is substantially developed and, in a test environment, we are able to extract
        titanium from raw materials in order to produce a high quality titanium dioxide
        pigment. The AHPP is not, however, a one-size-fits-all technology and needs
        to
        be customized to the particular needs of any potential licensee. As described
        below, we have entered into a license with Western Oil Sands, Inc.
        (“ **Western** ”)
        with
        respect to the AHPP. In addition to our work with Western, we have submitted
        phased development proposals for the testing and economic evaluation of our
        titanium pigment production technology to several companies. As illustrated
        by
        the description of our license with Western below, any license of the AHPP
        will
        involve various stages of testing and development tailored to the licensee’s
        specific needs. Such licenses may involve incremental payments and development
        services along the way but will lead to significant revenue only if a full-scale
        commercial titanium pigment production facility is constructed.
 
 In
        January 2004, we entered into a license agreement with Western with respect
        to
        its possible use of the AHPP 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 AHPP on heavy minerals derived from oil sands
        in
        Alberta, Canada. The agreement also contemplates a three-phase, five-year
        program pursuant to which the parties will work together to further evaluate,
        develop and commercialize the AHPP. In the first phase of the program, Western
        is expected to spend $650,000 ($500,000 of which is scheduled to be paid
        to
        Altair for work performed) to evaluate the AHPP and confirm that the AHPP
        will
        produce pigment from oil sands. During 2004, we received several bulk samples
        of
        oil sand material from Western, processed them in various configurations
        to
        obtain mineral concentrates, and processed the concentrates using the AHPP
        to
        recover the titanium dioxide. We have now completed in excess of 75% of the
        work
        scope included in phase one with satisfactory results.
 
 In
        October 2005, we entered into a phase one extension agreement with Western
        that
        will extend phase one until December 2006 in order to complete the
        characterization and demonstrate mineral recovery feasibility. A pilot plant
        has
        been constructed to demonstrate mineral recovery and will be used to prepare
        bulk ilmenite concentrates for AHPP pilot plant trials.
 
 5
 Table
            of Contents
  Assuming
        phase one is successful, Western may elect to commence phase two, the
        construction of a demonstration titanium pigment production facility using
        the
        AHPP. If phase two is successful, Western may elect to commence phase three,
        the
        construction and operation of a full-scale commercial titanium pigment
        production facility using the AHPP.
 
 The
        scope
        of the license granted to Western under the agreement will vary with Western’s
        commitment to the project. The initial license, related to use of the AHPP
        on
        heavy minerals derived from oil sands in Alberta, Canada, will terminate
        if
        Western fails to complete phase one and will convert to a non-exclusive license
        if Western commences phase two but fails to complete, or spend at least $25
        million in an effort to complete, phase two.
 
 If
        Western completes phase one and commences phase two, Western’s license will be
        expanded to include the right to use the AHPP for the production of titanium
        dioxide pigment and pigment-related products from oil sands resources, primary
        ore resources and titanium deposits in Canada and Minnesota and for the
        production of titanium dioxide pigment and pigment-related products from
        oil
        sands resources world wide. This expanded license will continue on an exclusive
        basis if Western completes phase two and completes, or spends at least $50
        million in an effort to complete, phase three. This expanded license will
        continue, but on a non-exclusive basis, if Western completes phase two but,
        after spending more than $5 million but less than $50 million on phase three,
        does not complete phase three. If Western does not commence, or spends less
        than
        $5 million with respect to, phase three, the expanded license
        terminates.
 
 If
        commercialization occurs, Western is required to pay Altair royalties based
        on a
        percentage of net sales revenue from any production facility.
  Proprietary
        Rights
  We
        have
        been awarded four U.S. and several 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.
  Competition
 
 Existing
        chloride pigment technologies are guarded by the top tier producers that
        developed the technologies. Licenses are not typically granted by top tier
        companies to emerging nation companies because of the complexity of the process
        and difficulty in extracting revenues from those countries. By contrast,
        we are
        willing to license our AHPP. 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 AHPP. We believe there are no competing new
        technologies to produce titanium dioxide pigment.
  **Advanced
        Materials and Power Systems Initiative**
 Key
          Concepts
 
 Rechargeable
          batteries are made from various materials, each of which has certain
          characteristics or tendencies, depending upon how 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 leakage is referred to as “self discharge” and is a natural
                    tendency of all batteries for which the rate 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.
  6
 Table
                of Contents
 Other
          important factors include the cost, safety, environmental friendliness
          and
          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 a
          hand-held cordless power tool is not very important in a battery designed
          to
          power a cell phone because a cell phone needs very little power; however,
          high
          specific energy 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.
 
 Background
          and Comparison
 
 Prior
          to
          1990, nickel cadmium (“NiCd”) and lead acid (“PbA”) technologies dominated the
          rechargeable battery market. During the 1990’s, nickel metal hydride (“NiMH”)
          and lithium ion rechargeable batteries emerged and currently hold high
          volume
          positions in various markets alongside NiCd and PbA.
 
 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, but charging rates
          must be
          reduced by a factor of 5 to 10 at temperatures below  0°C (32°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 charge after
          moderate periods of storage. More seriously, NiCd batteries are exceedingly
          environmentally unfriendly. The metal cadmium is toxic and causes 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.
  PbA
          batteries are used everyday by anyone who drives an automobile or operates
          a
          wheel chair, electric scooter or golf cart. They are also the battery-of-choice
          for uninterruptible power supplies. PbA is an inexpensive, relatively simple
          to
          manufacture, mature, reliable technology that possesses a relatively low
          self
          discharge rate, and the modern sealed versions need little or no maintenance.
          However, PbA batteries are quite heavy, giving them very poor weight to
          energy
          and power ratios, which limit practical use to stationary and wheeled
          applications. They also suffer from long recharge times and 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
          discharge cycle life, and thermal runaway can occur with improper charging.
          As
          with NiCd batteries, the highly toxic metal, lead, and highly corrosive
          sulfuric
          acid render PbA batteries environmentally unfriendly.
 
 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
          batteries improve upon the energy capacity and power capabilities of NiCd
          (for
          the same size cell) by 30% to 40%. Since they contain only mild toxins,
          NiMH
          batteries are more environmentally friendly than both PbA and NiCd batteries.
          Like NiCd batteries, 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 cycleability,
          possessing a 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 battery cell 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 the hybrid electric vehicle (HEV) 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 PbA. 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 lend to larger power and / or energy densities.
          Lithium ion batteries are stable, charge rapidly, 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.
 
 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 a life of about 3 years. But vehicle lifetimes can be as
          long as
          10 to 15 years and require many hundreds, even thousands, of charge/discharge
          cycles. In addition, conventional lithium ion batteries do not function
          well at
          extremely hot or cold temperatures.
 
 7
 Table
              of Contents
  The
          safety problems inherent in conventional lithium ion batteries are mostly
          explainable in terms of their inability to delivery rapid discharge or
          function
          in extreme temperatures and stem from the use of graphite as the active
          material
          in the batteries’ negative electrode. In a lithium battery environment, graphite
          becomes very reactive with components of the battery’s electrolyte system. Upon
          manufacturing a lithium ion battery and subjecting the battery to its first
          charge/discharge cycle, the electrolyte will partially break down at the
          negative electrode, forming a passivating layer. This layer serves to protect
          the electrode from further electrolyte breakdown, but the layer is highly
          electrically resistant to the passage of electrolyte components (the lithium
          ions) needed to make the battery functional. This in turn limits the discharge
          rates but, more seriously, renders the battery un-chargeable at cold
          temperatures. If charging a cell at severely low temperatures is attempted,
          two
          dangerous conditions may result: (1) lithium plates in sharp projections
          called
          dendrites can form and contact the positive electrode, electrically shorting
          the
          cell and possibly resulting in thermal runaway, and (2) plated metallic
          lithium
          is very reactive with the electrolyte system, which can cause the battery
          to
          enter thermal runaway.
 
 New
          negative electrode materials are needed to solve these problems. In addition,
          new positive electrode materials are needed to address the cycle life and
          cost
          issues associated with current lithium ion technology.
 
 Altair
          Developments
 
 The
          principal advance we have made is in the optimization of nano-structured
          lithium
          titanate spinel oxide (“LTO”) electrode materials that replace graphite
          electrode materials used in the negative electrode of current lithium ion
          batteries. When used with a positive 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%
          of capacity and 10 minute discharges with 90% capacity utilizations.
 
 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 batteries
          described above.
 
 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 cycle life is greatly enhanced using Altair’s LTO.
 
 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 LTO cells. In contrast, common lithium ion technology
          possesses virtually no charging capabilities at this low temperature, and
          the
          other battery types discussed take 10 to 20 times longer to charge.
 
 8
 Table
              of Contents
  Safety
          testing has just been initiated on our lithium ion technology. Initial
          tests,
          including short circuit tests on large format cells, demonstrate the inherent
          safety of the Altair technology. Graphite negative electrode materials
          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 250°C. Our nano structured LTO cells have been heated to 235°C
          and exhibit no dangerous behavior. In addition, our batteries have been
          subjected to forced discharge, over charge, over discharge, nail penetration,
          crush and drop tests and have exhibited no dangerous behavior. Our batteries
          have passed every safety and abuse condition that they have been subjected
          to.
          Especially under the conditions of forced discharge, over charge, over
          discharge, and high temperature abuse testing, conventional lithium ion
          batteries typically fail in a violent mode that includes fire and
          explosion.
 
 All
          rechargeable batteries present a threat to the environment. When recycled
          properly, however, batteries made with nano-structure LTO are expected
          to have a
          lower impact on the environment than existing rechargeable battery types.
 
 On
          the
          negative side, the current generation of batteries made with our nano-structured
          LTO exhibit low energy density. If density is measured by weight, our batteries
          made with our nano-structured LTO have energy densities that are better
          than PbA
          and NiCd batteries and approximately 70% of those of NiMH. Energy densities
          of
          batteries made with our nano-structured LTO are lower than those of traditional
          lithium ion batteries.
 
 The
          next
          steps in the development program call for the optimization of the positive
          electrode materials to complement the work that has been completed on the
          negative electrode. This will result in a matched negative electrode/positive
          electrode pair. In parallel with the next phase of development, work is
          being
          conducted with other organizations to provide an electrolyte that will
          deliver a
          conducting layer consistent with the matched electrodes. This work will
          consist
          of optimizing the electrolyte for conductivity as well as other physical
          properties such as heat dissipation.
 
 Target
          Markets and Marketing Plans/Efforts
 
 According
          to information supplied by Telcordia (subsidiary of Science Applications
          International) the market for rechargeable batteries is approximately $6
          billion, $3 billion of which is taken by lithium ion batteries. These lithium
          ion 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 in automobiles, electric vehicles,
          and
          hybrid automobiles where direct electrical energy for starting and passing
          will
          assist the gasoline engines. Also, the development of fuel cells and solar
          generation systems will require enhanced battery capabilities.
 
 Our
          technology provides a fundamental building block for a new generation of
          rechargeable batteries. Our marketing efforts are focused on developing
          relationships with high volume battery manufacturers who will integrate
          our
          materials into new battery designs. Early stage discussions have taken
          place
          with several manufacturers with a view to developing a joint development
          program
          that will use the Altair electrode materials as the basis for a new generation
          of batteries. These discussions could lead to commercial relationships
          that will
          be characterized by a revenue stream consisting of one of more of development
          funding, materials manufacturing and royalties.
 
 We
          are
          focusing our marketing and development efforts on markets presently dominated
          by
          NiCd or NiMH batteries, such as power tools and automobiles, in which rapid
          charging, long cycle life and the additional power from the rapid discharge
          should prove advantageous. Secondarily, we intend to pursue markets, such
          as
          cell phone batteries, presently dominated by lithium ion batteries, which
          are
          characterized by slow charge and discharge rates and high specific energy.
          Because of the lower specific energy of the current generation of batteries
          made
          with our nano-structured LTO, we believe that initial acceptance of our
          batteries in the small electronics market will be limited, unless and until
          we
          can improve the specific energy of our batteries or persuade producers
          that the
          benefits of extremely rapid recharge exceed the benefits of slow discharge.
 
 9
 Table
              of Contents
  Research,
          Testing and Development
 
 In
          December 2004, we completed work under Phase I of a National Science Foundation
          (“NSF”) grant for development of electrode nanomaterials for next generation
          lithium ion power sources. The results of the research, announced on February
          10, 2005, indicated that lithium ion batteries prepared with nano-structured
          LTO
          negative electrode materials exhibit rapid charge and discharge rates,
          improved
          cycle life performance and a decrease in specific energy density when compared
          to conventional lithium ion, NiCd and NiMH battery materials. In June 2005,
          we
          were awarded a grant of $476,850 from the NSF for Phase II. Phase I work
          was
          designed to optimize the negative electrode materials and Phase II is designed
          to develop positive electrode materials, thus resulting in matched negative
          electrode-positive electrode materials for optimum electrochemical
          performance.
 
 In
          addition to our work under the NSF grants, we have been conducting our
          own
          internal research and development work on advanced battery materials. In
          October
          2005, we significantly expanded our battery initiative projects by adding
          thirteen highly qualified, advanced battery scientists, engineers, manufacturing
          and marketing specialists, several of whom are located at a new facility
          in
          central Indiana. At both this and our Reno facility, we are installing
          manufacturing equipment for the production of prototype lithium ion cells,
          batteries and battery packs in sufficient quantities to demonstrate end-user
          products in power tools, automobiles, trucks and buses. In January 2006,
          our
          battery research and development team successfully completed a testing
          program
          for lithium ion battery cells containing our nano-structured lithium titanate
          electrode materials. The test results demonstrated that the performance
          of the
          lithium ion battery cells exceeded the system-level power requirements
          set forth
          by the U.S. Council for Automotive Research FreedomCAR Energy Storage System
          Performance Goals for hybrid electric vehicles (HEVs), as well as the
          system-level power requirements published by major U.S. automakers. The
          battery
          cells using our nano-structured LTO materials in battery cell tests developed
          for HEV applications demonstrated a useable state-of-charge range twice
          that of
          conventional NiMH batteries presently used in hybrid electric vehicles.
          Nano-structured LTO offers a near-term promise of lithium ion batteries
          that
          exhibit rapid charge and discharge, longer cycle life and more inherently
          safe
          performance than either currently available NiMH or lithium ion batteries.
          These
          results support the feasibility of a power lithium ion battery pack half
          the
          size of those currently being tested for HEV applications.
 
 In
          April
          2005, we signed a partnering agreement with Advanced Battery Technologies,
          Inc.
          (“Advanced Battery”), a U.S. and Chinese-owned company, for the development of
          lithium polymer batteries in China. The agreement covers the incorporation
          of
          our nano-structured LTO electrode materials into Advanced Battery's existing
          polymer battery product lines on a testing and development basis. It
          specifically focuses on development of high power, lithium polymer batteries
          for
          use in electric vehicles where long life cycles and fast charge times are
          desirable. We have provided Advanced Battery with sample nano-structured
          LTO for
          their use in design and development of the batteries. Advanced Battery’s phase I
          testing of batteries using our battery electrodes showed that the
          nano-structured LTO electrode materials are performing as anticipated and
          have
          significantly improved recharging capability. We received an order for
          and have
          shipped 2,200 pounds of lithium titanate spinel electrode nanomaterials
          to
          Advanced Battery for use in their development program for polymer lithium
          ion
          batteries for electric vehicles. These materials are intended for use in
          the
          construction of developmental polymer lithium ion batteries designated
          to power
          one electric bus and one electric sedan. We expect road testing of the
          batteries
          in these vehicles in 2006.
 
 10
 Table
              of Contents
  Proprietary
          Rights
 
 We
          have
          been issued four U.S. patents: (1) “Process for making lithium titanate”, which
          expires in 2022, (2) “Process for making nano-sized and sub-micron sized
          lithium-transition metal oxides”, which expires in 2023, (3) “Method for
          producing mixed metal oxides and metal oxide compounds”, which expires in 2022,
          and (4) “Process for making nano-sized stabilized zirconia”, which expires in
          2022. We have also filed a patent application titled “High Performance Lithium
          Titanium Spinel for Electrode Material” with Ntera. In October 2004, we were
          awarded a European patent for our “Process for Making Lithium Titanate”, a
          product used in the development of lithium ion batteries and super
          capacitors.
 
 Competition
 
 Competing
          technologies are discussed in the “Background and Comparison” subsection above.
          There are presently no commercial products available with the same
          characteristics as our lithium titanate spinel, but others are conducting
          research on similar materials. Based solely on our review of published
          information, it appears that our development work is at a more advanced
          stage
          than others being reported.
  **NanocheckTM**
  We
        have
        developed a compound that has an affinity for certain oxy anions, including
        phosphate and arsenate. We believe the best near-term potential application
        for
        this material is the removal of phosphate from recreational waters, industrial
        waters used for cooling and aquariums to arrest the growth of
        algae.
  Key
        Feature
 
 Nanocheck
        is a lanthanum-based compound that can be used to treat water for the removal
        of
        phosphates. It has no reported human health hazards and works effectively
        in
        existing filtration units without the need of purchasing additional equipment.
 
 The
        management of swimming pool water is a difficult and time-consuming task.
        The
        chemical balance of the water must be carefully monitored to ensure that
        it does
        not become fouled with algae, or grow too much bacteria. Either of these
        will
        make the water smell and look unpleasant, and can be a health hazard. Nanocheck
        is designed to safely deprive algae of the phosphate nutrients required for
        them
        to grow and reproduce; and therefore, in conjunction with a commercial
        sanitizer, Nanocheck reduces or minimizes algae formation.
  Target
        Markets and Marketing Plans/Efforts
 
 We
        are in
        the process of marketing Nanocheck products to companies that already sell
        products into the recreational water treatment market including pool and
        spa
        chemical companies. The marketing effort so far has been focused on the major
        suppliers of chemicals to the recreational water market - swimming pools
        and
        spas, both private and public. These suppliers provide a distribution channel
        that has the potential for rapid market entry. When our potential customers
        complete the necessary testing, and if we are able to enter into a long-term
        relationship with one or more such suppliers, we expect to generate revenue
        in
        the form of royalties and in connection with our supply of key ingredients.
        The
        business relations with these companies will result in revenue to Altair
        from
        royalties and the supply of manufactured Nanocheck. Nanocheck’s ability to bind
        with the phosphate in water and effectively “starve” the algae makes it an ideal
        adjunct to algaecide-based water treatment. As such it is seen as line extension
        for the pool chemical suppliers.
 
