UNITED
STATES


SECURITIES AND
EXCHANGE COMMISSION


Washington,
D.C. 20549


__________________________________




FORM
10-KSB/A


(AMENDMENT
NO. 2 )




ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934




For
the fiscal year ended December 31, 2006





Commission
file number: 001-16237


__________________________________




AIRTRAX,
INC.


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




New Jersey
            22-3506376(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)200 Freeway
      Drive, Unit One, Blackwood, NJ
            08012(Address
      of principal
              executive
      offices)
            (Zip
      Code)


__________________________________




Issuer’s
telephone number, including area code: (856) 232-3000




Securities
registered under Section 12(b) of the Exchange Act: None




Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock, no par
value.




Check whether the issuer is
not required to file reports pursuant to Section 13 or 15(d) of the Exchange
Act. ̈




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




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B and no disclosure will be contained, to the best of the issuer’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
 ̈




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




The
issuer’s revenues for the fiscal year ended December 31, 2006 were $1,346,913.




The
aggregate market value of the Common Stock held by non-affiliates of the issuer
as of April 12, 2007 was $13,301,732.




The
number of shares outstanding of the issuer’s Common Stock as of April 12, 2007
was 24,376,887 shares.




DOCUMENTS
INCORPORATED BY REFERENCE: NONE





Transitional
Small Business Disclosure Format (check one): Yes  ̈ No T








EXPLANATORY NOTE




In conjunction with our
independent registered public accounting firm and professional advisors, we
conducted an analysis of our various financial instruments and agreements
involving convertible debt and common stock financings accompanied by warrants,
with a particular focus on the accounting treatment of derivative financial
instruments under Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities(“SFAS 133”), the
Emerging Issues Task Force issued EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock(“EITF 00-19”), and FASB Staff Position
No. EITF 00-19-2, “Accounting for Registration Payment Arrangements”
(“EITF 00-19-2”), (collectively, the “Derivative Accounting
Pronouncements”). Accordingly, certain accounting policies we previously
considered to reflect what was deemed to be appropriate at the time when the
financings were previously reported, have been modified by recent
interpretations, including the Derivative Accounting Pronouncements.





On November 2, 2007, as
a result of this analysis, we noted that our previously filed financial
statements in the annual reports for the years ended December 31, 2004, 2005 and
2006 filed on Form 10-KSB, together with the quarterly reports on Form 10-QSB
for the quarters ending March 31, 2005, June 30, 2005, September 30, 2005,
March 31, 2006, June 30, 2006, September 30, 2006, March 31, 2007, June 30, 2007
and September 30, 2007 (collectively, the “Reports”) could no longer be relied
upon.  We sent a formal letter request to the Office of the Chief
Accountant (OCA) of the Security and Exchange Commission (SEC) dated December
17, 2007, petitioning the OCA to waive the requirement to file separate amended
and restated Reports for the periods noted above, and instead file a
comprehensive amended and restated comparative Form 10-KSB for the years ended
December 31, 2006 and 2005, along with certain comprehensive financial
information and disclosures for 2004, and comprehensive amended and restated
comparative Form 10-QSBs for the periods ended March 31, 2007, June 30, 2007,
and September 30, 2007 along with certain comprehensive financial information
and disclosures for 2005. This waiver was granted by the OCA on December 27,
2007.




This restatement is
required to properly reflect our financial results for certain non-cash, and
non-operational related charges or credits to earnings associated with both
embedded and freestanding derivative liabilities, and the accounting for certain
derivatives under the control of the issuer due to the revised interpretation
and implementation of the Derivative Accounting Pronouncements.




Under EITF 00-19,
warrants are considered free-standing instruments in that they are legally
detachable and separately exercisable. The conversion benefits, which are
embedded in these debt issues, derive value from the relationship between the
stock price and debt conversion price, and are considered embedded derivatives
under the provisions of SFAS 133. The fair values of both the warrants and
conversion benefits are calculated using a Black-Scholes Option Pricing Model,
taking into consideration factors such as the underlying price of the common
stock, the exercise price for warrants or the conversion price for the
conversion benefit, the stock volatility, and the risk-free interest rates
available for comparable time periods.