 11
 Table
            of Contents
  We
        are in
        discussion with the top three recreational water chemical suppliers. These
        discussions are at various stages of maturity and two of the suppliers are
        actively testing Nanocheck.
  Research,
        Testing and Development
  We
        have
        conducted in-house tests for phosphate removal in swimming pool simulations
        and
        recreational water companies have performed materials and pool testing that
        shows effective phosphate removal, pool water turbidity reduction and good
        phosphate binding kinetics. Larger scale swimming pool tests being performed
        by
        a recreational water company began in mid-August 2004 and are continuing.
        Delays
        occurred, first due to internal issues within the recreational water company
        and
        then due to the effects of hurricanes in the locale where tests were to be
        conducted. As a result, tests are now scheduled through the summer of 2006.
        Negotiations with major pool chemical companies are underway and if testing
        is
        successful and sales agreements are entered into, significant sales of products
        incorporating Nanocheck, if any, may begin in 2006. ****
  Proprietary
        Rights
  We
        have
        filed two U.S. patent applications for the application of this product entitled
        “Rare Earth Compositions and Structures for Removing Phosphates from Water” and
“Ceramic structure for removing toxic elements from water.”
  Competition
 
 Pool
        chemicals are a commodity market with price, merchandising and small functional
        advances providing differentiation. There are already a few other phosphate
        binding products on the market. These products are high maintenance, usually
        requiring weekly service. We believe that Nanocheck offers high phosphate
        binding capacity with a longer service life. Although field trials of Nanocheck
        are still under way, early indications are that it can be added to a swimming
        pool and then left for a month or two without requiring attention.
  **Secondary
        Products and Research and Development Projects in Progress**
  **Thermal
        Spray Grade Powders (TSGP)**
  We
        have
        developed thermal spray grade nanomaterial powders that can be applied on
        the
        surface of metals by standard thermal “gunning” techniques. We have sold
        approximately one ton of our powders to F.W. Gartner Thermal Spraying Company
        for thermal application onto heavy-duty ball valves. Ball valves made of
        solid
        titanium alloys have been introduced to control the flow and containment
        of hot
        acidic slurry solutions in high pressure acid leach technologies applied
        to
        metal extraction of nickel/cobalt ores. To extend the life of these critical
        components, a ceramic coating is applied via a thermal spray process. These
        coatings must be impervious to the acidic solution and provide protection
        against wear from the abrasive solid particles.
 
 12
 Table
            of Contents
  Our
        nanomaterials coatings possess enhanced toughness and increased hardness;
        these
        features contribute to superior abrasive wear resistance over the conventional
        coating of the same material. The nanomaterial coatings also demonstrate
        improved porosity over standard thermal spray powders making them more resistant
        to corrosive attack. We believe that improvements will enable longer periods
        between maintenance, repairs and examinations of these critical components,
        therefore improving the economics of the industrial application. Such thermal
        spray products could be used in a variety of harsh environment applications
        such
        as aerospace propulsion systems, blades and vanes, medical applications,
        textile
        and paper machinery, boilers for power plants, waste incinerators, oil and
        gas
        industry, etc.
 
 In
        November 2003, we contracted the National Research Council of Canada to
        demonstrate, test and evaluate our powders and prepare specification sheets
        of
        standard thermal spray gunning instructions to advise specialty thermal spray
        shops how to apply our material. The goal of the project was to produce titania
        coatings by thermal spraying using nano-structured titania powders developed
        by
        Altair and compare and contrast to conventional titania powders. The coatings
        were characterized and evaluated to determine various characteristics, including
        porosity and abrasion resistance. The report, completed in the first quarter
        of
        2004, concluded that our powders were more abrasion resistant than conventional
        powders. Since that time, we have prepared sample packages of our thermal
        spray
        grade powders for customer testing.
 
 F.W.
        Gartner Thermal Spraying Company, Mogas Industries, Inc. and Perpetual
        Technologies researchers have reported on the use of our nanomaterial powders
        in
        tests to determine the bond strength, corrosion and abrasion resistance and
        the
        porosity after applying ours and competitors’ materials on metal using Vacuum
        Plasma Spray and Atmosphere Plasma Spray. The results of these researchers’
tests indicate that our novel coatings possess enhanced toughness and increased
        hardness; these features contribute to its superior abrasive wear resistance
        over the conventional coating of the same material. Ball valves with the
        new
        coatings have been introduced into different high pressure acid leach autoclave
        installations over the past two years.
 
 We
        are
        currently in discussions with a potential distributor that has the capability
        to
        test and qualify our thermal spray products, fund the development of new
        products and market the same. The distributor is currently testing two of
        our
        products. We believe the market for each TSGP 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.
 
 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.
  **Nanosensors
        Program**
  In
        September 2003, we entered into an agreement with Western Michigan University
        (“WMU”) to provide research services and materials to support research involving
        a technology used in the detection of chemical, biological and radiological
        agents. The teaming/research agreement with WMU, funded by the Department
        of
        Energy (“DOE”), provided for total payments to Altair of $356,500 over a
        two-year period. In September 2004, the DOE awarded a stage 2 contract for
        the
        project under which we will continue joint development work for the design,
        synthesis and characterization of nanosensors for chemical, biological and
        radiological agents. Altair will receive an additional $672,000 over the
        two-year term of the stage 2 contract. WMU and Altair have a teaming agreement
        partnership for seeking Federal support for nanotechnology research and
        development and will utilize the new grant funding equally.
 
 13
 Table
            of Contents
  In
        the
        fiscal year 2006 congressional direction, Altair was awarded $2.5 million
        for
        DOE research grants using our nanoparticle technology. Of this amount, $1
        million will be committed to the continuance of the nanosensor project with
        WMU
        and most of the remainder will be utilized in the development and testing
        of
        battery materials. We expect that contracts for the nanosensor project will
        be
        in place by mid-2006 and we anticipate that prototype hand-held sensors will
        enter the development and demonstration phase in the second quarter of
        2006.
  **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 DOE 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 will receive $750,000
        under a grant award from the DOE for collaborative research and development
        work
        beginning October 1, 2005 and continuing through December 2006.
 
 The
        development work is expected to involve, 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. We expect to be able
        to use
        our nanomaterials synthesis technology to develop low cost processing for,
        and
        further improve the performance of, the thin film electrodes in these solar
        cells. Our efforts will focus on iron oxide-based materials and include
        development of film deposition methods and synthesis routes for the optimized
        metal oxide nanomaterials.
  **Catalyst
        Support and Electrode Structures for Titanium Metals**
 
 In
        January 2004, we entered into a contract with Titanium Metals Corporation
        (“TIMET”) to provide custom oxide feedstocks for a novel, four-year, titanium
        metal research program funded by the Department of Defense, Defense Advanced
        Research Projects Agency (“DARPA”). We became a subcontractor for the DARPA
        program with responsibility to design and develop a titanium oxide electrode
        structure and supply TIMET optimized titanium oxide feedstock to produce
        50
        pounds of titanium metal per day in batch production demonstrations. The
        DARPA
        program sought to lower the cost of titanium metal and titanium metal alloys
        through the use of a new process for making titanium metal (the “FFC Cambridge
        Process”) and thereby enable a broader market use and lower the cost of military
        applications. During the course of the contract, which has now expired, we
        provided TIMET with specified quantities of feedstock materials as their
        preferred supplier. We currently are seeking alternative sponsors and
        partners.
 
 According
        to the AMPTIAC Quarterly, a Department of Defense-sponsored publication,
        current
        global production of titanium metal is approximately 50,000 tons per year
        at a
        market value of $600 million. AMPTIAC estimates that, due to the current
        state
        of manufacturing, titanium is produced at only about 1/20th of its current
        potential world volume. It is widely believed that a reduction of cost in
        the
        manufacturing process will expand the use of titanium metal in a wider range
        of
        applications that include lightweight armored military vehicles, the manufacture
        of automotive components and components for utility plants, oil and gas
        drilling, and lightweight and durable consumer goods. Our intent is to develop
        a
        suitable process for making the titanium dioxide electrodes used by the FFC
        Cambridge Process but not ultimately to manufacture the electrodes. We would
        most likely license the technology for manufacture of the titanium dioxide
        electrodes to producers of metal using the FFC Cambridge Process or their
        suppliers.
 
 14
 Table
            of Contents
  We
        have
        been awarded one US patent protecting the catalyst and electrode structure
        technologies entitled “Method for producing catalyst structures”, which expires
        in 2021.
 
 **Photocatalytic
        Materials**
 
 Our
        proprietary high-photocatalytic nano titanium dioxide product, irradiated
        by
        ultraviolet light, accelerates eradication of most airborne bacteria, viruses,
        mold, spores and fungi. Ultraviolet light has long been used in hospitals
        and
        other critical environments to kill bacteria, viruses and other contaminants
        and
        its benefits are proven and well-known. The oxidizing effect produced by
        ultraviolet light and Altair’s nano titanium dioxide converts chemical and
        biological contaminants into benign elements - carbon dioxide, water vapor
        and
        other materials.
 
 Altair
        has sold its high-photocatalytic nano titanium dioxide product for use in
        air
        cleaning devices manufactured and distributed by Genesis Air, Inc. (“Genesis
        Air”). The Genesis Air device is being tested in dozens of poor air quality
        environments including casinos, meat packing plants, military quarters, bowling
        alleys and the like and is designed to simply fit into existing heating,
        ventilation and air conditioning systems.
  **Our
        Life Sciences Business**
  **Primary
        Products**
  **RenaZorb®
        Products** **
  In
        the
        second quarter of 2002, we initiated research and development efforts directed
        toward the utilization of nanomaterials in the pharmaceuticals industry.
        In July
        2002, we announced the development of a new active pharmaceutical ingredient
        (“API”) for the treatment of hyperphosphatemia (elevated serum phosphate levels)
        in patients undergoing kidney dialysis, as well as a new drug delivery system
        using inorganic ceramic nanomaterials. This API, given the name RenaZorb,
        showed
        excellent capacity for phosphate removal in laboratory tests using standard
        in-vitro (laboratory) procedures.
 
 In
        January 2005, we signed a license agreement with Spectrum Pharmaceuticals,
        Inc.
        (“Spectrum”) 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. Additional
        payments by Spectrum are contingent upon the achievement of various milestones
        in the testing, regulatory approval and sale of RenaZorb.
 
 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;
 
 ·
                milestone
                    payments upon obtaining approval to market RenaZorb from the
                    FDA and
                    similar regulatory agencies in Europe and Japan;
 
 ·
                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.
  Assuming
          the testing, development and regulatory approvals of RenaZorb proceed at
          the
          rate reasonably expected by the Company, the aggregate value of all the
          first
          year payments and all potential stock premiums, milestone payments and
          other
          payments to the Company over the first 5-7 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.
 Key
        Features
  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, but 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
  15
 Table
            of Contents
   Target
        Markets
 
 Our
        pharmaceutical product RenaZorb was developed to treat elevated phosphate
        levels
        in patients with chronic kidney disease, especially in patients with end
        stage
        renal disease. According to information published by AnorMED, the worldwide
        market for phosphate binders for chronic renal failure patients is approximately
        $400 million to $600 million annually.
  Research,
        Testing and Development
  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. 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. We believe, however, that the FDA’s approval of Fosrenol, a
        chemically related drug, by the FDA and other regulatory bodies may accelerate
        the approval process for RenaZorb but note that 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.
 
 We
        have
        supplied Spectrum with test quantities of RenaZorb in order to conduct in-vivo
        animal testing. The
        tests
        were completed in September 2005 and, although we have been informed that
        the
        results were positive and we have received a copy of the test results, Altair
        has not received the milestone payment of 100,000 shares of Spectrum
        Pharmaceuticals, Inc. stock called for in the agreement.  Spectrum asserts
        that the milestone has not been met. In order to resolve this disagreement
        and
        the damage claims of both Altair and Spectrum, Altair and Spectrum entered
        the
        early stages of a dispute resolution process as required by our license
        agreement.
  In
        November 2005, the respective chief executive officers of the two companies
        participated in a meeting at which a total settlement of all issues in dispute
        was reached. The settlement included the agreement by Spectrum to pay Altair
        100,000 shares of Spectrum Pharmaceuticals, Inc. stock and an additional
        40,000
        shares of Spectrum Pharmaceutical, Inc. stock for payment of certain Altair
        claims and rights to certain improvements made by Altair in the preparation
        and
        performance of lanthanum carbonate chemistries.
  In
        January 2006, Spectrum notified us that it would not honor the settlement
        agreement reached at the November 2005 meeting. Altair and Spectrum re-initiated
        the dispute resolution process as required by our license agreement. This
        process may delay the product development process and our receipt of our
        next
        milestone payment and could lead to the payment or receipt of monetary
        damages.
  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,
        and
        also aluminum hydroxide-based products such as Gaviscon manufactured by Glaxo
        Smith Kline, both of which are available over the counter, as well as Renagel
        manufactured by Genzyme, which is available only by prescription. In addition,
        Fosrenol, another lanthanum based active pharmaceutical agent developed by
        Shire
        Pharmaceuticals of the UK, received approval from the United States FDA in
        October 2004.
 
 16
 Table
            of Contents
  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 is 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.
 
 The
        prescription phosphate binder Renagel is relatively expensive (approximately
        $2,800 per patient per year), has a high dosage requirement (2 x 800 mg or
        4 x
        400 mg capsules/tablets or more three times per day) and water intake is
        required. The most common side effects related to the use of Renagel include
        nausea (7% of patients), constipation (2% of patients), diarrhea (4% of
        patients), gas or bloating (4% of patients) and heartburn or indigestion
        (5%
        patients).
 
 Fosrenol
        is marketed as large chewable tablets with a proposed dosage of 1.5 to 3.0
        grams
        active drug per day. As with all medicines, Fosrenol has some side effects,
        primarily associated with the gastrointestinal system including bloating,
        GI
        upset and vomiting. It has been reported that the use of Fosrenol increases
        serum lanthanum levels compared with levels in patients taking a placebo.
        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 (“LCTH”), 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.
        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.
 
 Both
        RenaZorb and Fosrenol involve the binding of phosphate by lanthanum compounds.
        In fact, the end product of the binding mechanism is identical; lanthanum
        phosphate is the product formed. Based on laboratory tests conducted by Altair
        comparing RenaZorb with LCTH, the API in Fosrenol, RenaZorb RZB 012, one
        of the
        two drug candidates, required 30% less drug to bind the same amount of phosphate
        and shows less lanthanum going into solution in simulated stomach fluid at
        various pH values. In addition, in Altair’s testing, using methods published by
        AnorMed, RenaZorb reacts with phosphate more rapidly. In 20 minute simulated
        stomach acid tests conducted by Altair, RenaZorb absorbed approximately 140
        mg of
        phosphate and LCTH absorbed approximately 60 mg of phosphate.
  **Renalan** **
 
 During
        2004, we recognized that companion animals (cats and dogs), like humans,
        also
        suffer from hyperphosphatemia during chronic renal failure. We determined
        that
        this condition could be treated with similar chemistry to RenaZorb, so we
        initiated a project to develop a similar product. We have named this potential
        product Renalan. The RenaZorb licensing agreement with Spectrum applies only
        to
        the human market, thus leaving us free to license the chemistry into the
        animal
        health market. We are actively pursuing a partner to license the product
        and
        supply this to the companion animal market. The product could be sold either
        as
        a drug candidate requiring regulatory approval, or it could be marketed as
        a
        food supplement which potentially would provide a faster route to market.
        There
        is no currently established product on the market to specifically address
        hyperphosphatemia in animals; however a new over-the-counter product called
        Epakitin has just been released in the United States which appears to target
        the
        complaint.
  17
 Table
            of Contents
  Key
        Features
  Renalan
        is a highly-active, lanthanum-based nanomaterial with low intestinal solubility
        and excellent in-vitro phosphate binding. Animal testing of RenaZorb/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 hyperphosphatemia in companion
                  animals
 ·
              Palatable
                  with manageable 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 (CKD). According to information published in the Textbook of Veterinary
        Internal Medicine by Stephen J. Ettinger, DVM and Edward C. Feldman, DVM,
        the
        dog CKD population is variously estimated at between 0.5% and 7% of population,
        resulting in a worldwide CKD population of between 0.75 million and 10.5
        million
        dogs. They go on to state that the cat CKD population is estimated at between
        1.6% and 20% of total population, resulting in a worldwide CKD 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 CKD
        population of approximately 4.2 million and a dog CKD population of about
        1.2
        million.
  Research,
        Testing and Development
 
 Renalan
        could be marketed either as a drug or as a food supplement. As a drug, the
        product would enter an FDA approval process that would be expected to take
        two
        years to complete; however timing for FDA and other regulatory approval of
        drug
        candidates is unpredictable. As a food supplement the product requires no
        regulatory approval, and so has the potential to be in the market more rapidly
        than as a drug; however, we would be unable to make certain effectiveness
        claims
        if it were marketed as a food product. Any future animal health company partner
        would determine the marketing strategy for the product, and therefore the
        level
        of additional testing required before the product can enter the market. We
        are
        in discussions with various animal health companies regarding future development
        of Renalan.
  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
  There
        are
        no well established products on the market that specifically target
        hyperphosphatemia in companion animals. 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.
  
 18
 Table
            of Contents
   **Secondary
        Products and Research and Development Projects in Progress**
  **TiNano®
        Spheres**
  Our
        proposed chemical delivery system involves depositing active chemicals on
        or
        inside hollow spheres made of titanium dioxide and other metal oxide materials,
        including nanomaterials.
 
 Because
        of the early stage of development of this chemical delivery system, we are
        unable to state with any certainty how (or if) such a delivery system would
        be
        used and, if used, what the uses for such system would be and what the
        comparative advantages, side effects and other aspects of such a delivery
        system
        would be. Nevertheless, we believe that the following uses of a
        nanomaterials-based chemical delivery system are feasible:
 
 ·
              New
                  delivery forms for existing drugs;
 ·
              Delivery
                  methods for new drugs;
 ·
              Enhanced
                  delivery of hard to dissolve drugs;
 ·
              Delivery
                  of sustained release drugs; and
 ·
              Delivery
                  of dual action drugs
 
 Altair’s
        hollow sphere structures may be able to deliver active chemicals or drugs
        in a
        sustained release fashion because the active component could be “mounted” on
        both the outside surface and inside the hollow ball structure. The dissolution
        and availability of the surface-mounted active component would likely be
        different than the active component inside the hollow spheres. Material inside
        the hollow structure will possibly be released more slowly compared to
        surface-mounted material **.** An
        additional feature of Altair’s nanomaterials-based hollow structures is that two
        different active substances could be mounted, one inside the hollow spheres
        and
        another on the surface. This allows the possibility for dual action
        pharmaceuticals to be developed using this technology.
 
 During
        2005, we started early investigation of the potential of TiNano Spheres by
        engaging in collaborative research projects with other companies. This research
        is at an early stage, and it is premature to determine the market potential
        for
        this technology.
 
 We
        have
        filed two patent applications regarding this field including: (1)
“Pharmaceutical composition and structure containing rare earth porous
        particles” and (2) “Pharmaceutical composition with controlled surface
        area.”
 
 **Dental
        Materials**
 
 During
        2005, we engaged a potential commercial partner to determine market suitability
        for dental materials utilizing our nano-sized zirconia. We expect the results
        from this research during 2006 and at that time we will be able to determine
        market potential.
 
 
 19
 Table
            of Contents
  **Government
        Regulation and Environmental Concerns**
  **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. 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 exploration,
        mining and processing sites.
 
 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
        ("Hazardous Substances"). 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.
 
 **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 and life sciences segments is
        presented in Note 14, 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 14, Business Segment Information, of Notes to Consolidated Financial
        Statements in Part IV.
 
 
 20
 Table
            of Contents
  **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 Altair Nanomaterials, Inc. were direct
        wholly-owned subsidiaries of Altair US Holdings, Inc., while Tennessee Valley
        Titanium, Inc. remained a wholly-owned subsidiary of MRS.
 
 Fine
        Gold
        was acquired by Altair in April 1994. Fine Gold has earned no operating revenues
        to date. Fine Gold acquired the intellectual property associated with the
        Altair
        jig, a fine particle separation device for use in minerals processing, in
        1996.
        Altair intends that Fine Gold will hold and maintain jig technology rights,
        including patents.
 
 MRS
        was
        incorporated by Altair 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. All mining claims
        have now been abandoned. MRS currently holds, directly or indirectly, all
        of
        Altair’s interest in the Tennessee mineral property, where we formerly held
        mineral leases on approximately 14,000 acres. We have terminated the mineral
        leases on all but approximately 1,300 acres as of December 31, 2005 and will
        terminate these remaining leases as soon as possible. The wholly-owned
        subsidiary of MRS, Tennessee Valley Titanium, does not have any assets or
        operations.
 