Free-standing
instruments (warrants), and embedded derivatives (conversion benefits) which are
initially bifurcated or separated from the host financial instrument, are
recorded as separate liabilities, in cases where the security holder has a right
to choose to receive a “net settlement” of cash. The identification of such net
settlement provisions for prior convertible debt issuances with warrants
resulted in us concluding that such securities should have been identified as
“derivatives”, and therefore warrant liabilities must be recorded as separate
derivative liability accounts on our restated balance sheet, and marked to
market for each subsequent reporting period with any non-cash charges or credits
attributed to the revised fair value of the liability being recognized through
earnings (after the reversal of previously incorrectly recorded charges and/or
credits to earnings).




If
the decision to settle the outstanding liability remains with us, the value of
the warrants should be recorded in an equity account. The identification of the
settlement provisions we controlled under certain debt issuances resulted in us
determining that the warrants should be reflected in the restated financial
statements as components of equity, as compared to having been previously
recorded as liabilities with non-cash charges and/or credits to earnings as a
result of being marked to market for each period presented.




2





EITF 00-19-2
specifies that the contingent obligations to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, “Accounting
for Contingencies.” FSP No. EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. This
EITF is effective January 1,2007 and will be adopted by the us.




We
also previously sold stock units, which included warrants along with common
stock. In these cases, a portion of the proceeds equal to the value of the
warrants is allocated to the warrants, with the balance allocated to the stock.
In such cases where a net settlement provision for cash exists, the values of
the warrants are treated as liabilities, and the balance is revalued at the end
of each reporting period with any change in value being recognized currently as
a non-cash charge and/or credit to earnings. When a warrant classified as a
liability is exercised or cancelled, the fair value of the warrant, as
determined at the time of exercise or cancellation, is transferred to equity,
and is no longer revalued. A similar adjustment is made for a conversion benefit
classified as a liability when the debt is converted to stock, or cancelled.




For
the convenience of the reader, this Form 10-KSB/A sets forth the original Form
10-KSB in its entirety. However, this Form 10-KSB/A only amends our financial
statements and the footnotes to our financial statements, along with the
corresponding changes to our Management’s Discussion and Analysis. We also
corrected typographical errors and have revised our controls and procedures
disclosure as a result of these restatements. No other information in the
original Form 10-KSB is amended hereby. In addition, pursuant to the rules of
the SEC, Item 13 of Part III to the filing has been amended to contain currently
dated certifications from our Principal Executive Officer and Principal
Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act
of 2002. The certifications of our Principal Executive Officer and Principal
Financial Officer are attached to this Form 10KSB/A as Exhibits 31.1, 31.2, 32.1
and 32.2, respectively.








3


AIRTRAX,
INC.




2006
FORM 10-KSB/ A
ANNUAL REPORT




TABLE
OF CONTENTS




Page




PART IItem 1.  Description of
      Business
            5Item 2.  Description of
      Property
            13Item 3.  Legal
      Proceedings
            13Item 4.  Submission of
      Matters to a Vote of Security Holders.
            13PART IIItem 5.  Market for
      Common Equity and Related Stockholder Matters.
            14Item 6.  Management’s
      Discussion and Analysis or Plan of Operation.
            18Item 7.  Financial
      Statements.
            32Item 8.  Changes in and
      Disagreements with Accountants on Accounting and Financial Disclosure.
            33Item 8A.  Controls and
      Procedures.
            33Item 8B.   Other
      Information
            33PART IIIItem 9.   Directors,
      Executive Officers, Promoters and Control Persons: Compliance with Section
      16(a) of the Exchange Act
            34Item 10.   Executive
      Compensation
            36Item 11.   Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholders
            39Item 12.   Certain
      Relationships and Related Transactions, and Director Independence
            40Item 13.  Exhibits
            41Item 14.  Principal
      Accountant Fees and Services.
            44




4


PART
I





NOTE
REGARDING FORWARD LOOKING INFORMATION




Various
statements in this Form 10-KSB and in future filings by us with the Securities
and Exchange Commission, in our press releases and in oral statements made by or
with the approval of authorized personnel constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are based on current expectations and are
indicated by words or phrases such as "anticipate," "could," "currently
envision," "estimate," "expect," "intend," "may," "project," "seeks," "we
believe," and similar words or phrases and involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements to differ materially from any future results, performance or
achievements expressed or implied by those forward-looking
statements.