 Altair
        Nanomaterials, Inc. was incorporated in 1998 as a wholly-owned subsidiary
        of MRS
        and holds all of the Company’s interest in our nanomaterials and titanium
        dioxide pigment technology and related assets.
 
 **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 which 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.
 
 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.
 
 Since
        1996, we have leased mineral property near Camden, Tennessee and owned the
        rights to the Altair jig. However, we are disposing of the Tennessee mineral properties and limiting our expenditures
        on
        our centrifugal jig to patent maintenance expenses.
 
 In
        November 1999, we acquired all the rights of BHP Minerals International,
        Inc.
        (“ **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.
 
 21
 Table
            of Contents
 
 We have experienced an operating loss in every year of operation. In the
        fiscal
        year ended December 31, 2005, we experienced a net loss of
        $9,937,212.
 
 **Employees**
  The
        business of Altair is currently managed by Dr. Alan J. Gotcher, President
        and
        Chief Executive Officer of the Company, Mr. Edward Dickinson, Chief Financial
        Officer, Mr. Douglas Ellsworth, Senior Vice President, Dr. Bruce Sabacky,
        Vice
        President of Research and Engineering and Mr. Roy Graham, Senior Vice President.
        We have 56 additional regular employees and one full-time temporary employee
        in
        research and development. We have employment agreements with Messrs. Gotcher,
        Dickinson, Ellsworth, Sabacky and Graham.
 
 During
        2006, we may hire up to 25 additional employees, primarily in research and
        development and
        operations. Such additional hiring, if it occurs, will be dependent upon
        business conditions.
 
 **Available
        Information**
 
 The
        Company files 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 .
  The
        Company makes available, free of charge on its Internet website located at www.altairnano.com ,
        its
        most recent Annual Report on Form 10-K, its most recent Quarterly Report
        on Form
        10-Q, any current reports on Form 8-K filed since the Company’s 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, the Company provides electronic or paper copies of its
        filings
        free of charge upon request.
  **Forward-looking
        Statements**
  **This
        Form 10-K 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 Form 10-K and our other filings with the Commission.
        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 Form 10-K 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.**
 
 22
 Table
            of Contents
  ***Item
        1A. Risk Factors***
  ***We
        may continue to experience significant losses from
        operations*** .
 
 We
        have
        experienced a loss from operations in every fiscal year since our inception.
        Our
        losses from operations were $10,481,853 in 2005 and $6,904,955 in 2004. We
        will
        continue to experience a net operating loss until, and if, the applications
        of
        our nanomaterials and titanium dioxide pigment technology begin generating
        revenues in excess of our operating expenses. Even if any or all applications
        of
        the nanomaterials and titanium dioxide pigment technology begin generating
        significant revenues, the revenues may not exceed our costs of production
        and
        operating expenses. We may not ever realize a profit from
        operations.
  ***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 similar patents or defects in the
                  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 stock 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 have a material adverse effect on our business.
 
 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.
  23
 Table
            of Contents
  ***Our
        competitors have more resources than we do, which may give them a competitive
        advantage.***
 
 We
        have
        limited financial 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.
  ***We
        may not be able to generate substantial revenues from the licensing of
        RenaZorb*** ***.***
 
 On
        January 28, 2005, we entered into a license agreement with Spectrum
        Pharmaceuticals, Inc. under which we granted Spectrum the exclusive worldwide
        rights to develop, market and sell RenaZorb, a potential drug candidate for
        patients with kidney disease, for human therapeutic and diagnostic applications.
        Under the terms of the license, we will not generate substantial recurring
        revenues unless and until Spectrum completes clinical testing of
        RenaZorb  and
        applies for and receives marketing approval from the FDA and similar regulatory
        agencies worldwide, begins marketing products containing RenaZorb and
        experiences substantial, sustained market penetration with such products.
        There
        are substantial risks associated with that process, including the following:
 
 ·
              further
                  testing conducted by Spectrum may indicate that RenaZorb is less
                  effective
                  than existing products, is unsafe, has significant side effects
                  or is
                  otherwise not viable;
 ·
              Spectrum
                  may be unable to obtain FDA or other regulatory approval of RenaZorb
                  for
                  technical, political or other reasons or, even if it obtains such
                  approval, may not obtain such approval on a timely
                  basis;
 ·
              products
                  containing RenaZorb may not be accepted in the market for various
                  reasons,
                  including questions about its efficacy, safety and side effects
                  or because
                  of poor marketing by Spectrum;
 ·
              Spectrum
                  may terminate the license agreement, experience financial or other
                  problems or otherwise fail to effectively test, seek approval for
                  and
                  market RenaZorb;
 ·
              the
                  arbitration currently ongoing (see Item 3, Legal Proceedings) could
                  seriously delay commercialization of RenaZorb:
                  and
 ·
              prior
                  to or following regulatory approval, superior products may be developed
                  and introduced into the market.
 
 If
        any of
        the foregoing risks, or other risks associated with developing pharmaceutical
        products were to occur, we would not receive substantial, recurring revenue
        from
        our license with Spectrum.
 
 ***Our
        lithium titanate spinel, with potential application in the rechargeable battery
        market, has not been commercialized and may not generate significant
        revenue.***
  We
        are
        still testing and developing our lithium titanate spinel nanomaterial
        technology, which has potential applications in rechargeable batteries. Although
        we have entered a partnering agreement with Advanced Battery Technologies,
        Inc.
        for the development of lithium polymer batteries in China and have supplied
        them
        with nanomaterials for  their
        use
        in design and development of the batteries, the project is in the early stages
        and substantial design, development and testing work remains to be done.
        We have
        not entered into written partnering or development agreements with any other
        battery manufacturers or end users. Even if Advanced Battery or other potential
        partners are successful in producing battery products with our nanomaterial
        technology:
  24
 Table
            of Contents
 ·
              batteries
                  utilizing the technology may not exhibit expected charge rates,
                  discharge
                  rates or durability run time or other features when used in real
                  world
                  applications;
 ·
              batteries
                  incorporating the technology may not meet the distinct needs of
                  potential
                  customers, applications or industries or otherwise prove competitive
                  with
                  existing technologies or technologies under development on account
                  of
                  technical limitations, such as a short run time between charges;
 ·
              marketing
                  and branding efforts by us, a potential strategic partner or others
                  may be
                  insufficient to attract a sufficient number of customers;
                  and
 ·
              competitors
                  may have developed, or be in the process of developing, batteries
                  or
                  materials that are better suited to our target markets than batteries
                  using our materials.
 
 ***We
        may not benefit from licenses to use our technology for titanium dioxide
        pigment
        production.***
 
 Because
        of our relatively small size and limited resources, we do not plan to use
        our
        titanium processing technology for large-scale production of titanium dioxide
        pigments. We have entered into discussions with various minerals and materials
        companies about licensing our technology to such entities for large-scale
        production of titanium dioxide pigments. To date, we have entered into a
        license
        agreement with only one such entity, Western Oil Sands, Inc. Under our license
        agreement with Western Oil Sands, we expect to receive a limited amount of
        revenue during the early testing and development phase of the agreement but
        will
        receive significant royalties only if Western Oil Sands and licensees of
        Western
        Oil Sands determine in their discretion, after testing at a demonstration
        plant,
        to construct or license the construction of a full-scale titanium pigment
        production facility. If we enter into other license agreements, we expect
        that,
        as with the Western Oil Sands agreement, we would not receive significant
        revenues from such licenses unless and until feasibility testing yielded
        positive results and the licensee determined, in its discretion, to construct
        and operate a titanium pigment production facility.
 
 ***We
        may not be able to sell nanoparticles produced using our nanomaterials and
        titanium dioxide pigment technology.***
 
 We
        plan
        to use the nanomaterials and titanium dioxide pigment technology to produce
        titanium dioxide nanoparticles for various applications. Titanium dioxide
        nanoparticles and other products we intend to initially produce with the
        nanomaterials and titanium dioxide pigment technology generally must be
        customized for a specific application working in cooperation with the end-user.
        We are still testing and customizing our titanium dioxide nanoparticle products
        for various applications and have no long-term agreements with end-users
        to
        purchase any of our titanium dioxide nanoparticle products. We may be unable
        to
        recoup our investment in the nanomaterials and titanium dioxide pigment
        technology and nanomaterials and titanium dioxide pigment equipment for various
        reasons, including the following:
 
 ·
              products
                  utilizing our titanium dioxide nanoparticle products, most of which
                  are in
                  the research or development stage, may not be completed or, if
                  completed,
                  may not be readily accepted by expected
                  end-users;
 ·
              we
                  may be unable to customize our titanium dioxide nanoparticle products
                  to
                  meet the distinct needs of potential customers;
 ·
              potential
                  customers may purchase from competitors because of perceived or
                  actual
                  quality or compatibility
                  differences;
 ·
              our
                  marketing and branding efforts may be insufficient to attract a
                  sufficient
                  number of customers; and
 ·
              because
                  of our limited funding, we may be unable to continue our development
                  efforts until a strong market for nanoparticles develops.
  ***Our
        costs of production may be too high to permit
        profitability*** ***.***
 
 We
        have
        not produced any pigments, nanoparticles or other products using our
        nanomaterials and titanium dioxide pigment technology and equipment on a
        sustained commercial basis. Our actual costs of production, or those of our
        licensees, may exceed those of competitors. Even if our costs of production
        are
        lower, competitors may be able to sell titanium dioxide and other products
        at a
        lower price than is economical for us or our licensees.
  25
 Table
            of Contents
  ***We
        have issued a $3,000,000 note to secure the purchase of the land and the
        building where our nanomaterials and titanium dioxide pigment assets are
        located.***
 
 In
        August
        2002, we entered into a purchase and sale agreement with BHP Minerals
        International Inc. to purchase the land, building and fixtures in Reno, Nevada
        where our nanomaterials and titanium dioxide pigment assets are located.
        In
        connection with this transaction, 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.
        The
        first payment of $600,000 of principal plus accrued interest was due and
        paid
        February 8, 2006. Additional payments of $600,000 plus accrued interest are
        due
        annually on February 8, 2007 through 2010. If we fail to make the required
        payments on the note, BHP has the right to foreclose and take the property.
        If
        this should occur, we would be required to relocate our primary operating
        assets
        and offices, causing a significant disruption in our business.
  ***We
        may not be able to raise sufficient capital to meet future obligations.***
 
 As
        of
        March 3, 2006, we had approximately $19.5 million in cash, an amount sufficient
        to fund our ongoing operations for approximately 2-3 years at
        current working capital expenditure levels .
        However, we may use our existing capital sooner than projected in connection
        with capital expenditures, transactions, litigation or other events that
        are not
        currently reflected in our projections. We may also use more capital than
        projected as we expand our research, development and marketing efforts. Unless
        we experience a significant increase in revenue, we will need to raise
        additional capital in the future in order to sustain our ongoing operations,
        continue unfinished testing and additional development work and, if certain
        of
        our products have been commercialized, produce and market such 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 shares of common stock;
 ·
              our
                  financial results, particularly the amount of revenue we are generating
                  from operations;
 ·
              the
                  amount of our capital needs;
 ·
              the
                  market’s perception of nanotechnology and/or chemical
                  stocks;
 ·
              the
                  economics of projects being pursued;
                  and
 ·
              the
                  market’s perception of our ability to generate revenue through the
                  licensing or use of our nanoparticle technology for pharmaceutical,
                  pigment production, nanoparticle production and other
                  uses.
 
 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, and may be forced to discontinue
        operations.
  ***Operations
        using the nanomaterials and titanium dioxide pigment technology or our Tennessee
        mineral property may lead to substantial environmental
        liability.***
 
 Virtually
        any prior or future use of the nanomaterials and titanium dioxide pigment
        technology is subject to federal, state and local environmental laws. In
        addition, we have constructed a pilot plant on, and are in the process of
        reclaiming mineral property that we leased in Tennessee. Under such 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.
  26
 Table
            of Contents
  ***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 (i) 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 (ii) 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
        Dr.
        Alan J. Gotcher, our Chief Executive Officer and President, Edward Dickinson,
        our Chief Financial Officer, Douglas Ellsworth and Roy Graham, our Senior
        Vice
        Presidents and Dr. Bruce Sabacky, our Vice President of Research and
        Engineering. The loss or unavailability of any or all of these individuals
        could
        have a material adverse effect on our business and the market price of our
        shares of common stock. We have key man insurance on the lives of Dr. Gotcher
        and Dr. Sabacky. We do not have agreements requiring any of our key personnel
        to
        remain with our company.
  ***We
        may issue substantial amounts of additional shares without stockholder
        approval.*** ******
 
 Our
        articles of incorporation authorize the issuance of an unlimited number of
        shares of common stock 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 shares of common stock would further dilute the percentage
        ownership of our company held by existing stockholders.
  ***We
        have a*** ***substantial
        number of warrants and options outstanding and may issue a significant number
        of
        additional shares upon exercise thereof.***
 
 As
        of
        March 3, 2006, there were outstanding warrants to purchase up to 1,318,556
        shares of common stock and options to purchase up to 2,541,200 shares of
        common
        stock. **** The
        existence of such warrants and options, and any additional warrants and options
        we issue in the future, may hinder future equity offerings, and the exercise
        of
        such warrants and options may further dilute the interests of all shareholders.
        The shares of common stock issuable upon the exercise of many of our outstanding
        warrants are subject to resale registration statements, and all of our options
        are subject to a registration statement on Form S-8. Accordingly, future
        resale
        of the shares of common stock issuable on the exercise of such warrants and
        options in most cases occurs immediately after exercise and may have an adverse
        effect on the prevailing market price of the shares of common stock.
  ***The
        market price of our common stock may increase or decrease dramatically at
        any
        time for any or no reason.***
 
 The
        market price of our common stock, like that of the securities of other early
        stage companies, may be 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, u ncertainty
        regarding the viability of the nanomaterials and titanium dioxide pigment
        technology, 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. In addition, the market price
        for
        our common stock may be affected by various factors not directly related
        to our
        business or future prospects, including the following:
 
 27
 Table
            of Contents
 ·
              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 stock. 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 stock in the foreseeable
        future.
  ***We
        are subject to various regulatory regimes, and may be adversely affected
        by
        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 our execution of our business plan.   In addition,
        through such audits, inquiries and investigations, we or a regulator have
        from
        time to time determined, and may in the future determine, that we are out
        of
        compliance with one or more governing rules or laws.  Remedying such
        non-compliance may divert 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.  Any
        charge, and particularly any determination, that we had materially violated
        a
        governing law would likely have a material adverse effect on the market price
        of
        our stock, our ability to execute our business plan and our ability to retain
        and attract qualified management.
 
 ***Item
        1B.******Unresolved
        Staff Comments***
  None
  28
 Table
            of Contents
  ***Item
        2.******Properties***
  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
        80,000
        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%. The first payment of $600,000 of principal plus accrued
        interest on such promissory note was due and paid February 8, 2006.
 
 In
        addition, we lease 4,744 square feet of office and laboratory space in the
        Flagship Enterprise Center Building located at 2701 Enterprise Drive in
        Anderson, Indiana. The
        space
        is used for the production of prototype batteries and battery cells. The
        lease
        was entered into in October 2005 for an initial term of three years with
        the
        option for subsequent one-year renewals. Total
        rent for the leased premises, including normal utilities, real estate taxes
        and
        common area fees is scheduled to be $7,907 per month during the first year
        (increasing to $8,302 per month during the second year and $8,697 per month
        during the third year). This rent is net of a 20% rent subsidy offered by
        local
        government entities. In exchange for that rent subsidy, the Company has 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. In addition to the government rent subsidy, Landlord has authorized
        a
        $100,000 rental credit, the net effect of which is to giving the Company
        free
        rent during the first year of the Lease.
 
 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
        believe that the existing offices and test facilities of Altair and its
        subsidiaries are adequate for our current needs. In the event that alternative
        or additional office space is required, we believe we could obtain additional
        space on commercially acceptable terms.
 
 As
        mentioned above in *Subsidiaries* ,
        we have
        terminated the mineral leases on all but approximately 1,300 acres of our
        Tennessee mineral property and intend to terminate the remaining leases as
        soon
        as possible. Remediation work on the properties has been substantially
        completed. Certain re-vegetation measures, the planting of small trees, cannot
        be completed until late winter 2006. Once completed, the applicable regulatory
        authorities will review and, if acceptable, approve completion of remediation
        work and a multi-year monitoring plan. Future remediation costs are not expected
        to be significant.
 
 ***Item
        3.******Legal
        Proceedings***
  In
        June
        2005, the Company filed a Complaint against Rudi E. Moerck, former President
        and
        a director of the Company, alleging breach of his Employee Confidential
        Information and Inventions Agreement (the “Information Agreement”) and seeking
        declaratory relief, injunctive relief and damages. Specifically, the Company
        requested that Mr. Moerck be ordered to assign his rights in certain patent
        applications to the Company, return all Company proprietary information in
        his
        possession to the Company and to delete/destroy Mr. Moerck’s copies of all such
        information. Mr. Moerck filed a timely Answer to the Complaint. Subsequently,
        Mr. Moerck executed and delivered the requested patent application assignments.
        The Company executed a settlement agreement with Mr. Moerck, which the Company
        believes will fully preserve and protect the Company’s interests in its
        proprietary information. Prior to the execution of the Settlement Agreement,
        Mr.
        Moerck provided the Company with several Offers of Judgment against him in
        this
        case. The Company accepted an Offer of Judgment against Mr. Moerck, where
        he
        agreed that he breached his Employee Confidential Information and Inventions
        Agreement and he has complied with all terms of the Offer of Judgment, including
        the return of all Company Confidential Information. This suit has now officially
        been concluded.




29
 Table
          of Contents


On
        July 29, 2005, the Company was served with a
        complaint in the matter of Louis Schnur v. Al Moore, Altair Nanotechnologies,
        Inc. and Does 1 through 10, filed in the U.S. District court, Central District
        of California. On October 13, 2005 the Company filed a counterclaim (the
        "Company's Counterclaim) against Mr. Schnur for declaratory relief, asking
        the
        Court to issue a declaration that: (1) Altair did not improperly disclose
        material, non-public information in violation of any statute; (2) Altair
        did not breach its fiduciary duties to its shareholders; and (3) Altair had
        no duty or ability to prevent an individual from purchasing Altair common
        stock
        from an individual shareholder.  Mr. Schnur timely filed an Answer to the
        Company's Counterclaim on November 2, 2005. On
        February 23, 2006, The Company announced that the lawsuit titled Louis Schnur
        v.
        Al Moore, Altair Nanotechnologies Inc. and Does 1 through 10 filed on or
        about
        July 26, 2005, has been dropped by Mr. Schnur with prejudice and without
        any
        monetary remuneration to Mr. Schnur. Also, Mr. Schnur, Mr. Moore and Altair
        Nanotechnologies Inc. have signed a Mutual Agreement that there will be no
        additional lawsuits pertaining to the allegations made in the Louis Schnur
        v. Al
        Moore, Altair Nanotechnologies, and Does 1 through 10 suit. Additionally
        the
        Mutual Agreement prevents any lawsuit or claim over anything that has occurred
        or any allegations made prior to the signing of the Mutual Agreement. The
        Company reiterates that Altairnano management had not breached its fiduciary
        duties to its shareholders and that the lawsuit was completely without merit.
        This suit has now officially been concluded without any finding of wrongdoing
        by
        Altair and with no monetary award or settlement made to Mr. Schnur.
 