These
forward-looking statements are based largely on our expectations and are subject
to a number of risks and uncertainties, many of which are beyond our control.
Actual results could differ materially from these forward-looking statements as
a result of the facts described in "Risk Factors." We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks and
uncertainties, we cannot assure you that the forward-looking information
contained in this Form 10-KSB will, in fact, transpire.




Our
fiscal year ends on December 31. References to a fiscal year refer to the
calendar year in which such fiscal year ends.




Item 1.   Description of
Business




Corporate Information and
History




We were
incorporated in the State of New Jersey on April 17, 1997. On May 19, 1997, we
entered into a merger agreement with a predecessor company that was incorporated
on May 10, 1995. We were the surviving company in the merger.




Effective
November 5, 1999, we merged with MAS Acquisition IX Corp ("MAS"), and were the
surviving company in the merger. Pursuant to the Agreement and Plan of Merger,
as amended, each share of common stock of MAS was converted to 0.00674 shares of
our company. After giving effect to fractional and other reductions, MAS
shareholders received 57,280 of our shares as a result of the
merger.




In March
2004, we reached an agreement in principal, subject to certain closing
conditions, with Fil Filipov to acquire 51% of the capital stock of Filco GmbH,
a German corporation. In October 2004, Mr. Filipov and we agreed to modify our
agreement in principal so as to increase the number of shares of the capital
stock of Filco GmbH, which we could acquire, if we had finalized the
acquisition, from 51% to 75.1%. Through December 31, 2005, we had loaned Filco
GmbH an aggregate principal amount of $6,275,881 with no loans made by us in
2006, exclusive of interest at 8% per annum, pursuant to a series of secured
promissory notes. Security for these loans consisted of Filco's plant machinery,
equipment and other plant property, and intellectual property, including designs
and drawings. We used proceeds from the private placement offerings that we
completed during 2004 and 2005 to fund the Filco loans.





On
January 20, 2006, Filco filed for insolvency in Germany. As a result of the
filing by Filco, we terminated the Acquisition Agreement on February 7, 2006. An
auction sale of Filco’s assets occurred on May 10, 2006. Due to the uncertainty
of our position under German bankruptcy law, $4,275,881 of the Filco advances
was written off in 2005, and the remaining $2,000,000 was written off in 2006.
Accordingly, any inventory, equipment or outstanding advances to Filco have been
written off during 2006 and there is no indication that the proceeds of any
inventory or equipment at the Filco plant will be returned to us.




In
connection with the Acquisition Agreement, Mr. Filipov was to receive options to
purchase 900,000 shares of our common stock at an exercise price of $0.01. We
did not issue such options because the Acquisition Agreement was terminated and
we believe that the conditions for such issuance were never fulfilled. Mr.
Filipov has indicated to us that he believes that the conditions were fulfilled
and that we owe him the options. We and Mr. Filipov are endeavoring to reach a
mutually acceptable settlement.




5




Introduction




Our principal executive offices are located at 200 Freeway
Drive, Unit One, Blackwood, NJ 08012 and our telephone number is (856) 232-3000.
We are incorporated in the State of New Jersey.




Since
1995, substantially all of our resources and operations have been directed
towards the development of the Omni-Directional wheel, related components,
Omni-Directional Lift Trucks and other Omni-Directional Vehicles. Many of the
components, including the unique shaped wheels, motors, and frames, have been
designed by Airtrax and are specially manufactured for us.




Omni-Directional
means that vehicles designed and built by us can travel in any direction. Our
Omni-directional vehicles are controlled with a joystick. The vehicle will
travel in the direction the joystick is pushed. If the operator pushes the
joystick sideways, the vehicle will travel sideways. If the operator were to
twist the joystick the vehicle will travel in circles. Our omni-directional
vehicles have one motor and one motor controller for each wheel. The
omni-directional movement is caused by coordinating the speed and direction of
each motor with joystick inputs which are routed to a micro-processor, then from
the micro-processor to the motor controllers and finally to the motor
itself.




During
the year ended December 31, 2006, we continued development of the COBRA and KING
COBRA scissor lifts and the Omni-Directional power chair. We anticipate
incurring more costs on these products and plan to begin production of the first
COBRA model and the KING COBRA in 2007. The growth and development of our
business will require a significant amount of additional working capital. We
currently have limited financial resources and based on our current operating
plan, we will need to raise additional capital in order to continue operations.
However, we are in discussions with lenders to raise capital in order to
continue operating, although we have no contracts or commitments for additional
capital at this time. We currently do not have adequate cash to meet our short
or long term objectives. In the event additional capital is raised, it may have
a dilutive effect on our existing stockholders. However, there can be no
assurance that additional financing will be available at terms that are suitable
to us.