 The
        Company and Spectrum Pharmaceuticals, Inc. (“Spectrum”) are parties to an
        arbitration arising out of a License Agreement between the parties. After
        Altair
        notified Spectrum of several claims it had for compensation under the Agreement,
        Spectrum formally initiated the arbitration by filing its claims
        for unspecified breach of contract damages on September 30, 2005. The
        Company answered by denying all of Spectrum’s claims for relief and bringing
        counterclaims of its own, including specific performance of a milestone payment
        for 100,000 shares of Spectrum common stock. On November 28, 2005, the chief
        executive officers of the parties and their counsel met and reached an oral
        settlement agreement that, despite Spectrum's claims for $2,000,000 in
        unspecified damages, resolved all issues in the arbitration without
        any payment of funds by either company and a payment to Altair of 40,000
        shares of Spectrum stock. The oral agreement was reduced to writing by the
        parties’ legal counsel, but Spectrum has refused to sign the written agreement.
        Spectrum now continues to seek monetary damages based upon alleged breaches
        of
        the License Agreement. The Company is requesting that the arbitration panel
        enforce the parties’ oral settlement agreement, or, in the alternative, dismiss
        all of Spectrum’s claims and award the Company damages in its
        counterclaims.
 
 The
        arbitration is occurring under the auspices of the American Arbitration
        Association (“AAA”). The AAA has appointed a three-person panel of arbitrators,
        and has stated that the arbitration will take place in Irvine, California.
        No
        proceedings have yet occurred in front of the AAA panel. Because the arbitration
        is in its early stages, the likelihood of an unfavorable outcome and an estimate
        of the amount or range of potential loss is not known.
 
 ***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 2005 fiscal year.
  30
 Table
            of Contents
 
 **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, 2004**
              **Low**
              
              **High**1st
                  Quarter
              $2.20
              
              $4.402nd
                  Quarter
              $2.05
              
              $3.583rd
                  Quarter
              $0.95
              
              $2.374th
                  Quarter
              $1.50
              
              $3.17**Fiscal
                  Year Ended December 31, 2005**
              **Low**
              
              **High**1st
                  Quarter
              $1.93
              
              $6.522nd
                  Quarter
              $2.53
              
              $4.383rd
                  Quarter
              $2.40
              
              $3.404th
                  Quarter
              $1.93
              
              $2.82
 
 The
        last
        sale price of our common shares, as reported on the Nasdaq Capital Market
        on
        March 3, 2006, was $3.65 per share.
  **Outstanding
        Shares and Number of Shareholders** ****
  As
        of
        March 3, 2006, the number of common shares outstanding was 59,352,519 held
        by
        approximately 500 holders of record. In addition, as of the same date, we
        have
        reserved 3,606,000 common shares for issuance upon exercise of options that
        have
        been, or may be, granted under our employee stock option plans and 1,318,556
        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.
  31
 Table
            of Contents
  **Securities
        Authorized for Issuance under Equity Compensation Plans**
  We
        have
        stock option plans administered by the Board of Directors that provide for
        the
        granting of options to employees, officers, directors and other service
        providers of the Company. All option plans have been approved by security
        holders. The following table sets forth certain information with respect
        to
        compensation plans under which equity securities are authorized for issuance
        at
        December 31, 2005:
  **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**
                2,533,200
                $2.69
                3,568,000**Equity
                    compensation plans not approved by security
                    holders**
                None
                N/A
                None**Total**
                2,533,200
                $2.69
                3,568,000
  **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,
        2005.
  **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
        Taxation 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
        which
        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.
 
 32
 Table
            of Contents
 
 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 Stock 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 non-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.
 
 ***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 (“ **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,
              
              2005
              
              2004
              
              2003
              
              2002
              
              2001STATEMENTS
                  OF OPERATIONSRevenues
              
              $
              2,806,535
              
              $
              1,151,892
              
              $
              72,851
              
              $
              253,495
              
              $
              42,816Operating
                  expenses
              
              $
              (13,288,388
              )
              $
              (8,056,847
              )
              $
              (5,858,061
              )
              $
              (8,110,206
              )
              $
              (6,064,348
              )Interest
                  expense
              
              $
              (207,189
              )
              $
              (194,180
              )
              $
              (454,415
              )
              $
              (1,151,388
              )
              $
              (1,881,077
              )Interest
                  income
              
              $
              750,306
              
              $
              96,229
              
              $
              1,879
              
              $
              2,105
              
              $
              148,980Gain
                  (Loss) on foreign exchange
              
              $
              1,524
              
              $
              626
              
              $
              (193
              )
              $
              (835
              )
              $
              (402
              )Loss
                  on extinguishment of debt
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (914,667
              )
              $
              -Net
                  Loss
              
              $
              (9,937,212
              )
              $
              (7,002,280
              )
              $
              (6,237,939
              )
              $
              (9,921,496
              )
              $
              (7,754,031
              )Basic
                    and diluted net loss per common share
              
              $
              (0.17
              )
              $
              (0.14
              )
              $
              (0.19
              )
              $
              (0.40
              )
              $
              (0.39
              )Cash
                    dividends declared per common share
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -BALANCE
                  SHEET DATAWorking
                  capital
              
              $
              21,482,766
              
              $
              7,663,264
              
              $
              3,565,039
              
              $
              (204,365
              )
              $
              (81,154
              )Total
                  assets
              
              $
              33,464,016
              
              $
              15,547,021
              
              $
              11,659,754
              
              $
              8,914,405
              
              $
              10,853,243Current
                  liabilities
              
              $
              (2,427,543
              )
              $
              (376,773
              )
              $
              (397,141
              )
              $
              (604,503
              )
              $
              (714,689
              )Long-term
                  obligations
              
              $
              (2,400,000
              )
              $
              (2,880,311
              )
              $
              (2,686,130
              )
              $
              (3,905,040
              )
              $
              (1,462,060
              )Net
                  shareholders' equity
              
              $
              (28,636,473
              )
              $
              (12,289,937
              )
              $
              (8,576,483
              )
              $
              (4,404,862
              )
              $
              (8,676,494
              )
 
 
  33
 Table
            of Contents
  ***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 company, 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 two divisions,
        a
        Performance Materials Division and a Life Sciences Division. Our research,
        development, production and marketing efforts are currently directed toward
        six
        market applications that utilize our proprietary technologies:
 
 ·
              Advanced
                  Materials
 o
              The
                  marketing and licensing of titanium dioxide pigment production
                  technology.
 o
              The
                  marketing and production of nano-structured ceramic powders for
                  thermal
                  spray applications.
 o
              The
                  development of nano-structured ceramic powders for nano-sensor
                  applications.
 o
              The
                  development of titanium dioxide electrode structures in connection
                  with
                  research programs aimed at developing a lower-cost process for
                  producing
                  titanium metals and related alloys. Development of this product
                  is largely
                  inactive as we seek a business
                  partner.
 ·
              Air
                  and Water Treatment
 o
              The
                  development, production and sale of photocatalytic materials for
                  air and
                  water cleansing.
 o
              The
                  marketing****of
                  Nanocheck products for phosphate binding to prevent or reduce algae
                  growth
                  in recreational and industrial
                  water.
 ·
              Alternative
                  Energy
 o
              The
                  development, production and sale of nano-structured lithium titanate
                  spinel, lithium cobaltate and lithium manganate spinel materials
                  for high
                  performance lithium ion batteries.
 o
              The
                  design and development of power lithium ion battery cells, batteries
                  and
                  battery packs as well as related design and test services.
 o
              The
                  development of materials for photovoltaics and transparent electrodes
                  for
                  hydrogen generation and fuel cells.
 ·
              Lanthanum
                  based Pharmaceutical Products
 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
                  testing of Renalan, a test-stage active pharmaceutical ingredient,
                  which
                  is designed to be useful in the treatment of elevated serum phosphate
                  levels in companion animals suffering from chronic renal
                  disease.
 ·
              Chemical
                  Delivery Products
 o
              The
                  development of TiNano Spheres, which are rigid, hollow, porous,
                  high
                  surface area ceramic micro structures that are derived from Altair’s
                  proprietary process technology for the delivery of chemicals, drugs
                  and
                  biocides.
 ·
              Biocompatible
                  Materials
 o
              The
                  development of nanomaterials for use in various products for dental
                  implants, dental fillings and dental products, as well as biocompatible
                  coatings on implants.
 
 34
 Table
            of Contents
  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
        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) provide research involving a
        technology used in the detection of chemical, biological and radiological
        agents, (2) license and evaluate our pigment production process for the
        production of titanium dioxide  pigment
        and pigment-related products from titanium-bearing oil sands, (3) supply
        nano-sized anode and cathode materials for design and development of high
        capacity lithium ion battery and super capacitor applications, and (4) provide
        research utilizing nanotechnology processes for the production and
        commercialization of solar-based hydrogen technologies. In addition, we have
        entered into a licensing agreement for RenaZorb, our potential pharmaceutical
        product, and we have made product sales consisting principally of battery
        materials and thermal spray products. 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  licensee
        in obtaining FDA approval for the drug, and the success of our marketing
        efforts
        with respect to both product sales and technology licenses.
 
 **General
        Outlook**
 
 We
        have
        generated net losses in each fiscal year since incorporation. In fiscal 2005,
        we
        generated our first licensing revenues when we licensed RenaZorb to Spectrum.
        Revenues from product sales, commercial collaborations and contracts and
        grants
        increased significantly in 2005 but operating expenses also increased as
        we
        added employees and committed additional funds to our customer contracts,
        battery initiative, pigment process technology and sales and marketing efforts. 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 advanced battery
        materials to be a source of such higher-margin revenues. Consequently, during
        2005, we greatly expanded the scope of our battery initiative by (1) hiring
        thirteen highly qualified advanced battery scientists, engineers, manufacturing
        and marketing specialists, (2) leasing office, laboratory and production
        space
        in Indiana, and (3) acquiring test and production
        equipment.
 
 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:
 
 ·
              We
                  must continue the development work on our advanced battery materials,
                  produce sufficient quantities of batteries and battery cells for
                  test
                  purposes, obtain satisfactory test results and successfully market
                  the
                  materials. Toward that end, we have hired additional employees,
                  are
                  constructing test and production facilities and are purchasing
                  equipment.
                  Our intent is to initially market our battery materials to the
                  automotive
                  industry where we must be able to demonstrate to prospective customers
                  that our lithium battery materials offer significant advantages
                  over
                  existing technologies.
 
 ·
              Spectrum
                  must begin the testing and application processes necessary to receive
                  FDA
                  approval of our RenaZorb product. Animal testing of RenaZorb was
                  completed
                  in September 2005 and, although we have been informed that the
                  results
                  were positive and we have received a copy of the test results,
                  Altair has
                  not received the milestone payment of 100,000 shares of Spectrum
                  Pharmaceuticals, Inc. stock called for in the agreement. Altair
                  and
                  Spectrum entered the early stages of a dispute resolution process
                  as
                  required by our license agreement. This process will likely delay
                  the
                  product development process and our receipt of our next milestone
                  payment.
   35
 Table
            of Contents
 
 ·
              Licensing
                  and product purchase commitments for our Nanocheck swimming pool
                  product
                  are currently under discussion. Successful completion of potential
                  license
                  agreement(s) and product purchase commitments are essential for
                  the
                  commercialization of the Nanocheck product, which could bring
                  manufacturing and licensing revenue in 2006.
 
 ·
              The
                  initial phase of work for the Western Oil Sands license agreement
                  has been
                  expanded and will run through December 31, 2006. We must successfully
                  complete the initial phase, and Western Oil Sands must decide to
                  proceed
                  with phase 2 work for this project to continue to move toward
                  commercialization.
 
 ·
              In
                  April 2005, we entered into a joint venture with Bateman Engineering
                  NV
                  (“Bateman”) to combine our hydrochloride pigment process technology with
                  Bateman’s engineering, design and construction expertise. The joint
                  venture, Altair-Bateman Titania, Inc., will offer customers an
                  integrated
                  resource for technology development, engineering, design and construction
                  of pigment processing projects. We anticipate that the joint venture
                  will
                  be funded entirely by Altair and Bateman, with each having equal
                  shareholding and Altair having voting control. We expect to make
                  a
                  significant capital investment in the venture and, in order to
                  recover our
                  investment, we must be successful in licensing the pigment process
                  technology.
 
 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 $7,357,843 at December 31, 2004
        to
        $23,054,074 at December 31, 2005. In early February 2005, the market price
        of
        our common shares increased significantly. As a result, 2,839,281 warrants
        and
        379,000 options were exercised, resulting in cash proceeds to us of $4,903,487.
        During the remainder of 2005, additional warrants and stock options were
        exercised, resulting in additional cash proceeds of $1,753,980. Additionally,
        on
        February 14, 2005, we sold 5,000,000 of our common shares which had been
        previously registered in a shelf registration for net proceeds to us of
        approximately $19.3 million.
 
 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 $7,833,268 in 2005, and we expect this amount to remain
        approximately the same in 2006. We currently have contracts in place that
        are
        expected to generate approximately $1,453,000 of revenues in 2006, and we
        expect
        to substantially add to this amount 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 Nanocheck,
        thermal spray, battery material and other products.
        Cash outflows will increase in 2006 due primarily to staff additions, operating
        expense increases and increased capital expenditures. During
        2005, we began making significant expenditures for our battery initiative,
        added
        staff and equipment for the manufacture of nanoparticle products and increased
        our sales and marketing efforts. In 2006, we intend to significantly increase
        spending for the battery initiative and pigment process development. We
        estim ate
        that
        our current cash and short-term investments balance is sufficient to support
        our
        operations for approximately 2-3 years at projected revenue and expenditure
        levels.
 
 36
 Table
            of Contents
 
 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 recent public offering of securities, we
        do
        not presently have any plans to pursue additional debt or equity financing
        during 2006 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 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 principal payment of $600,000 plus accrued
        interest was due and paid on February 8, 2006. Future payments of principal
        and
        interest are due annually on February 8, 2007 through 2010.
 
 **Capital
        Commitments and Expenditures**
 
 The
        following table discloses aggregate information about our contractual
        obligations including notes payable, mineral lease payments, contractual
        service
        agreements, facilities lease payments and unfulfilled purchase orders, and
        the
        periods in which payments are due as of December 31, 2005:
 
 **Less
                  Than**
              
              
              
              
              
              **After****Contractual
                  Obligations**
              
              **Total**
              
              **1
                  Year**
              
              **1-3
                  Years**
              
              **4-5
                  Years**
              
              **5
                  Years**Notes
                  Payable
              
              $
              3,000,000
              
              $
              600,000
              
              $
              1,200,000
              
              $
              1,200,000
              
              $
              -Interest
                  on notes payable
              
              
              525,000
              
              
              105,000
              
              
              294,000
              
              
              126,000
              
              
              -Mineral
                  Leases*
              
              
              86,386
              
              
              81,586
              
              
              4,800
              
              
              -
              
              
              -Contractual
                  Service Agreements
              
              
              789,631
              
              
              777,131
              
              
              12,500
              
              
              -
              
              
              -Facilities
                  Leases
              
              
              206,872
              
              
              31,626
              
              
              175,246
              
              
              -
              
              
              -Unfulfilled
                  Purchase Orders
              
              
              1,208,662
              
              
              1,208,662
              
              
              -
              
              
              -
              
              
              -Total
                  Contractual Obligations
              
              $
              5,816,551
              
              $
              2,804,005
              
              $
              1,686,546
              
              $
              1,326,000
              
              $
              -*
                  Although we expect to terminate all mineral leases as soon as is
                  practicable, the obligations are included here because they are
                  not yet
                  terminated.
 
 The
        major
        capital expenditures during 2005 were $1,480,000 for construction of dry
        rooms
        and purchase of equipment for the battery initiative, $356,000 for equipment
        for
        the UNLV solar hydrogen project, $275,000 for production equipment, $198,000
        for
        pigment production equipment, $113,000 for new accounting software and network
        equipment and $106,000 for equipment for the WMU nanosensor project. At December
        31, 2005, we had $1,195,000 of outstanding commitments for capital additions,
        of
        which approximately 90% are for the battery initiative.
   37
 Table
            of Contents
  
 **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, stock-based compensation, revenue recognition,
        overhead allocation, allowance for doubtful accounts 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, 2005, the carrying value of these assets was $8,746,543,
                  or
                  26% 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.
 
 ·
              Stock-Based
                  Compensation. We have three stock option plans which provide for
                  the
                  issuance of common stock options to employees and service providers.
                  Although SFAS No. 123,*Accounting
                  for Stock Based Compensation*,
                  encourages entities to adopt a fair-value-based method of accounting
                  for
                  stock options and similar equity instruments, it also allows an
                  entity to
                  continue measuring compensation cost for stock-based compensation
                  for
                  employees and directors using the intrinsic-value method of accounting
                  prescribed by Accounting Principles Board (“APB”) Opinion No. 25,*Accounting
                  for Stock Issued to Employees*.
                  We have elected to follow the accounting provisions of APB 25 and
                  to
                  furnish the pro forma disclosures required under SFAS 123 for employees
                  and directors, but we also issue warrants and options to non-employees
                  that are recognized as expense when issued in accordance with the
                  provisions of SFAS 123. We calculate compensation expense under
                  SFAS 123
                  using a modified Black-Scholes 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 2 of Notes to Consolidated
                  Financial Statements, are appropriate and reasonable. As explained
                  in Note
                  2 to the Consolidated Financial Statements, the Financial Accounting
                  Standards Board has issued a revision to SFAS 123 (“SFAS 123R”) that
                  eliminates the alternative of applying the intrinsic value measurement
                  provisions of APB 25. We are required to adopt SFAS 123R no later
                  than
                  January 1, 2006. Although we have not yet quantified the effects
                  of
                  adoption, it is expected that the new standard will result in significant
                  additional expense depending upon the nature and amount of stock-based
                  compensation awards which may be
                  granted.
   38
 Table
            of Contents
 
 ·
              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.  During 2005, our
                  revenues were derived from four sources: license fees, commercial
                  collaborations, contract research and development and product sales. 
                  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 at the time the purchaser
                  has
                  accepted delivery of the product. 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.
 
 ·
              Overhead
                  Allocation. Facilities overhead, which is comprised primarily of
                  occupancy
                  and related expenses, is initially recorded in general and administrative
                  expenses and then allocated monthly to research and development
                  expense
                  based on labor costs. Facilities overheads 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 collectibility 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.
 
 ·
              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.  The Company has 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, 2005.  Management has,
                  therefore, established a full valuation allowance against its net
                  deferred
                  income tax assets as of December 31,
                  2005.
  
 39
 Table
            of Contents
  **Results
        of Operations**
  **Fiscal
        Year 2005 vs. 2004**
 
 Revenues
        increased by $1,654,643 in 2005 over 2004, while operating expenses increased
        by
        $5,231,541. As a result, our loss from operations increased by $3,576,898,
        from
        $6,904,955 in 2004 to $10,481,853 in 2005.
 
 In
        January 2005, we licensed Renazorb to Spectrum and received $695,000 of license
        revenues, the first license revenues received by Altair.
 
 Contract
        and grant revenues increased from $591,890 in 2004 to $1,136,439 in 2005,
        principally as a result of billings under an agreement with the University
        of
        Nevada, Las Vegas Research Foundation that was entered into in November 2004.
        Revenues in connection with this agreement increased by approximately $460,000
        from 2004 to 2005.
 
 Commercial
        collaborations revenues increased from $552,499 in 2004 to $825,723 in 2005
        due
        to increased billings to Western Oil Sands for design and construction of
        a
        pilot plant and increased staff time spent on the project.
 
 Product
        sales increased from $7,503 in 2004 to $149,373 in 2005 as a result of sales
        of
        battery materials and thermal spray materials.
 
 Research
        and development (“R&D”)
        expense increased by $2,884,328, from $2,189,150 in 2004 to $5,073,478 in
        2005.
        We made a significant resource commitment to the battery initiative project
        beginning in early 2005 and in addition, during the fourth quarter of 2005,
        we
        hired thirteen employees with extensive scientific, engineering, manufacturing
        and marketing experience in the battery industry. As a result, expenditures
        for
        the battery initiative increased by $1,298,660 in 2005. We also increased
        our
        commitment to pigment process technology development with a resulting increase
        in expenditures of $256,914. Expenditures for contract and grant work increased
        primarily as a result of new grants received in late 2004 and in 2005.
        Expenditures under the National Science Foundation grant for development
        of
        advanced battery materials increased by $121,388 in 2005, expenditures under
        the
        UNLV Research Foundation grant for development of solar hydrogen generation
        cells increased by $170,412 and expenditures under the Western Michigan
        University grant for development of nanosensors increased by $59,690 in 2005.
        The scope of work under phase 1 of the Western Oil Sands contract was expanded
        in 2005 and we also constructed a pilot plant for the project. As a result,
        charges under the contract increased by $256,050 in 2005. In April 2005,
        we
        entered into a joint venture with Bateman Engineering NV to promote the
        development of the pigment process technology and we incurred $136,403 of
        expenses during the year in connection with the venture. The remaining increase
        in R&D expenditures of approximately $584,000 was incurred for management,
        facilities, equipment and other support functions for R&D.
  40
 Table
            of Contents
 
 Sales
        and
        marketing expenses increased by $1,204,544, from $335,221 in 2004 to $1,539,765
        in 2005. The increase is due to payment of a $500,000 fee to RBC Capital
        Markets
        in connection with the RenaZorb licensing agreement, increased payroll expense
        resulting from the addition of five new employees and increased business
        development activities.
 
 General
        and administrative expenses increased by $944,892, from $4,626,562 in 2004
        to
        $5,571,454 in 2005. Consulting costs incurred to comply with the Sarbanes-Oxley
        Act increased by $632,010 in 2005; legal fees associated with patent work
        and
        general corporate matters increased by $454,485; stock option compensation
        expense and deferred compensation expense associated with restricted stock
        issuances, both non-cash items, increased by $390,566; rents paid for additional
        laboratory space increased by $156,000; utilities increased by $68,106 due
        primarily to increased production and R&D activity; payroll expense
        increased by approximately $100,000 due mainly to staff additions and increased
        labor overhead costs and recruiting, and relocation expense increased by
        $96,902
        as a result of staff additions. These increases were partially offset by
        a
        decrease in investor relations expense of $687,709 resulting from a
        cutback
        in our investor relations programs, and a decrease in general consulting
        of
        $260,587.
 
 Interest
        income increased by $654,077, from $96,229 in 2004 to $750,306 in 2005 due
        to
        the significant increase in cash available for investment that was generated
        through the sale of common shares and the exercise of warrants and options
        in
        early 2005.
  **Fiscal
        Year 2004 vs. 2003**
 
 Our
        revenues increased significantly from $72,851 in 2003 to $1,151,892 in 2004
        as a
        result of new customer contracts we entered into under which we provided
        research and development work on a variety of projects.
 
 Cash
        used
        in operations increased by $1,615,302 from $4,004,805 in 2003 to $5,620,108
        in
        2004 due to increased R&D and general and administrative (“G&A”)
        expenses. We added staff in R&D in order to meet the workload created by new
        customer contracts and we added staff in G&A primarily to meet the
        requirements of the Sarbanes-Oxley Act. Other increases in these expenses
        are
        discussed below.
 
 Operating
        losses increased from $5,785,210 in 2003 to $6,904,955 in 2004. Although
        revenues increased significantly in 2004, this increase was more than offset
        by
        increases in R&D and G&A expenses.
 
 Revenues
        from commercial collaborations increased by $524,803, from $27,696 in 2003
        to
        $552,499, in 2004. Revenues in 2003 were derived from two customers. In late
        2003 and during 2004, we entered into new contracts which generated the
        substantial increase in revenues. Our commercial collaborations included
        projects to (1) provide
        custom oxide feedstocks for a titanium metal research program funded by the
        Department of Defense, (2) license and evaluate our pigment production process
        for the production of titanium dioxide  pigment
        and pigment-related products from titanium-bearing oil sands, (3) develop
        advanced aerospace materials, and (4) evaluate our pigment production process
        for the production of titanium dioxide pigment from titanium-bearing
        minerals.
 
 Revenues
        from contracts and grants increased by $555,337, from $36,553 in 2003 to
        $591,890, in 2004. We had one customer contract in place during the last
        half of
        2003, and we entered into two additional contracts during 2004. Our contracts
        and grants revenues were generated by projects to (1) provide research involving
        a technology used in the detection of chemical, biological and radiological
        agents, (2) supply nano-sized anode and cathode materials for design and
        development of high capacity lithium ion battery and super capacitor
        applications, and (3) provide research utilizing nanotechnology processes
        for
        the production and commercialization of solar-based hydrogen
        technologies.
  41
 Table
            of Contents
  Increased
        customer contract work was the primary driver behind the increase in R&D
        expenses in 2004. R&D labor costs increased by $339,410 in 2004 due to the
        addition of four R&D employees, the cost of temporary employees doing
        R&D work, salary increases for existing employees and an increase in the
        cost of employee benefit plans. RenaZorb development expenses increased by
        $157,300 in 2004 as a result of animal testing, laboratory and other costs.
        Out-of-pocket costs for customer projects increased by $220,819 in 2004 due
        to
        the increase in the amount of customer contract work being done. These increases
        were partially offset by a decrease in stock option expense allocable to
        R&D
        of approximately $264,000 as a result of a reduction in value of repriced
        stock
        options. Repriced stock options are revalued at each reporting date based
        on the
        market price of our common shares on that date. Any increase or decrease
        in the
        value of the options is recorded in the accounts. We also experienced a decrease
        in development expenses for other products of approximately $60,000 and a
        decrease in minerals R&D of approximately $224,000. During
        2004, our
        board
        of directors made the decision to dispose of the Tennessee mineral properties.
        In accordance with this, we began terminating the mineral leases and prepared
        plans for remediation of the property and sale of the pilot plant. As of
        December 31, 2004, we had terminated the mineral leases on 4,750 acres out
        of a
        total of approximately 8,700 acres originally under lease.
 
 Sales
        and
        marketing expenses increased by $120,843, from $214,378 in 2003 to $335,221
        in
        2004, primarily as a result of additional labor costs for time spent on sales
        and marketing activities.
 
 Our
        general and administrative expenses increased by $1,825,111, from $2,801,451
        in
        2003 to $4,626,562 in 2004. G&A labor increased by $483,161 in 2004 due to
        salary increases, employee bonuses, an increase in the cost of employee benefit
        plans and the net addition of three new employees. Investor relations expenses
        increased by $305,681 in 2004 as a result of increased investor relations
        programs aimed at increasing investor awareness of Altair. In 2004, we incurred
        an expense of $235,000, representing the value of common shares issued to
        a
        shareholder in connection with an agreement with a shareholder resolving
        various
        issues, including claims for reimbursement for payments allegedly made by
        the
        shareholder for and on behalf of the Company and a dispute over registration
        rights of certain common shares owned by the shareholder. Consulting fees
        increased by $270,000 in 2004, primarily as a result of consultants hired
        to
        assist with marketing and product development in both the performance materials
        and life sciences divisions. Legal expenses increased by $257,467 in 2004,
        due
        to patent costs associated with performance materials and life sciences
        products, and a settlement agreement involving a shareholder. Accounting
        fees
        increased by $123,897 in 2004, primarily as a result of costs associated
        with
        the Sarbanes-Oxley Act. General office expenses increased by $172,258 in
        2004,
        primarily as a result of additional purchases of office supplies and equipment
        as well as higher costs for utilities, telephone, postage and printing. Director
        fees and expenses increased by $108,579 in 2004 due to the addition of two
        non-employee directors and an increase in the fees paid to directors. Insurance
        expense increased by $64,872 in 2004 as a result of increased premiums for
        liability insurance. Shareholder information expenses increased by $43,031
        in
        2004 due to annual report printing and mailing costs; the number of shareholders
        owning our stock increased substantially in 2004. These increases were partially
        offset by a decrease in stock option expense of approximately $194,000 which
        occurred due to a reduction in value of repriced stock options.
 
 Interest
        expense decreased by $260,235, from $454,415 in 2003 to $194,180 in 2004.
        The
        decrease is due to the payoff of our note payable to Doral 18, LLC in September
        2003.
 
 Interest
        income increased by $94,350, from $1,879 in 2003 to $96,229 in 2004, as a
        result
        of increased invested cash balances.
 
 
 42
 Table
            of Contents
  ***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 2004
        and
        2005 were 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, 2005 and 2004****(Unaudited)****Quarter
                  Ended**
              
              **Quarter
                  Ended**
              
              **Quarter
                  Ended**
              
              **Quarter
                  Ended****March
                  31**
              
              **June
                  30**
              
              **September
                  30**
              
              **December
                  31****Year
                  Ended December 31, 2005:**Revenues
              
              $
              1,027,580
              
              $
              502,881
              
              $
              585,405
              
              $
              690,669Operating
                  Expenses
              
              $
              3,325,584
              
              $
              2,554,426
              
              $
              2,939,565
              
              $
              4,468,813Net
                  Loss
              
              $
              (2,245,959
              )
              $
              (1,919,078
              )
              $
              (2,176,826
              )
              $
              (3,595,349
              )Loss
                  per Common Share: (1)Basic
                  and Diluted
              
              $
              (0.04
              )
              $
              (0.03
              )
              $
              (0.04
              )
              $
              (0.06
              )**Year
                  Ended December 31, 2004:**Revenues
              
              $
              139,749
              
              $
              154,233
              
              $
              346,907
              
              $
              511,003Operating
                  Expenses
              
              $
              1,822,763
              
              $
              2,283,269
              
              $
              1,766,962
              
              $
              2,183,853Net
                  Loss
              
              $
              (1,710,757
              )
              $
              (2,154,032
              )
              $
              (1,440,324
              )
              $
              (1,697,167
              )Loss
                  per Common Share: (1)Basic
                  and Diluted
              
              $
              (0.04
              )
              $
              (0.04
              )
              $
              (0.03
              )
              $
              (0.03
              )(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-5 through F-27
        of
        this Form 10-K.
  ***Item
        9.******Changes
        in and Disagreements with Accountants on Accounting and Financial
        Disclosure.***
 
 The
        information called for by this item was previously reported on a Current
        Report
        on Form 8-K filed with the SEC on August 24, 2005 which discloses the
        termination of our engagement of Deloitte & Touche LLP and on a Current
        Report on Form 8-K filed with the SEC on September 30, 2005 which discloses
        the
        engagement of Perry-Smith LLP as the Company's accountants.
 No
          report
          of Deloitte & Touche LLP on the financial statements of the Company for the
          fiscal years ended December 31, 2003 or December 31, 2004 contained an
          adverse
          opinion or a disclaimer of opinion or was qualified or modified as to
          uncertainty, audit scope, or accounting principles **.**
 
 During
          the fiscal years ended December 31, 2003 and December 31, 2004, and during
          the
          interim period between January 1, 2005 and the date of the Form 8-K filed
          on
          August 24, 2005, there were no disagreements with Deloitte & Touche LLP on
          any matter of accounting principles or practices, financial statement
          disclosure, or auditing scope or procedure which disagreement, if not resolved
          to the satisfaction of Deloitte & Touche LLP, would have caused it to make
          reference to the subject matter of the disagreements in its reports. There
          were
          no “reportable events,” as described in Item 304(a)(1)(v) of Regulation S-K,
          during the fiscal years ended December 31, 2003 and December 31, 2004,
          and from
          January 1, 2005 to the date of this Report.
  43
 Table
            of Contents
 ***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, 2005. Based upon this
        evaluation, our chief executive officer and our chief financial officer have
        concluded that, as of December 31, 2005, 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.
 
 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, 2005. 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, 2005, 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.
 
 44
 Table
            of Contents
  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 2005
        that
        has materially affected, or is reasonably likely to materially affect, our
        internal control over financial reporting.
 
 ***Item
        9B.******Other
        Information***
  None.
 
 **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.
  45
 Table
            of Contents
  **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
 
 ·
              Report
                  of Former Independent Registered Public Accounting
                  Firm
 
 ·
              Consolidated
                  Balance Sheets, December 31, 2005 and
                  2004
 
 ·
              Consolidated
                  Statements of Operations for Each of the Three Years in the Period
                  Ended
                  December 31, 2005
 
 ·
              Consolidated
                  Statements of Shareholders’ Equity and Comprehensive Loss for Each of the
                  Three Years in the Period Ended December 31,
                  2005
 
 ·
              Consolidated
                  Statements of Cash Flows for Each of the Three Years in the Period
                  Ended
                  December 31, 2005
 
 ·
              Notes
                  to Consolidated Financial
                  Statements
 
 2.  *Financial
        Statement Schedule* .
        Not
        applicable.
 
 3.  *Exhibit
        List* .
  **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. **
  
 46
 Table
              of Contents
 **Exhibit
                    No.**
                
                **Description**
                
                **Incorporated
                    by Reference/Filed Herewith (and Sequential Page
                    #)**4.2
                
                Amended
                    and Restated Shareholder Rights Plan dated October 15, 1999,
                    between the
                    Company and 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 adopted by shareholders
                    on May 10,
                    1996
                
                Incorporated
                    by reference to the Company's Registration Statement on Form
                    S-8, File No.
                    333-33481filed with the SEC on July 11, 1997.10.2
                
                1998
                    Altair International Inc. Stock Option Plan adopted by Shareholders
                    on
                    June 11, 1998
                
                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
                
                Incorporated
                    by reference to the Company’s Registration Statement on Form S-8, File No.
                    333-125863, filed with the SEC on June 16, 2005.10.4
                
                Installment
                    Note dated August 8, 2002 (re Edison Way property)
                
                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, 2003.10.5
                
                Trust
                    Deed dated August 8, 2002 (re Edison Way property)
                
                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, 2003.10.6
                
                Technology
                    License Agreement dated September 29, 2003, with Bateman Luxembourg
                    SA
                    *
                
                Incorporated
                    by reference to the Company’s Quarterly Report on Form 10-Q filed with the
                    SEC on November 14, 2003.10.7
                
                License
                    Agreement for Altair TiO2 Pigment Technology between Altair
                    Nanotechnologies, Inc. and Western Oil Sands, Inc. *
                
                Incorporated
                    by reference to the Company’s Current Report on Form 8-K filed with the
                    SEC on February 3, 2004. **10.8
                
                Settlement
                    Agreement with Louis Schnur et al
                
                Incorporated
                    by reference to the Company’s Amendment No. 2 to Registration Statement on
                    Form S-3, File No. 333-117125, filed with the SEC on July 30,
                    2004.10.9
                
                Employment
                    Agreement of Douglas Ellsworth
                
                Incorporated
                    by reference to the Company’s Quarterly Report on Form 10-Q filed with the
                    SEC November 15, 2004.**10.10
                
                Employment
                    Agreement of Edward Dickinson
                
                Incorporated
                    by reference to the Company’s Current Report on Form 8-K filed with the
                    SEC on February 21, 2006. **
  
 47
 Table
              of Contents
 **Exhibit
                    No.**
                
                **Description**
                
                **Incorporated
                    by Reference/Filed Herewith (and Sequential Page
                    #)**10.11
                
                Employment
                    Agreement of 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.**10.12
                
                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.**10.13
                
                Letter
                    Agreement dated February 11, 2005 between the Company and Maxim
                    Group LLC
                
                Incorporated
                    by reference from the Current Report on Form 8-K filed by the
                    Company on
                    February 15, 2005. **10.14
                
                Subcontract
                    between the UNLV Research Foundation and Altair Nanomaterials,
                    Inc.
                
                Incorporated
                    by reference to the Company’s Quarterly Report on Form 10-Q filed with the
                    SEC August 15, 2005. **10.15
                
                Lease
                    (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. **21
                
                List
                    of Subsidiaries
                
                Incorporated
                    by reference from Item 1 of this report.23.1
                
                Consent
                    of Perry-Smith LLP
                
                Filed
                    herewith.23.2
                
                Consent
                    of Deloitte & Touche 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-154a 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.
  48
 Table
            of Contents
  **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 15, 2006.
 ALTAIR
                NANOTECHNOLOGIES, INC.By:
              /s/ Alan
                J.
                GotcherAlan
                  J.
                  Gotcher,
                President and Chief Executive
                  Officer
 Date: March 15, 2006
 
 **POWER
        OF ATTORNEY AND ADDITIONAL SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Form 10-K
        has
        been signed by the following persons in the capacities and on the dates
        indicated. Each person whose signature to this Form 10-K appears below hereby
        constitutes and appoints Alan J. Gotcher 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 Form 10-K, and any and all
        instruments or documents filed as part of or in connection with this Form
        10-K
        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/
                  Alan J. Gotcher
                Alan
                  J. Gotcher
              
              President,
                  Chief Executive Officer and Director (Principal Executive
                  Officer)
              
              March
                  15, 2006/s/
                  Edward Dickinson
                Edward
                  Dickinson
              
              Chief
                  Financial Officer and Secretary (Principal Financial and Accounting
                  Officer)
              
              March
                  15, 2006/s/
                  Michel Bazinet
                Michel
                  Bazinet
              
              Director
              
              March
                  15, 2006/s/
                  Jon N. Bengtson
                Jon
                  N. Bengtson
              
              Director
              
              March
                  15, 2006/s/
                  James I. Golla
                James
                  I. Golla
              
              Director
              
              March
                  15, 2006/s/
                  George Hartman
                George
                  Hartman
              
              Director
              
              March
                  15, 2006/s/
                  Christopher E. Jones
                Christopher
                  E. Jones
              
              Director
              
              March
                  15, 2006/s/
                  David King
                David
                  King
              
              Director
              
              March
                  15, 2006
 
   49
 Table
            of Contents
   
  ***Altair
                  Nanotechnologies Inc.***
                ***and
                  Subsidiaries***
                
                
                
                
                *Consolidated
                  Financial Statements as of December 31, 2005 and 2004 and for Each of
                  the Three Years in the Period Ended December 31, 2005 and Report
                  of
                  Independent Registered Public Accounting Firm*
 
 
  
  
  Table
            of Contents
   **ALTAIR
        NANOTECHNOLOGIES INC. AND SUBSIDIARIES**
 
  **TABLE
        OF CONTENTS**
  **Page**REPORT
                    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                F-1REPORT
                    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
                    CONTROL OVER
                    FINANCIAL REPORTING
                F-2-F-3REPORT
                    OF FORMER INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                F-4FINANCIAL
                    STATEMENTS:Consolidated
                    Balance Sheets, December 31, 2005 and 2004
                F-5Consolidated
                    Statements of Operations for Each of the Three Years in
                    the Period Ended December 31, 2005
                F-6Consolidated
                    Statements of Stockholders’ Equity and Comprehensive Loss for
                    Each of the Three Years in the Period Ended December 31,
                    2005
                F-7-F-8Consolidated
                    Statements of Cash Flows for Each of the Three Years in the
                    Period Ended December 31, 2005
                F-9-F-10Notes
                    to Consolidated Financial Statements
                F-11-F-27
 
 
  Table
            of Contents
    **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  The
        Shareholders and Board of Directors
 Altair
        Nanotechnologies, Inc. and Subsidiaries
  We
        have
        audited the accompanying consolidated balance sheet of Altair Nanotechnologies,
        Inc. and subsidiaries (the "Company") as of December 31, 2005 and the related
        consolidated statements of operations, changes in shareholders' equity and
        comprehensive loss and cash flows for the year then ended. These consolidated
        financial statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these consolidated financial
        statements based on our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable
        assurance about whether the 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 audit provides a reasonable basis for our
        opinion.
  In
        our
        opinion, based on our audit, the consolidated financial statements referred
        to
        above present
        fairly, in all material respects, the consolidated financial position of
        the
        Company as of December
        31, 2005 and the consolidated results of their operations and their cash
        flows
        for the year ended December 31, 2005, in conformity with accounting principles
        generally accepted in the United States of America.
  We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company's internal
        control over financial reporting
        as of December 31, 2005, 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 9, 2006 expressed an unqualified opinion on management's
        assessment of the effectiveness
        of the Company's internal control over financial reporting and an unqualified
        opinion on the
        effectiveness of the Company's internal control over financial
        reporting.
   /s/PERRY-SMITH
        LLP
   Sacramento,
        California
 March
        9,
        2006
 
   F-1
 Table
            of Contents
   **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 management's assessment, included in the accompanying Management's Report
        on
        Internal Control Over Financial Reporting, that Altair Nanotechnologies,
        Inc.
        and subsidiaries
        (the "Company") maintained effective internal control over financial reporting
        as of December
        31, 2005, based on criteria established in *Internal
        Control—Integrated Framework* issued 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, evaluating management's assessment, testing
        and evaluating the design and operating effectiveness of internal control,
        and
        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
 Table
            of Contents
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 **ON
        INTERNAL CONTROL OVER FINANCIAL REPORTING**
 (Continued)
  In
        our
        opinion, management's assessment that the Company maintained effective internal control
        over financial reporting as of December 31, 2005, is fairly stated, in all
        material respects, based on the COSO criteria. Also in our opinion, the Company
        maintained, in all material respects, effective internal control over financial
        reporting as of December 31, 2005, 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, 2005, and the related consolidated statements of operations,
        changes in shareholders' equity and comprehensive
        loss, and cash flows for the year then ended and our report dated March 9,
        2006 expressed
        an unqualified opinion.
  