The
assembly of our products is conducted at our executive offices. Currently 100%
of our vehicle frames are being manufactured in the USA. These frames are
shipped to the Blackwood plant for final assembly. Previously, partially
assembled vehicles were shipped to the Blackwood facility from the Filco plant
in Germany. Fourteen were shipped to the USA for final assembly. A total of
approximately sixty frames were shipped from Bulgaria to the Filco plant for
partial assembly. None of the frames shipped from Bulgaria were within
specification. The twenty-seven frames shipped to the United States required
re-machining in order to make them useable. The balance were rejected and
abandoned with other parts inventory that was stored in the Filco
plant.


6




OMNI-DIRECTIONAL
TECHNOLOGY




Prior
History




Omni
directional vehicle technology has been the subject of research and development
by universities, the Department of Defense, and industry for over 25 years. A
Swedish inventor patented an early stage omni-directional wheel. Thereafter, the
technology was purchased by the United States Navy and was advanced at the Naval
Surface Warfare Center. The US Navy held the patent until its expiration in
1990. In 1996, the Navy transferred this technology to us for commercialization
through a Cooperative Research and Development Agreement (CRADA).




Technology
Description




Since the
technology transfer under the CRADA agreement, we have examined and redesigned
many aspects of the system for use in various applications including lift trucks
and other material handling equipment. In this regard, we refined control
software and hardware, and tested a variety of drive component features on our
pilot Omni-Directional lift trucks, scissor-lifts, and multi-purpose mobility
platforms. Extensive demonstrations of prototype vehicles for commercial and
military users in combination with market research have enabled us to direct our
development efforts towards the products offering the best probability of
success in the market.




Our
engineers have designed other aspects of our machine to complement the unique
functionality of our Omni-Directional technology. In so doing, we achieved a
virtually maintenance free drive system which allows the vehicle free and
unrestricted movement during operation. Each vehicle is powered with electric
motors that eliminate brushes and commutators of conventional DC motors. The
motors also are lubricated for life thereby eliminating the need for additional
greasing and fittings. The ATX-3000 transmission uses a synthetic lubricant, and
is sealed for life. The joysticks control all vehicle movement. Conventional
drive trains, steering racks, hydraulic valve levers, and foot petals for
braking and acceleration are all non-existent.




On
vehicles employing our Omni-Directional Technology, each wheel powered wheel has
a separate electric motor, making the vehicle capable of traveling in any
direction. The motion of the vehicle is controlled by coordinating all powered
wheels through a microprocessor that receives input from an operator-controlled
joystick(s). The joystick(s) control all vehicle movement (starting, steering,
and stopping). The frame of our ATX-3000 Omni-Directional Lift Truck consists of
a steel main frame and attached articulating axle, mobilized with four
Omni-Directional wheels. The AC electric motor for each wheel turns its own
wheel hub. Each wheel hub is encircled with multiple specially shaped rollers
that are offset 45 degrees. By independently controlling the forward or rearward
rotation of each wheel, the vehicle has the capability of traveling in any
direction. The technology allows the vehicle to move forward, laterally,
diagonally, or completely rotate within its own footprint, thereby allowing it
to move into confined spaces without difficulty. The navigational options of an
Omni-Directional vehicle are virtually limitless.




EXISTING
AND PROPOSED PRODUCTS




SIDEWINDER Omni-Directional Lift
Trucks. We anticipate that we will add additional models of lift trucks
to the SIDEWINDER line, including a Reach truck and an Order Picker
truck.




Omni-Directional Aerial Work
Platform. In late February 2004, we, in collaboration with MEC Aerial
Platform Sales Corporation of Fresno, California ("MEC"), introduced a concept
version of a scissor lift at the American Rental Association trade show in
Atlanta. The scissor lift called the "PHOENIX(TM)", incorporated our
Omni-Directional technology along with an MEC platform and lift
mechanisms.