 /s/
          PERRY-SMITH LLP
 
  Sacramento,
        California
 March
        9,
        2006
 
    F-3
 Table
            of Contents
  **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
          the
          Board of Directors and Stockholders of
 Altair
          Nanotechnologies Inc.
 Reno,
          Nevada
 
 We
          have
          audited the accompanying consolidated balance sheet of Altair Nanotechnologies
          Inc. and subsidiaries (the “Company”) as of December 31, 2004, and the related
          consolidated statements of operations, stockholders’ equity, and cash flows for
          the years ended December 31, 2004 and 2003. These financial statements
          are the
          responsibility of the Company’s management. Our responsibility is to express an
          opinion on these financial statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. The Company is not required
          to have, nor were we engaged to perform an audit of its internal control
          over financial reporting. Our audits included consideration of internal
          control over financial reporting as a basis for designing audit procedures
          that
          are appropriate in the circumstances, but not for the purpose of expressing
          an
          opinion on the effectiveness of the Company’s internal control over financial
          reporting. Accordingly, we express no such opinion. An audit also includes
          examining, on a test basis, evidence supporting the amounts and disclosures
          in
          the financial statements, 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, such consolidated financial statements present fairly, in all
          material
          respects, the financial position of the Altair Nanotechnologies Inc. and
          subsidiaries as of December 31, 2004, and the results of their operations
          and
          their cash flows for the years ended December 31, 2004 and 2003, in conformity
          with accounting principles generally accepted in the United States of
          America.
 
 
 
 /s/
          DELOITTE & TOUCHE LLP
 
 Salt
          Lake
          City, Utah
 March
          7,
          2005
   F-4
 Table
            of Contents
  **PART
        I - FINANCIAL INFORMATION**
 **Item
          1. Financial Statements**
 
 **ALTAIR
          NANOTECHNOLOGIES INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          BALANCE SHEETS**
 **(Expressed
          in United States Dollars)**
 
 
 **December
                    31,**
                
                **December
                    31,****2005**
                
                **2004****ASSETS****Current
                    Assets**Cash
                    and cash equivalents
                
                $
                2,264,418
                
                $
                7,357,843Investment
                    in available for sale securities
                
                
                20,789,656
                
                
                -Accounts
                    receivable
                
                
                602,168
                
                
                499,599Prepaid
                    expenses and other current assets
                
                
                254,067
                
                
                182,595Total
                    current assets
                
                
                23,910,309
                
                
                8,040,037**Investment
                    in Available for Sale Securities**
                
                
                423,000
                
                
                -**Property,
                    Plant and Equipment, net**
                
                
                8,169,445
                
                
                6,513,907**Patents,
                    net**
                
                
                890,062
                
                
                974,877**Other
                    Assets**
                
                
                71,200
                
                
                18,200**Total
                    Assets**
                
                $
                33,464,016
                
                $
                15,547,021**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****Current
                    Liabilities**Trade
                    accounts payable
                
                $
                808,905
                
                $
                81,030Accrued
                    salaries and benefits
                
                
                709,349
                
                
                154,558Accrued
                    liabilities
                
                
                309,289
                
                
                141,185Note
                    payable, current portion
                
                
                600,000
                
                
                -Total
                    current liabilities
                
                
                2,427,543
                
                
                376,773**Note
                    Payable, Long-Term Portion**
                
                
                2,400,000
                
                
                2,880,311**Total
                    Liabilities**
                
                
                4,827,543
                
                
                3,257,084**Commitments
                    and Contingencies (Notes 7, 10 and 12)****Stockholders'
                    Equity**Common
                    stock, no par value, unlimited shares authorized;59,316,519
                    and 49,775,694 shares issued andoutstanding
                    at December 31, 2005 and December 31, 2004
                
                
                92,126,714
                
                
                65,505,630Accumulated
                    deficit
                
                
                (63,152,905
                )
                
                (53,215,693
                )Deferred
                    compensation expense
                
                
                (165,336
                )
                
                -Accumulated
                    other comprehensive loss
                
                
                (172,000
                )
                
                -**Total
                    Stockholders' Equity**
                
                
                28,636,473
                
                
                12,289,937**Total
                    Liabilities and Stockholders' Equity**
                
                $
                33,464,016
                
                $
                15,547,021See
                    notes to the consolidated financial
                    statements.
  F-5
 Table
              of Contents
   **ALTAIR
          NANOTECHNOLOGIES INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **(Expressed
          in United States Dollars)**
  **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003****Revenues**License
                  fees
              
              $
              695,000
              
              $
              -
              
              $
              -Product
                  sales
              
              
              149,373
              
              
              7,503
              
              
              8,602Commercial
                  collaborations
              
              
              825,723
              
              
              552,499
              
              
              27,696Contracts
                  and grants
              
              
              1,136,439
              
              
              591,890
              
              
              36,553Total
                  revenues
              
              
              2,806,535
              
              
              1,151,892
              
              
              72,851**Operating
                  Expenses**Cost
                  of product sales
              
              
              69,489
              
              
              1,361
              
              
              1,731Research
                  and development
              
              
              5,073,478
              
              
              2,189,150
              
              
              1,961,744Sales
                  and marketing
              
              
              1,539,765
              
              
              335,221
              
              
              214,378General
                  and administrative
              
              
              5,571,454
              
              
              4,626,562
              
              
              2,801,451Depreciation
                  and amortization
              
              
              1,034,202
              
              
              904,553
              
              
              878,757Total
                  operating expenses
              
              
              13,288,388
              
              
              8,056,847
              
              
              5,858,061**Loss
                  from Operations**
              
              
              (10,481,853
              )
              
              (6,904,955
              )
              
              (5,785,210
              )**Other
                  Income (Expense)**Interest
                  expense
              
              
              (207,189
              )
              
              (194,180
              )
              
              (454,415
              )Interest
                  income
              
              
              750,306
              
              
              96,229
              
              
              1,879Gain
                  (loss) on foreign exchange
              
              
              1,524
              
              
              626
              
              
              (193
              )Total
                  other income (expense), net
              
              
              544,641
              
              
              (97,325
              )
              
              (452,729
              )**Net
                  Loss**
              
              
              (9,937,212
              )
              
              (7,002,280
              )
              
              (6,237,939
              )**Preferential
                  Warrant Dividend**
              
              
              -
              
              
              -
              
              
              (592,486
              )**Net
                  Loss Applicable to Shareholders**
              
              $
              (9,937,212
              )
              $
              (7,002,280
              )
              $
              (6,830,425
              )**Loss
                  per common share - Basic and diluted**
              
              $
              (0.17
              )
              $
              (0.14
              )
              $
              (0.19
              )**Weighted
                  average shares - Basic and diluted**
              
              
              57,766,557
              
              
              48,677,283
              
              
              36,222,026See
                  notes to the consolidated financial statements.
 
 F-6
 Table
              of Contents
  **ALTAIR
          NANOTECHNOLOGIES INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS**
 **(Expressed
          in United States Dollars)**
 
 **Accumulated****Deferred**
              
              **Other****Compen-**
              
              **Compre-****Common
                  Stock**
              
              **Accumulated**
              
              **sation**
              
              **hensive****Shares**
              
              **Amount**
              
              **Deficit**
              
              **Expense**
              
              **Loss**
              
              **Total**BALANCE,
                  JANUARY 1, 2003
              
              
              30,244,348
              
              $
              43,787,850
              
              $
              (39,382,988
              )
              $
              -
              
              $
              -
              
              $
              4,404,862Stock
                  options issued to non-employees
              
              
              -
              
              
              64,346
              
              
              -
              
              
              -
              
              
              -
              
              
              64,346Variable
                  accounting on stock options
              
              
              -
              
              
              903,668
              
              
              -
              
              
              -
              
              
              -
              
              
              903,668Shares
                    issued under Employee Stock Purchase Plan
              
              
              873,480
              
              
              606,675
              
              
              -
              
              
              -
              
              
              -
              
              
              606,675Stock
                  warrants issued
              
              
              -
              
              
              101,416
              
              
              -
              
              
              -
              
              
              -
              
              
              101,416Preferential
                  warrant dividend
              
              
              -
              
              
              592,486
              
              
              (592,486
              )
              
              -
              
              
              -
              
              
              -Shares
                  issued for settlement of debt
              
              
              695,052
              
              
              280,000
              
              
              -
              
              
              -
              
              
              -
              
              
              280,000Shares
                  issued for interest
              
              
              277,169
              
              
              133,315
              
              
              -
              
              
              -
              
              
              -
              
              
              133,315Shares
                  issued for services
              
              
              213,102
              
              
              89,297
              
              
              -
              
              
              -
              
              
              -
              
              
              89,297Exercise
                  of stock options
              
              
              478,100
              
              
              488,836
              
              
              -
              
              
              -
              
              
              -
              
              
              488,836Exercise
                  of warrants
              
              
              3,210,328
              
              
              3,417,109
              
              
              -
              
              
              -
              
              
              -
              
              
              3,417,109Common
                  stock issued
              
              
              7,196,783
              
              
              4,324,898
              
              
              -
              
              
              -
              
              
              -
              
              
              4,324,898Net
                  loss
              
              
              -
              
              
              -
              
              
              (6,237,939
              )
              
              -
              
              
              -
              
              
              (6,237,939
              )BALANCE,
                  DECEMBER 31, 2003
              
              
              43,188,362
              
              
              54,789,896
              
              
              (46,213,413
              )
              
              -
              
              
              -
              
              
              8,576,483Stock
                  options issued to non-employees
              
              
              -
              
              
              270,560
              
              
              -
              
              
              -
              
              
              -
              
              
              270,560Modification
                    of stock options issued to employee
              
              
              -
              
              
              39,000
              
              
              -
              
              
              -
              
              
              -
              
              
              39,000Variable
                  accounting on stock options
              
              
              -
              
              
              136,212
              
              
              -
              
              
              -
              
              
              -
              
              
              136,212Shares
                  issued for services
              
              
              200,000
              
              
              413,000
              
              
              -
              
              
              -
              
              
              -
              
              
              413,000Exercise
                  of stock options
              
              
              561,900
              
              
              902,109
              
              
              -
              
              
              -
              
              
              -
              
              
              902,109Exercise
                  of warrants
              
              
              5,825,432
              
              
              8,954,853
              
              
              -
              
              
              -
              
              
              -
              
              
              8,954,853Net
                  loss
              
              
              -
              
              
              -
              
              
              (7,002,280
              )
              
              -
              
              
              -
              
              
              (7,002,280
              )BALANCE,
                  DECEMBER 31, 2004
              
              
              49,775,694
              
              
              65,505,630
              
              
              (53,215,693
              )
              
              -
              
              
              -
              
              
              12,289,937*(continued)*
 
  F-7
 Table
            of Contents
 **ALTAIR
        NANOTECHNOLOGIES INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS**
 **(Expressed
        in United States Dollars)**
  **Accumulated****Deferred**
              
              **Other****Compen-**
              
              **Compre-****Common
                  Stock**
              
              **Accumulated**
              
              **sation**
              
              **hensive****Shares**
              
              **Amount**
              
              **Deficit**
              
              **Expense**
              
              **Loss**
              
              **Total**BALANCE,
                  DECEMBER 31, 2004
              
              
              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 options issued to employees
              
              
              -
              
              
              56,060
              
              
              -
              
              
              -
              
              
              -
              
              
              56,060Variable
                  accounting on stock options
              
              
              -
              
              
              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 deferred compensation expense
              
              
              -
              
              
              -
              
              
              -
              
              
              106,819
              
              
              -
              
              
              106,819Common
                    stock issued, net of issuance
                  costs
                    of $2,081,989
              
              
              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
              )
              $
              28,636,473*(concluded)*See
                  notes to the consolidated financial statements.
 
   F-8
 Table
            of Contents
  **ALTAIR
          NANOTECHNOLOGIES INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **(Expressed
          in United States Dollars)**
  **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (9,937,212
              )
              $
              (7,002,280
              )
              $
              (6,237,939
              )Adjustments
                  to reconcile net loss to net cash used
                  in operating activities:Depreciation
                  and amortization
              
              
              1,034,202
              
              
              904,553
              
              
              878,757Stock
                  options issued to non-employees
              
              
              -
              
              
              270,560
              
              
              64,346Modification
                  of stock options issued to employees
              
              
              56,060
              
              
              39,000
              
              
              -Shares
                  issued for interest
              
              
              -
              
              
              -
              
              
              133,315Shares
                  issued for services
              
              
              -
              
              
              413,000
              
              
              89,297Issuance
                  of stock warrants
              
              
              -
              
              
              -
              
              
              101,416Variable
                  accounting on stock options
              
              
              297,138
              
              
              136,212
              
              
              903,668Securities
                  received in payment of license fees
              
              
              (595,000
              )
              
              -
              
              
              -Amortization
                  of discount on note payable
              
              
              119,689
              
              
              194,182
              
              
              181,090Amortization
                  of deferred compensation expense
              
              
              106,819
              
              
              -
              
              
              -Loss
                  on disposal of fixed assets
              
              
              81,203
              
              
              34,716
              
              
              25,661Changes
                  in assets and liabilities:Accounts
                  receivable, net
              
              
              (102,569
              )
              
              (486,275
              )
              
              119,535Prepaid
                  expenses and other current assets
              
              
              (71,472
              )
              
              (103,408
              )
              
              (56,589
              )Other
                  assets
              
              
              (53,000
              )
              
              -
              
              
              -Trade
                  accounts payable
              
              
              507,978
              
              
              (4,225
              )
              
              (247,461
              )Accrued
                  salaries and benefits
              
              
              554,791
              
              
              56,371
              
              
              (60,203
              )Accrued
                  liabilities
              
              
              168,104
              
              
              (72,514
              )
              
              100,302**Net
                  cash used in operating activities**
              
              
              (7,833,268
              )
              
              (5,620,108
              )
              
              (4,004,805
              )**Cash
                  flows from investing activities:**Purchase
                  of available for sale securities
              
              
              (27,089,656
              )
              
              -
              
              
              -Sale
                  of available for sale securities
              
              
              6,300,000
              
              
              -
              
              
              -Purchase
                  of property and equipment
              
              
              (2,466,230
              )
              
              (748,680
              )
              
              (92,400
              )Proceeds
                  received from sale of property and equipment
              
              
              -
              
              
              -
              
              
              4,675**Net
                  cash used in investing activities**
              
              
              (23,255,886
              )
              
              (748,680
              )
              
              (87,725
              )*(continued)*
 
   F-9
 Table
            of Contents
   **ALTAIR
        NANOTECHNOLOGIES INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(Expressed
        in United States Dollars)**
  **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003****Cash
                  flows from financing activities:**Issuance
                    of common shares for cash, net of issuance costs
              
              $
              19,338,262
              
              $
              -
              
              $
              4,324,898Issuance
                    of shares under Employee Stock Purchase Plan
              
              
              -
              
              
              -
              
              
              606,675Proceeds
                  from exercise of stock options
              
              
              1,828,900
              
              
              902,109
              
              
              488,836Proceeds
                  from exercise of warrants
              
              
              4,828,567
              
              
              8,954,853
              
              
              3,417,109Payment
                  of notes payable
              
              
              -
              
              
              -
              
              
              (1,120,000
              )**Net
                  cash provided by financing activities**
              
              
              25,995,729
              
              
              9,856,962
              
              
              7,717,518**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              (5,093,425
              )
              
              3,488,174
              
              
              3,624,988**Cash
                  and cash equivalents, beginning of period**
              
              
              7,357,843
              
              
              3,869,669
              
              
              244,681**Cash
                  and cash equivalents, end of period**
              
              $
              2,264,418
              
              $
              7,357,843
              
              $
              3,869,669**Supplemental
                  disclosures:**Cash
                  paid for interest
              
              
              None
              
              
              None
              
              $
              140,009Cash
                  paid for income taxes
              
              
              None
              
              
              None
              
              
              None
  **Supplemental
          schedule of non-cash investing and financing activities:**
 **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. (See Note
          8).
 
 **For
          the year ended December 31, 2004:**
 -
          None
 
 **For
          the year ended December 31, 2003:**
 -
          We
          issued 695,052 common shares to Doral 18, LLC in payment of $280,000 of
          principal on our note payable. The conversion of the note resulted in additional
          interest expense of $133,315.
 -
          On or
          about June 2, 2003, we repriced warrants, held by a shareholder, for 796,331
          common shares. The repriced warrants have an incremental fair value of
          $176,472
          and have been accounted for as a preferential warrant dividend.
 -
          In
          September 2003, we entered an agreement with a shareholder wherein the
          shareholder agreed to exercise 631,882 warrants that had an exercise price
          of
          $1.00 each. In return, we issued the shareholder 631,882 new warrants having
          an
          exercise price of $1.75 each. The new warrants have a fair value of $416,014
          and
          have been accounted for as a preferential warrant dividend.
   
 *(concluded)*
 See
        notes
        to the consolidated financial statements.
 
  F-10
 Table
            of Contents
   **ALTAIR
        NANOTECHNOLOGIES INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003**
 **(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,
        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.
 
 ***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”), (4) Altair Nanomaterials, Inc. (“ANI”), and (5)
        Tennessee Valley Titanium, Inc. (“TVT”), (collectively referred to as the
“Company”), all of which are 100% owned. All of the subsidiaries are
        incorporated in the United States of America. Intercompany 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, 2005, 2004 and 2003,
        we
        incurred net losses of $9,937,212, $7,002,280 and $6,237,939, respectively.
        At
        December 31, 2005 and 2004, we had stockholders’ equity of $28,636,473 and
        $12,289,937, 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 sales of common
        stock
        will be sufficient to enable us to continue as a going concern through
        2007.
 
 
 **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-11
 Table
            of Contents
 ***Cash,
        Cash Equivalents and Investment in Available for Sale Securities
        (short-term)*** **** ***—*** **** Cash,
        cash equivalents and **** investment
        in available for sale securities (short-term) consist principally of bank
        deposits, institutional money market funds and corporate notes. Short-term
        investments which are highly liquid, have insignificant interest rate risk
        and
        maturities of 90 days or less are classified as cash and cash equivalents.
        Investments which do not meet the definition of cash equivalents are classified
        as held-to-maturity or available-for-sale in accordance with the provisions
        of
        Statement of Financial Accounting Standards No. 115, *Accounting
        for Certain Investments in Debt and Equity Securities* .
 
 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, 2005
        and 2004, we had cash deposits of approximately $1.9 million and $300,000,
        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 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. Management determined that all amounts due were fully
        collectible as of December 31, 2005 and 2004. Accordingly, there is no allowance
        for losses reflected in our financial statements. Actual losses related to
        collection of accounts receivable for the years ended December 31, 2005,
        2004
        and 2003 were insignificant.
 
 ***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.
 
 ***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.
 
 F-12
 Table
            of Contents
 ***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 —*** Our
        stock
        option plans are subject to the provisions of Statement of Financial Accounting
        Standards (“SFAS”) No. 123, *Accounting
        for Stock-Based Compensation* .
        Under
        the provisions of SFAS 123, employee and director stock-based compensation
        expense is measured using either the intrinsic-value method as prescribed
        by
        Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        or the
        fair value method described in SFAS 123. We have elected to follow the
        accounting provisions of APB 25 for our employee and director stock-based
        awards
        and to furnish the pro forma disclosures required under SFAS 123.
 
 In
        accordance with APB 25, we use the variable accounting method to record expense
        associated with modifications of stock options issued to employees. Variable
        accounting requires that changes in the intrinsic value of such modifications
        be
        recorded as periodic income or expense.
 
 We
        account for stock options and warrants issued to non-employees in accordance
        with SFAS 123. In calculating compensation related to non-employee stock
        option
        grants, 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:
 
 **2005**
              
              **2004**
              
              **2003**Dividend
                  yield
              None
              
              None
              
              NoneExpected
                  volatility
              107%
              
              61%
              
              65%Risk-free
                  interest rate
              3.70%
              
              3.17%
              
              2.33%Expected
                  life (years)
              1.72
              
              5.40
              
              4.10
 
 
 To
        estimate compensation expense that would be recognized under SFAS 123 for
        all
        stock-based awards, we have used the modified Black-Scholes option pricing
        model. If we had accounted for our stock options issued to employees and
        directors using the accounting method prescribed by SFAS 123, our net loss
        and
        loss per share would be as follows:
  F-13
 Table
            of Contents
  
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**Net
                  loss applicable to shareholders, as reported
              
              $
              (9,937,212
              )
              $
              (7,002,280
              )
              $
              (6,830,425
              )Deduct:
                  stock-based employee compensationexpense
                  included in reported net loss applicableto
                  shareholders, net of $0 related tax effects
              
              
              353,198
              
              
              445,772
              
              
              903,668(Add):
                  total stock-based employee compensationexpense
                  determined under fair value basedmethod
                  for all awards, net of $0 related tax effects
              
              
              (1,502,731
              )
              
              (1,536,945
              )
              
              (590,908
              )Pro
                  forma net loss applicable to shareholders
              
              $
              (11,086,745
              )
              $
              (8,093,453
              )
              $
              (6,517,665
              )Loss
                  per common share (basic and diluted):As
                  reported
              
              $
              (0.17
              )
              $
              (0.14
              )
              $
              (0.19
              )Pro
                  forma
              
              $
              (0.19
              )
              $
              (0.17
              )
              $
              (0.18
              )
 
 
 In
        calculating pro forma compensation related to employee stock option grants,
        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:
 
 **2005**
              
              **2004**
              
              **2003**Dividend
                  yield
              None
              
              None
              
              NoneExpected
                  volatility
              103%
              
              61%
              
              65%Risk-free
                  interest rate
              3.99%
              
              3.55%
              
              3.16%Expected
                  life (years)
              2.83
              
              5.30
              
              5.00
 
 
 ***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.  During 2005, our revenues were 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 at the time the purchaser has accepted delivery
        of
        the product. 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.
 
 F-14
 Table
            of Contents
 ***Overhead
        Allocation*** —
        Facilities overhead, which is comprised primarily of occupancy and related
        expenses, is initially recorded in general and administrative expenses and
        then
        allocated to research and development based on 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 Note 8, were included in the
        computation of diluted loss per share as they were antidilutive.  Stock
        options and warrants to purchase a total of 4,097,756, 7,865,431 and 14,122,431
        shares of common stock were excluded from the calculations of diluted loss
        per
        share for the years ended December 31, 2005, 2004 and 2003,
        respectively.
 
 ***Accumulated
        Other Comprehensive Loss*** **** ***—*** **** Accumulated
        other comprehensive loss consists entirely of unrealized loss on the investment
        in available for sale securities. The components of comprehensive loss for
        the years
        ended December 31, 2005, 2004 and 2003 are as
        follows:
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**Net
                  loss
              
              $
              (9,937,212
              )
              $
              (7,002,280
              )
              $
              (6,237,939
              )Unrealized
                  gain (loss) on investment in availablefor
                  sale securities, net of taxes of $0
              
              
              (172,000
              )
              
              -
              
              
              -Comprehensive
                  loss
              
              $
              (10,109,212
              )
              $
              (7,002,280
              )
              $
              (6,237,939
              )
 
 
 ***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 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.
 
 ***Deferred
        Compensation Expense —*** The
        issuance of restricted stock under our stock incentive plan is recorded at
        its
        intrinsic value as deferred compensation expense in the shareholders’ equity
        section of the balance sheet and is amortized to expense over the period
        in
        which the shares are subject to restriction.
 
 F-15
 Table
            of Contents
 ***Recent
        Accounting Pronouncements*** **—** As
        described above in *Stock
        Based Compensation* ,
        we
        account for stock-based compensation awards issued to employees using the
        intrinsic value measurement provisions of APB 25. Accordingly, no compensation
        expense has been recorded for stock options granted to employees with exercise
        prices greater than or equal to the fair value of the underlying common stock
        at
        the option grant date. On December 16, 2004, the FASB issued Statement of
        Financial Accounting Standards No. 123 (revised 2004), *Share-Based
        Payment* (“SFAS
        123R”) which eliminates the alternative of applying the intrinsic value
        measurement provisions of Opinion 25 to stock compensation awards issued
        to
        employees. The new standard requires enterprises to measure the cost of employee
        services received in exchange for an award of equity instruments based on
        the
        grant-date fair value of the award. That cost will be recognized over the
        period
        during which an employee is required to provide services in exchange for
        the
        award, known as the requisite service period (usually the vesting
        period).
 
 We
        have
        not yet quantified the effects of the adoption of SFAS 123R, but it is expected
        that the new standard will result in significant stock-based compensation
        expense. The pro forma effects on net loss and loss per share if we had applied
        the fair value recognition provisions of original SFAS 123 on stock compensation
        awards (rather than applying the intrinsic value measurement provisions of
        Opinion 25) are disclosed above in *Stock Based Compensation* .
        Although such pro forma effects of applying original SFAS 123 may be indicative
        of the effects of adopting SFAS 123R, the provisions of these two statements
        differ in some important respects. The actual effects of adopting SFAS 123R
        will
        be dependent on numerous factors including, but not limited to, the valuation
        model chosen by the Company to value stock-based awards, the assumed award
        forfeiture rate, the accounting policies adopted concerning the method of
        recognizing the fair value of awards over the requisite service period, and
        the
        transition method (as described below) chosen for adopting SFAS 123R.
  SFAS
        123R
        will be effective for our fiscal year beginning January 1, 2006, and requires
        the use of either the Modified Prospective Application Method or the Modified
        Retrospective Method.  Under the Modified Prospective Method, SFAS 123R is
        applied to new awards and to awards modified, repurchased, or cancelled after
        the effective date.  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 the date of adoption shall be recognized
        as
        the remaining requisite services are rendered.  The compensation cost
        relating to unvested awards at the date of adoption shall be based on the
        grant-date fair value of those awards as calculated for pro forma disclosures
        under the original SFAS 123.  In addition, companies may use the Modified
        Retrospective Application Method.  This method may be applied to all prior
        years for which the original SFAS 123 was effective or only to prior interim
        periods in the year of initial adoption.  If the Modified Retrospective
        Application Method is applied, financial statements for prior periods shall
        be
        adjusted to give effect to the fair-value-based method of accounting for
        awards
        on a consistent basis with the pro forma disclosures required for those periods
        under the original SFAS 123.
  In
        March
        2004, the FASB Emerging Issues Task Force ("EITF") reached consensus on several
        issues being addressed in EITF Issue No. 03-1, *The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments* .
        The
        consensus provides guidance for evaluating whether an investment is
        other-than-temporarily impaired and was effective for other-than-temporary
        impairment evaluations made in reporting periods beginning after June 15,
        2004.
        The disclosure provisions of EITF 03-1 continue to be effective for the
        Company's consolidated financial statements for the year ended December 31,
        2005.
  On
        November 3, 2005, the FASB issued FASB Staff Position ("FSP") Nos. FAS 115-1
        and
        FAS 124-1, *The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments* .
        This
        FSP addresses the determination as to when an investment is considered impaired,
        whether that impairment is other than temporary, and the measurement of an
        impairment loss. This FSP also includes accounting considerations subsequent
        to
        the recognition of an other-than-temporary impairment and requires certain
        disclosures about unrealized losses that have not been recognized as
        other-than-temporary impairments. This FSP nullifies certain requirements
        of
        EITF Issue 03-1, and supersedes EITF Topic No. D-44, *Recognition
        of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose
        Cost Exceeds Fair Value* .
        The
        guidance in this FSP amends FASB Statement No. 115, *Accounting
        for Certain Investments in Debt and Equity Securities* .
        The FSP
        is effective for reporting periods beginning after December 15, 2005. The
        Company does not anticipate any material impact to its financial condition
        or
        results of operations as a result of the adoption of this guidance.
  F-16
 Table
            of Contents
  In
        May
        2005, the FASB issued Statement of Financial Accounting Standards No. 154, *Accounting
        Changes and Error Corrections* ("SFAS
        154"), which replaces Accounting Principles Board Opinions No. 20, *Accounting
        Changes* and SFAS
        No. 3, *Reporting
        Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion
        No. 28* .
        SFAS
        154 provides guidance on the accounting for and reporting of accounting changes
        and error corrections. It requires retrospective application to prior periods'
        financial statements for changes in accounting principle, unless it is
        impracticable to determine either the period-specific effects or the cumulative
        effect of the change. SFAS 154 is effective for accounting changes and
        corrections of errors made in fiscal years beginning after December 15, 2005.
        The Company does not expect the adoption of SFAS 154 to have a material impact
        on its consolidated financial position, results of operations or cash
        flows.
  ***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 (short-term) consist of auction rate corporate
        notes. The notes are long-term instruments with expiration dates through
        2043.
        Interest is settled and the rate is reset every 7 to 28 days.
 
 Investment
        in available for sale securities (long-term) consists of 100,000 restricted
        shares of Spectrum Pharmaceuticals, Inc. (“Spectrum”) common stock received in
        January 2005. The shares are "restricted securities," as defined in Rule
        144 and are not registered for resale.  They will be eligible for resale
        under Rule 144 beginning in January 2006. The shares were received as partial
        payment of licensing fees when Spectrum entered into a license agreement
        for
        RenaZorb TM .
        On
        receipt, the shares were recorded at their market value of $595,000 as measured
        by their closing price on the Nasdaq Capital Market. At December 31, 2005,
        their
        fair value was $423,000, representing an unrealized holding loss of $172,000.
        We
        evaluated this investment to determine if there is an other than temporary
        impairment at December 31, 2005. Our evaluation took into consideration
        published investment analysis, a recent substantial increase in institutional
        ownership of the investee’s common stock 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,
        2005.
  
 F-17
 Table
            of Contents
 **4.** **PROPERTY,
            PLANT AND EQUIPMENT**
  Property,
        plant and equipment consisted of the following as of December 31, 2005 and
        2004:
 
 2005
              
              2004Machinery
                  and equipment
              
              $
              9,977,474
              
              $
              7,743,357Building
              
              
              2,430,952
              
              
              2,335,979Furniture,
                  office equipment & other
              
              
              377,716
              
              
              201,314Total
              
              
              12,786,142
              
              
              10,280,650Less
                  accumulated depreciation
              
              
              (4,616,697
              )
              
              (3,766,742
              )Total
                  property and equipment
              
              $
              8,169,445
              
              $
              6,513,907
 
 Depreciation
        expense for the years ended December 31, 2005, 2004, and 2003 totaled $949,387,
        $818,861 and $793,077, respectively.
 
 **5.** **PATENTS**
  Patents
        consisted of the following at December 31, 2005 and 2004:
 
 2005
              
              2004Patents
                  and patent applications
              
              $
              1,517,736
              
              $
              1,517,736Less
                  accumulated depreciation
              
              
              (627,674
              )
              
              (542,859
              )Total
                  patents and patent applications
              
              $
              890,062
              
              $
              974,877
 
 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, $85,692 and $85,680 for the years ended December 31, 2005, 2004
        and
        2003, respectively, which represented the amortization relating to the
        identified intangible assets still required to be amortized under SFAS 142.
        For
        each of the next five years, amortization expense relating to intangibles
        is
        expected to be approximately $85,000 per year.
  **6.** **ACCRUED
            LIABILITIES**
  Accrued
        liabilities consisted of the following at December 31, 2005 and
        2004:
 
 2005
              
              2004Accrued
                  interest
              
              $
              87,500
              
              $
              -Accrued
                  use tax
              
              
              50,866
              
              
              2,689Accrued
                  property tax
              
              
              27,600
              
              
              23,046Accrued
                  mineral lease payments
              
              
              77,936
              
              
              62,153Accrued
                  reclamation costs
              
              
              20,500
              
              
              21,607Other
              
              
              44,887
              
              
              31,690$
              309,289
              
              $
              141,185
 
  
 F-18
 Table
            of Contents
 **7.** **NOTES
            PAYABLE**
  Notes
        payable consisted of the following at December 31, 2005 and 2004:
 
 2005
              
              2004Note
                    payable to BHP Minerals International, Inc.
              
              $
              3,000,000
              
              $
              2,880,311Less
                  current portion
              
              
              (600,000
              )
              
              -Long-term
                  portion of notes payable
              
              $
              2,400,000
              
              $
              2,880,311
  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. The first
        payment of $600,000 of principal plus accrued interest is due February 8,
        2006.
        Additional payments of $600,000 plus accrued interest are due annually on
        February 8, 2007 through 2010.
 
 **8.** **STOCK
            OPTIONS, RESTRICTED STOCK AND WARRANTS**
  ***Stock
        Options —*** We have
        a 1996 Stock Option Plan, a 1998 Stock Option Plan and a 2005 Stock Incentive
        Plan, all administered by the Board of Directors and providing for the granting
        of options to employees, officers, directors and other service providers
        of the
        Company. 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.
 
 Stock
        option activity for the years ended December 31, 2005, 2004, and 2003 is
        summarized as follows:
 
 2005
              
              2004
              
              2003Weighted
              
              
              
              Weighted
              
              
              
              WeightedAverage
              
              
              
              Average
              
              
              
              AverageExercise
              
              
              
              Exercise
              
              
              
              ExerciseShares
              
              Price
              
              Shares
              
              Price
              
              Shares
              
              PriceOutstanding
                  at beginning of year
              
              
              3,293,700
              
              $
              2.28
              
              
              3,668,600
              
              $
              3.11
              
              
              4,061,700
              
              $
              3.83Granted
                  during the year
              
              
              687,000
              
              
              3.30
              
              
              1,055,000
              
              
              2.03
              
              
              1,010,000
              
              
              1.10Cancelled/
                  Expired
              
              
              (243,000
              )
              
              3.06
              
              
              (868,000
              )
              
              5.31
              
              
              (925,000
              )
              
              6.20Exercised
              
              
              (1,204,500
              )
              
              1.53
              
              
              (561,900
              )
              
              1.61
              
              
              (478,100
              )
              
              1.02Outstanding
                  at end of year
              
              
              2,533,200
              
              $
              2.69
              
              
              3,293,700
              
              $
              2.28
              
              
              3,668,600
              
              $
              3.11Options
                  exercisable at year end
              
              
              1,739,325
              
              $
              2.59
              
              
              2,708,700
              
              $
              2.41
              
              
              3,181,100
              
              $
              3.38Weighted
                  average fair value ofoptions
                  granted during the year
              
              
              
              
              $
              2.11
              
              
              
              
              $
              1.15
              
              
              
              
              $
              0.51
  F-19
 Table
            of Contents
  The
        following table summarizes information about stock options outstanding at
        December 31, 2005:
 
 Stock
                  Options Outstanding
              
              Stock
                  Options ExercisableWeightedAverage
              
              Weighted
              
              
              
              WeightedRemaining
              
              Average
              
              
              
              AverageRange
                  of
              
              
              
              Contractual
              
              Exercise
              
              
              
              ExerciseExercise
                  Prices
              
              Shares
              
              Life
                  (Years)
              
              Price
              
              Shares
              
              Price$.80
                  to $1.53
              
              
              874,000
              
              
              4.8
              
              $
              1.10
              
              
              774,000
              
              $
              1.11$2.00
                  to $2.25
              
              
              538,000
              
              
              4.3
              
              
              2.18
              
              
              309,125
              
              
              2.17$2.56
                  to $3.62
              
              
              369,000
              
              
              6.9
              
              
              3.13
              
              
              116,500
              
              
              2.96$4.07
                  to $6.125
              
              
              752,200
              
              
              4.1
              
              
              4.71
              
              
              539,700
              
              
              4.922,533,200
              
              
              4.8
              
              $
              2.69
              
              
              1,739,325
              
              $
              2.59
  In
        March
        2006, we issued 250,641 stock options to employees under the Company’s bonus
        plan. These are deemed issued in 2005 and are included in pro forma compensation
        under SFAS 123 in Note 2.
 
 We
        have
        elected to follow the measurement provisions of APB 25, under which no
        recognition of expense is required in accounting for stock options granted
        to
        employees and directors for which the exercise price equals or exceeds the
        fair
        market value of the stock at the grant date. Generally, stock options are
        granted at an option price at or greater than fair market value on the date
        of
        grant. We recorded compensation expense, as a component of general and
        administrative expense, of $297,138, $136,212 and $903,668 for stock options
        that had been previously repriced and are accounted for under variable
        accounting in accordance with APB 25 for the year ended December 31, 2005,
        2004
        and 2003, respectively. In addition, we recorded $56,060 and $39,000 as a
        component of general and administrative expense for the year ended December
        31,
        2005 and 2004, respectively, for employee options for which the expiration
        date
        was extended.
 