7




On March
13, 2004, we entered into a draft Product Development, Sales and Representation
Agreement with MEC. The draft agreement called for the joint development of a
proto-type and production versions of an Omni-Directional aerial work platform
called the "3068ODS". During the development stage, each party was to provide
the parts, which apply to that party's area of responsibility. We would provide
all of the parts required for the Omni-Directional traction system and related
control systems, and MEC would provide all of the parts required for the scissor
lift and lifting apparatus and the control systems for the scissor lift
apparatus. After development of the prototype version, the parties were to
establish the cost of a commercial product, and if the cost of a commercial
product was considered commercially viable, the parties would jointly develop a
commercial version of the aerial work platform. If commercial production
resulted, we would have been responsible for product manufacturing, and MEC or
its affiliate would have been responsible to promote, market and sell the
product to their network of approximately 200 distributors. Aerial work platform
sales made by MEC would be subject to a royalty to us and, likewise sales made
by us would be subject to a royalty to MEC. The amount of the respective
royalties would be subject to agreement by the parties. Orders placed by MEC
would be financed by MEC subject to agreed production schedules. We also planned
to manufacture the COBRA(TM) AWP using the lifting mechanism as designed by us
or procured from MEC and vendors other than MEC.




During
2004, MEC was repositioned to perform manufacturing in the United States thus
removing their obligation under the agreement. During the latter part of 2004,
we presented MEC with invoices for payment of tooling and engineering costs
related to development of the PHOENIX(TM). The invoices were not paid by MEC who
was, at that time, in the process of realigning their finances. As a result of
the aforementioned changes, the agreement was modified. The modification stated
that the 3068ODS aerial work platform project would be products of our company
instead of an MEC designed or built vehicle. This meant that the project would
be henceforth designed and built by us. MEC would still have the ability to make
suggestions regarding vehicle design or construction, but the final product
would be our product. In addition, the agreement was revised to provide that we
would build another vehicle product line, the COBRA, which will be marketed
exclusively by our dealers. The parties mutually agreed to the dissolution of
the agreement and Airtrax has decided to design, build and market the AWP’s
under the COBRA brand exclusively. Discussions with MEC regarding ways that they
can make Omni-Directional AWP’s available to their customers are on
going.




Omni-Directional Personal Mobility
Devices. We have begun the development of new technologies which will
enable us in the future, to develop Omni-Directional Personal Mobility Devices
such as Power Chairs, Scooters, and patient beds or lifts. We have had
discussions with several equipment manufacturers who may be interested in
developing and marketing such products using these technologies. No agreements
have been made. We will require additional funds to complete structural and
ergonomic designs and proto-type vehicles, for further evaluation and testing.
We cannot predict whether we will be able to successfully develop these
products.




Military Products. During
1999, we were awarded a Phase I research contract under the Department of
Defense's Small Business Innovation Research program (SBIR) to develop an
Omni-Directional Multiple Purpose Mobility Platform (MP2). Under the Phase I
base contract, we studied the application of the omni-directional technology for
military use and were supervised by the Naval Air Warfare Center Aircraft
Division (NAWC-AD) in Lakehurst, New Jersey. The contemplated use includes the
installation of jet engines on military aircraft and the transportation of
munitions and other military goods. We completed the Phase I base contract in
1999 and were subsequently awarded a Phase I option from NAWC-AD to further
define the uses of the MP2. In July 2000, we were awarded a Phase II research
contract under the SBIR program. Under the Phase II contract, we studied the
feasibility of the MP2 for military purposes, and constructed two proto-type
devices. This contract (with the option) was extended twice for 6 months each
past the 42-month contract time period. A completed proto-type MP2 was delivered
to the US Navy during the end of the first quarter of 2004 for testing purposes.
A second design, an Omni-Directional Jet Engine Handler conversion kit was
constructed, and demonstrated as proof of concept of the modularity of the
design. We have been advised by the US Navy that a non-SBIR sponsor for the MP2
program must be identified before a Phase II option is exercised. A Phase III
contract could be awarded without such a sponsor. Although our management
believes the underlying Omni-Directional Technology for the proposed MP2 has
significant potential for both commercial and military applications, we cannot
predict whether any sales beyond the Phase II contract will result from the SBIR
program. It is the belief of management that sales to the US military for
products such as the MP2 will not materialize until the
Omni-Directional Technology achieves commercial acceptance. We do believe,
however, that products such as the ATX-3000 or the COBRA AWP can and will be
sold to the US government, possibly including the military, through a GSA
Multiple Awards Contract. We have begun the application process and hope it will
be awarded by mid-2007. We cannot predict whether we will be successful in our
application.