 We
        follow
        the measurement provisions of SFAS 123 for stock options issued to
        non-employees. We recorded compensation expense, as a component of general
        and
        administrative expense, of $0, $270,560 and $64,346, for stock options granted
        to non-employees for the years ended December 31, 2005, 2004, and 2003,
        respectively.
 
 ***Restricted
        Stock —*** The
        2005
        Stock Incentive Plan provides for the granting of other incentive awards
        in
        addition to stock options. During the year ended December 31, 2005, the Board
        of
        Directors granted 96,500 shares of restricted stock under the plan with a
        weighted average fair value of $2.82 per share. The shares vest over two-
        or
        three-year periods. Compensation cost for restricted stock is recognized
        in the
        financial statements on a pro rata basis over the vesting period. During
        the
        year ended December 31, 2005, we recorded $106,819 of compensation cost in
        general and administrative expense which represented the pro rata vesting
        of
        restricted shares issued.
 
 F-20
 Table
            of Contents
  ***Warrants
        —*** Warrant
        activity for the years ended December 31, 2005, 2004, and 2003 is summarized
        as
        follows:
 
 2005
              
              2004
              
              2003Weighted
              
              
              
              Weighted
              
              
              
              WeightedAverage
              
              
              
              Average
              
              
              
              AverageExercise
              
              
              
              Exercise
              
              
              
              ExerciseWarrants
              
              Price
              
              Warrants
              
              Price
              
              Warrants
              
              PriceOutstanding
                  at beginning of year
              
              
              4,571,731
              
              $
              1.90
              
              
              10,453,831
              
              $
              1.71
              
              
              9,170,171
              
              $
              1.92Issued
              
              
              250,000
              
              
              5.27
              
              
              60,000
              
              
              2.50
              
              
              5,331,827
              
              
              1.31Expired
              
              
              (101,667
              )
              
              3.41
              
              
              (116,668
              )
              
              3.14
              
              
              (837,839
              )
              
              2.72Exercised
              
              
              (3,201,508
              )
              
              1.51
              
              
              (5,825,432
              )
              
              1.54
              
              
              (3,210,328
              )
              
              1.38Outstanding
                  at end of year
              
              
              1,518,556
              
              $
              3.17
              
              
              4,571,731
              
              $
              1.90
              
              
              10,453,831
              
              $
              1.71Currently
                  exercisable
              
              
              1,518,556
              
              $
              3.17
              
              
              4,571,731
              
              $
              1.90
              
              
              10,453,831
              
              $
              1.71
 
 The
        following table summarizes information about warrants outstanding at December
        31, 2005:
 
 Warrants
                  Outstanding
              
              Warrants
                  ExercisableWeightedAverage
              
              Weighted
              
              
              
              WeightedRemaining
              
              Average
              
              
              
              AverageRange
                  of
              
              
              
              Contractual
              
              Exercise
              
              
              
              ExerciseExercise
                  Prices
              
              Warrants
              
              Life
                  (Years)
              
              Price
              
              Warrants
              
              Price$1.00
                  to $2.00
              
              
              650,224
              
              
              2.0
              
              $
              1.85
              
              
              650,224
              
              $
              1.85$2.50
                  to $3.50
              
              
              343,332
              
              
              0.9
              
              
              3.09
              
              
              343,332
              
              
              3.09$4.00
                  to $5.265
              
              
              525,000
              
              
              1.7
              
              
              4.86
              
              
              525,000
              
              
              4.861,518,556
              
              
              1.6
              
              $
              3.17
              
              
              1,518,556
              
              $
              3.17
  The
        warrants were issued in conjunction with debt offerings, issuance of common
        stock, and payment for outside services. To estimate costs related to the
        issuance of warrants, we have used the Black-Scholes option pricing model
        and
        the following assumptions for warrants issued during the year ended December
        31,
        2005: expected life of 1.72 years, volatility of 107%, annual rate of quarterly
        dividends of 0 and risk free interest rate of 3.7%. Warrant costs of $639,459
        for the year ended December 31, 2005 were recorded as common stock issuance
        costs. Warrants issued during the years ended December 31, 2004 and 2003
        were
        issued as components of equity offerings. The warrants expire on various
        dates
        ranging from May 2006 to February 2009.
 
 **9.** **OTHER
            TRANSACTIONS**
  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 estimate
        that the warrant has a value of $639,459; this amount was recorded as common
        stock issuance costs.
 
 On
        or
        about June 2, 2003, we reduced the exercise price of 796,331 warrants to
        $1.00
        per share. As a result of these repricings, we recorded a preferential warrant
        dividend of $176,472 as of the repricing date. The warrants had been previously
        issued with exercise prices ranging from $2.50 to $4.50.
  
 F-21
 Table
            of Contents
  In
        September 2003, we entered into an agreement with a shareholder wherein the
        shareholder agreed to exercise 631,882 warrants that had an exercise price
        of
        $1.00 each. In return, we issued to the shareholder 631,882 new warrants
        having
        an exercise price of $1.75 each. The new warrants have a fair value of $416,014
        and were recorded as a preferential warrant dividend.
 
 On
        August
        6, 2002, we adopted an Employee Stock Purchase Plan (“ESPP”) which allows
        employees to purchase common shares at the fair market value through payroll
        deductions. Through December 31, 2003, a total of 864,584 common shares were
        issued under the ESPP at prices ranging from $0.33 to $2.10 per share. No
        shares
        were issued under the ESPP in 2004. The ESPP terminated on August 31,
        2004.
 
 **10.** **LEASES**
  ***Operating
        Leases —*** We
        lease
        certain premises for office space and other corporate purposes. Operating
        lease
        commitments at December 31, 2005 were:
 
 Year
        ending December 31:
 2006
              $
                  31,6262007
              $
                  96,9702008
              $
                  78,276
  Lease
        expense for the years ended December 31, 2005, 2004, and 2003 totaled $181,549,
        $28,207 and $33,239, respectively.
 
 **11.** **INCOME
            TAXES**
  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 in the period
        ended December 31, 2005.
 
 A
        reconciliation of the federal statutory income tax rate (35%) and our effective
        income tax rates is as follows:
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**Federal
                  statutory income taxes (benefit)
              
              $
              (3,478,025
              )
              $
              (2,450,798
              )
              $
              (2,390,649
              )Expiration
                  of net operating loss carryforwards
              
              
              (61,123
              )
              
              -
              
              
              -Other,
                  net
              
              
              91,109
              
              
              3,875
              
              
              3,821Valuation
                  allowance
              
              
              3,448,039
              
              
              2,446,923
              
              
              2,386,828Total
              
              $
              -
              
              $
              -
              
              $
              -
 
 
 F-22
 Table
            of Contents
  The
        components of the deferred tax assets consisted of the following as of December
        31, 2005 and 2004:
 
 **2005**
              
              **2004**Deferred
                  tax assets:Net
                  operating loss carryforwards
              
              $
              13,645,639
              
              $
              10,570,378Basis
                  difference in long-lived assets
              
              
              414,591
              
              
              175,722Other
              
              
              158,271
              
              
              -Total
                  deferred tax assets
              
              
              14,218,501
              
              
              10,746,100Deferred
                  tax liabilities:Accrued
                  vacation
              
              
              -
              
              
              (35,838
              )Total
                  deferred tax liabilities
              
              
              -
              
              
              (35,838
              )Valuation
                  allowance
              
              
              (14,218,501
              )
              
              (10,710,262
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -
  The
        net
        operating loss carryforwards total $38,942,190 as of December 31, 2005 and
        will
        expire at various dates as follows:
 
 2006-2010
              $
                  2,101,4792011-2015
              $
                  1,376,5012016-2020
              $
                  4,776,7792021-2025
              $30,687,431
  Due
          to
          the significant increase in common stock issued and outstanding from 2003
          through 2005, Section 382 of the Internal Revenue Code may provide significant
          limitations on the utilization of net operating loss carryforwards of the
          Company. As a result of these limitations, a portion of these loss and
          credit
          carryovers may expire without being utilized.
  **12.** **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 which we believe
        could have a material adverse effect on our consolidated financial position
        or
        on our consolidated results of operations.
 
 ***Significant
        Contracts —*** In
        September 2003, we entered into an agreement with Western Michigan University
        (“WMU”) to provide research services and materials to support research involving
        a technology used in the detection of chemical, biological and radiological
        agents. In
        September 2004, the Department of Energy (“DOE”) awarded a stage 2 contract for
        the project under which we are continuing joint development work for the
        design,
        synthesis and characterization of nanosensors for chemical, biological and
        radiological agents. Altair will receive an additional $672,000 over the
        two-year term of the stage 2 contract. Revenues of $481,519 were recorded
        in
        2005 under this contract as a component of contracts and grants revenues
        in the
        consolidated statements of operations.
 
 F-23
 Table
            of Contents
  In
        January 2004, we entered into a license agreement with Western Oil Sands,
        Inc.
        with respect to its possible use of the Altair Hydrochloride Pigment Process
        (“AHPP”) 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 Oil Sands an exclusive,
        conditional license to use the AHPP on heavy minerals derived from oil sands
        in
        Alberta, Canada. The agreement also contemplates a three-phase, five-year
        program pursuant to which the parties will work together to further evaluate,
        develop and commercialize the AHPP. In the first phase of the program, Western
        Oil Sands and Altair will evaluate the AHPP and confirm that the AHPP will
        produce pigment from oil sands. Assuming phase one is successful, Western
        Oil
        Sands may elect to commence phase two, the construction of a demonstration
        titanium pigment production facility using the AHPP. If phase two is successful,
        Western Oil Sands may elect to commence phase three, the construction and
        operation of a full-scale commercial titanium pigment production facility
        using
        the AHPP. Revenues
        of $616,515 were recorded in 2005 under this contract as a component of
        commercial collaborations revenues in the consolidated statements of
        operations.
 
 In
        June
        2004, we were awarded a National Science Foundation grant of $100,000 to
        fund
        joint development work on next generation lithium ion power sources with
        Hosokawa Micron’s Nanoparticle Technology Center and Rutgers University’s Energy
        Storage Research Group. The grant was effective July 1, 2004 and we
        completed work under Phase I in December 2004. The results of the research
        indicated that lithium ion batteries prepared with nano-structured lithium
        titanate spinel anode materials exhibit rapid charge and discharge rates,
        improved cycle life performance and a decrease in specific energy density
        when
        compared to conventional lithium ion, nickel cadmium and nickel metal hydride
        battery materials. In June 2005, we were awarded a grant of $476,850 from
        the
        NSF for Phase II. Phase I work was designed to optimize the anode electrode
        materials and Phase II is designed to develop cathode electrode materials,
        thus
        resulting in matched anode-cathode electrode materials for optimum
        electrochemical performance. Revenues of $162,102 were recorded in 2005 under
        this contract as a component of contracts and grants revenues in the
        consolidated statements of operations.
 
 In
        November 2004, we entered into an agreement with the University of Nevada,
        Las
        Vegas Research Foundation (“UNLVRF”) to act as a subcontractor under a
        $3,000,000 grant awarded to them by the DOE for joint research activities
        related to solar hydrogen production at a refilling station under development
        in
        Las Vegas. The agreement provides 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 entered into an agreement with UNLVRF for collaborative
        research and development work under a Phase III grant award from the DOE
        that
        provides for payments to Altair of $750,000 for work beginning October 1,
        2005
        and continuing through December 2006. Revenues
        of $492,818 were recorded in 2005 under this contract as a component of
        contracts and grants revenues in the consolidated statements of
        operations.
 
 In
        January 2005, we signed a licensing agreement with Spectrum Pharmaceuticals,
        Inc. (“Spectrum”) which grants Spectrum exclusive worldwide rights to develop,
        market and sell RenaZorbTM. Upon signing the agreement, Spectrum issued to us
        100,000 restricted shares of their common stock at the then market value
        of
        $5.95 per share, 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 licensing agreement. Additional payments by Spectrum
        are
        contingent upon the achievement of various milestones in the testing, regulatory
        approval and sale of RenaZorbTM. Revenues of $729,271 were recorded in 2005 under
        this contract, of which $695,000 was recorded as a component of license fees
        revenues in the consolidated statements of operations.
  F-24
 Table
            of Contents
  In
        November 2005, we were awarded a $250,000 grant from the Indiana Advanced
        Energy
        Technologies Program initiative.  The Indiana Energy Group, a division of
        the Office of the Indiana Lieutenant Governor, administers the program. The
        grant funding must be used to manufacture products containing products that
        are
        not currently in the U.S. market and that are above industry standard in
        terms
        of energy efficiency (e.g. hybrid automobiles, fuel cells) and/or incorporate
        an
        innovative technology, such as nanotechnology, that allows the product to
        save
        energy.  We will use the grant funding to install production and test
        equipment for product application development in our development and
        manufacturing center in Anderson, Indiana. Pilot manufacturing is anticipated
        to
        begin by the end of the first quarter of 2006.
  **13.** **RELATED
            PARTY TRANSACTIONS**
  On
        December 31, 2003, we entered into a consulting agreement with Advanced
        Technology Group LLC (“ATG”), whose managing partner is David King, a Director
        of the Company. The agreement stipulates that ATG will furnish consulting
        services in reviewing potential federal grant opportunities and providing
        proposal development assistance on selected programs for a period of one
        year.
        The agreement was subsequently extended through December 31, 2005. Under
        the
        terms of the agreement, ATG is paid on a contingency basis at a rate of 6%
        of
        the first $1,000,000 in grant monies secured from applications prepared in
        any
        calendar year plus 3.5% of any cumulative amounts over $1,000,000. ATG also
        agreed to provide consulting services at a rate of $200 per hour upon request
        of
        the Company. During the year ended December 31, 2004, we paid ATG $6,000
        in fees
        in connection with securing a $100,000 grant from the National Science
        Foundation and $4,500 in fees for consulting work in connection with product
        marketing. During the year ended December 31, 2005, ATG earned $2,833 for
        certain consulting services and $28,611 in connection with our National Science
        Foundation Phase II grant application, which is recorded as a component of
        accrued liabilities on the consolidated balance sheets at December 31,
        2005.
  **14.** **BUSINESS
            SEGMENT INFORMATION**
  Management
        views the Company as operating in two business segments: Performance Materials
        and Life Sciences. The Performance Materials segment produces advanced materials
        for paints, coatings, sensors, power systems, alternative energy devices
        and
        materials for improving process technologies. The Life Sciences segment produces
        pharmaceutical products, drug delivery products and dental materials.
 
 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, 2005, 2004, and 2003 is as follows:
 
 **Depreciation****Loss
                  From**
              
              **and****Net
                  Sales**
              
              **Operations**
              
              **Amortization**
              
              **Assets****2005:**Performance
                  Materials
              
              $
              2,081,764
              
              $
              4,418,912
              
              $
              933,273
              
              $
              7,173,902Life
                  Sciences
              
              
              724,771
              
              
              191,149
              
              
              5,506
              
              
              500,914Corporate
                  and other
              
              
              -
              
              
              5,871,793
              
              
              95,423
              
              
              25,789,200Consolidated
                  Total
              
              $
              2,806,535
              
              $
              10,481,853
              
              $
              1,034,202
              
              $
              33,464,016
  F-25
 Table
            of Contents
  **2004:**Performance
                  Materials
              
              $
              1,151,892
              
              $
              4,475,013
              
              $
              839,974
              
              $
              5,567,685Life
                  Sciences
              
              
              -
              
              
              250,855
              
              
              1,307
              
              
              104,534Corporate
                  and other
              
              
              -
              
              
              2,179,087
              
              
              63,272
              
              
              9,874,802Consolidated
                  Total
              
              $
              1,151,892
              
              $
              6,904,955
              
              $
              904,553
              
              $
              15,547,021**2003:**Performance
                  Materials
              
              $
              72,851
              
              $
              2,771,433
              
              $
              809,344
              
              $
              5,362,003Life
                  Sciences
              
              
              -
              
              
              51,451
              
              
              -
              
              
              -Corporate
                  and other
              
              
              -
              
              
              2,962,326
              
              
              69,413
              
              
              6,297,751Consolidated
                  Total
              
              $
              72,851
              
              $
              5,785,210
              
              $
              878,757
              
              $
              11,659,754
 
 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, non-employee and employee variable
        accounting stock option compensation expense, shareholder information expense,
        investor relations, and general office expense.
 
 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
                  at****Customer**
              
              **December
                  31, 2005**
              
              **December
                  31, 2005****Performance
                  Materials Division:**Western
                  Michigan University
              
              $
              481,519
              
              $
              118,478Western
                  Oil Sands
              
              $
              616,515
              
              $
              166,031UNLV
                  Research Foundation
              
              $
              492,818
              
              $
              160,053**Life
                  Sciences Division:**Spectrum
                  Pharmaceuticals, Inc.
              
              $
              729,271
              
              $
              30,881
  For
        the
        year ended December 31, 2004, we had sales to three major customers, each
        of
        which accounted for 10% or more of revenues and all of which were made in
        the
        performance materials business segment. Total sales to these customers for
        the
        year ended December 31, 2004 and the balance of their accounts receivable
        at
        December 31, 2004 were as follows:
 
 **Sales
                  - Year Ended**
              
              **Accounts**
                **Receivable
                  at****Customer**
              
              **December
                  31, 2004**
              
              **December
                  31, 2004****Performance
                  Materials Division:**Titanium
                  Metals Corp.
              
              $
              152,550
              
              $
              39,382Western
                  Michigan University
              
              $
              491,320
              
              $
              319,739Western
                  Oil Sands
              
              $
              314,359
              
              $
              67,191
 
 
 F-26
 Table
            of Contents
  For
        the
        year ended December 31, 2003, we had sales to three major customers, each
        of
        which accounted for 10% or more of revenues and all of which were made in
        the
        performance materials business segment. Total sales to these customers for
        the
        year ended December 31, 2003 and the balance of their accounts receivable
        at
        December 31, 2003 were as follows:
 
 **Sales
                  - Year Ended**
              
              **Accounts**
                **Receivable
                  at****Customer**
              
              **December
                  31, 2003**
              
              **December
                  31, 2003****Performance
                  Materials Division:**Titanium
                  Metals Corp.
              
              $
              9,000
              
              $
              -Western
                  Michigan University
              
              $
              36,553
              
              $
              12,620New
                  Zealand Steel
              
              $
              18,696
              
              $
              -
 
 
 Revenues
        for the years ended December 31, 2005, 2004 and 2003 by geographic area were
        as
        follows:
 
 **Revenues
                  -**
              
              **Revenues
                  -**
              
              **Revenues
                  -****Year
                  Ended**
              
              **Year
                  Ended**
              
              **Year
                  Ended****Geographic
                  information (a):**
              
              **December
                  31, 2005**
              
              **December
                  31, 2004**
              
              **December
                  31, 2003**United
                  States
              
              $
              2,101,551
              
              $
              817,052
              
              $
              52,442Canada
              
              
              641,515
              
              
              314,540
              
              
              174Other
                  foreign countries
              
              
              63,468
              
              
              20,300
              
              
              20,236Total
              
              $
              2,806,534
              
              $
              1,151,892
              
              $
              72,851(a)Revenues
                  are attributed to countries based on location of customer.
 
 **15.** **SUBSEQUENT
            EVENTS**
  In
        January 2006, a rainstorm in the Western Nevada area caused significant flooding
        in Reno, including our office and plant facility at 204 Edison Way. Although
        the
        interruption to our business activities was minor, we experienced damage
        to our
        building and certain equipment. Costs associated with the flood are expected
        to
        be approximately $450,000.
  F-27