8




On
September 7, 2006, we were awarded a $415,000 contract to design and build a
customized MP2 Equipment Handling Unit for the Israeli Air Force. The contract
includes an option to build 5 additional units at $95,000 each upon the
acceptance of the first unit. It is estimated that the follow on orders that
could result from this contract would be from 29 to 100 units over the next one
to three years. The Critical Design Review was completed in November 2006, the
design was approved and initial deliverables were provided. As a result, we
received a first process payment of $170,000 on December 12, 2006. We expect to
begin the Acceptance Test Procedure in mid-April 2007 and upon successful
completion, will receive a second payment of $162,000. We cannot predict whether
we will be able to successfully pass all of the acceptance tests and complete
the contract, or that if we do so, that any subsequent orders will
result.




CURRENT
OPERATIONS




Since
1995, substantially all of our resources and operations have been directed
towards the development of the Omni-Directional wheel, related components,
Omni-Directional Lift Trucks and other Omni-Directional Vehicles. Many of the
components, including the unique shaped wheels, motors, and frames, have been
designed by Airtrax and are specially manufactured for us. 29 ATX-3000
Omni-Directional lift trucks, carrying ANSI certification and the UL Label, have
been shipped to customers in 2006, and nine others are ready to ship pending
receipt of orders in the beginning of 2007.




ANSI
testing refers to a series of tests including tilt testing the vehicle with
masts it will use to make certain that it will not tip over in normal use. In
addition, ANSI testing includes drop testing specified loads on the overhead
guard to make certain that the overhead guard will not fail and crush the
operator. These tests require us to turn the vehicle on its side to prove that
the battery door lock will retain the battery in the event the vehicle is
overturned. ANSI testing was performed and documented by us and we have
certified that the tests have been completed and the vehicle has passed in all
respects. This testing was required prior to the vehicle being sold to the
public in the United States.




UL
testing is completed on lift trucks to certify that is free of hazards with
respect to fire and electrical shock. Completion of UL testing is generally
considered the mark of companies who will take extra steps and precautions to
protect their customers.




9


MANUFACTURING
AND SUPPLIERS




There was
limited production in the second through fourth quarters of 2006. All of the
units shipped in 2006 and our current inventory were assembled in the last
quarter of 2005 and the first quarter 2006. Our General Manager for plant
production, a former plant manager for GM, has established the production
assembly process and procedure for our vehicle assembly. His efforts have helped
to develop procedures, and to incorporate inventory control and quality
assurance programs so that we stand ready to rapidly scale production capacity
at the Blackwood facility. Initially this plant was equipped for nominal monthly
production but is capable of ramping up for anticipated demand before year's
end. We also plan to manufacture the KING COBRA Omni-Directional AWP in the
Blackwood plant beginning in the third quarter of 2007.





Components
for our products consist of over the counter products and proprietary products
that have been specially designed and manufactured by various suppliers in
collaboration with us. We believe that continual refinements of certain
components will occur during the first six months of initial KING COBRA
production in response to user feedback and additional product testing. We will
strive to improve product functionality, which may require additional
refinements in the future. We consider the specially designed and manufactured
products proprietary, and have entered into exclusive contractual agreements
with certain suppliers to protect the proprietary nature of these products.
These arrangements prohibit the supplier from producing the same or similar
products for other companies who would want to compete directly with us in the
omni-directional vehicle market. In addition, while we maintain single sources
for some of the over the counter components, we are engaged in qualifying and
securing agreements with second sources for all possible components




DISTRIBUTION
AND PRODUCT MARKETING




We intend
to establish a national and international network of distributors and dealers to
sell our SIDEWINDER and COBRA lines to users, however, we may sell directly to
select national and international accounts and retailers. National and
international accounts or retailers include, but are not limited to, nationally
recognized businesses with national or international locations having facilities
in numerous states or countries.




During
2004 and 2005, in anticipation of commercial production, we solicited interest
from targeted dealers nationwide, and in certain instances, received contracts
from a number of these dealers. Due to the delay in establishing commercial
production, the contracts were not fulfilled. In 2004, we began soliciting
dealers nationwide and distributors in several foreign countries. Principal
terms of the agreement reached is that these dealers will purchase our products
which include the SIDEWINDER or the COBRA AWP (scissor lift), or both and sell
these products to their clients. Certain of the distributors were given
"exclusive" territories, such as Airtrax Canada (Airtrax Canada is not owned or
operated by us but we have authorized their use of the Airtrax Name). Airtrax
Canada was required to purchase a minimum number of SIDEWINDER units to maintain
the "exclusivity" portion of the agreement between firms. Airtrax Canada lost
their exclusivity in 2006, as they did not meet the minimum requirements of the
agreement. Presently, we are unable to distribute quantities of vehicles in
Europe due to our inability to be certified compliant (“CE”) with Europe. We
expect to be CE compliant and able to distribute vehicles in 2007, although no
assurances can be given. The dealers in the US generally have not been given
exclusive territorial rights, but that has occurred in some areas. They are
required to purchase one or more vehicles, however, to become a dealer. Credit
terms are now available to approved dealers while foreign distributors are only
sold under the terms of letters of credit. All foreign sales are paid in
advance, under terms of an irrevocable letter of credit or approved credit
terms. Targeted dealers for the SIDEWINDER brand will consist of selected
premier equipment dealers, currently selling other lift truck products. The
dealer network will consist of dealers who have substantial market share in the
US, with a history of being able to sell and repair lift trucks and/or related
material handling solutions. Several of the targeted dealers are significant
sized entities, having annual sales in excess of $100 million. We expect to
provide a sales incentive to dealers through an aggressive pricing structure.
Typically, a dealer will earn a commission ranging from $500 to $1,000 on the
sale of a competitive lift truck. Our pricing structure will enable the dealer
to receive much higher commissions from the sale of the SIDEWINDER
products.




10




We also
intend to use trade shows and print and television media to advertise and
promote our Omni-Directional products. Print media will include advertisements
in national and international publications such as web based ads, major material
handling equipment magazines, and direct mailings to targeted distributors and
end-users. Heavy equipment is rarely, if at all, advertised on television.
However, we believe that television will provide an effective media for our
product, due to its unique attributes. We believe that due to the current
economic conditions, we will be able to capitalize on favorable advertising
pricing. We also expect to be an exhibitor at industry trade shows from time to
time, including the bi-annual ProMat show located in Chicago,
Illinois.




Product
Warranty Policies




Our
product warranty policy is similar to the warranty policies of other major
manufacturers, i.e., one-year warranties on all parts and labor, and two years
on major parts, however, our vehicles have fewer parts to warranty. In addition,
manufacturers of our parts and vehicles have their own warranty policies that,
in effect, take the financial exposure from our company. There are exceptions to
the one year rule, such as the frame and significantly, the motors and
controllers. These parts have an eighteen-month warranty, because the coverage
begins when the product is shipped to us and not when the product is
purchased.




MARKETS




Lift
Trucks




Our
initial market focus was directed to the lift truck market. We believe that
commercial versions of Omni-Directional Lift Trucks will improve the materials
handling and warehousing industries creating potential markets globally.
Industry data shows that during 2003 approximately 174,000 and 550,000 units
were sold in the United States and worldwide, respectively (Modern Materials
Handling). Based upon an average per unit sale price of $28,500 (Modern
Materials Handling estimate), the total market in the United States would
approximate $5 billion in 2003. This amount represents sales of a broad range of
vehicles with price ranges from $18,000 to $31,000 for a standard 3,000-pound
rated vehicle to $75,000 or greater for specialty narrow aisle or side loader
vehicles. We expect to continue to make inroads into this market with the
introduction of additional SIDEWINDER brand material handling vehicles in the
future.




Aerial
Work Platforms




Aerial
Work Platforms are used in the construction and warehousing industries, and are
ideally suited for our Omni-Directional Technology. According to data provided
by the United States Department of Commerce, this market consists of
approximately $1.2 billion in annual sales. Aerial Work Platforms and man lifts
range in size from single user lifts to large off road machines. Of the total
market, we expect to compete with a range of indoor man lifts. Great strides
were made in our development of our AWP products during 2006, and we now plan to
introduce two models under the COBRA brand in 2007, and additional units in
2008.





11


COMPETITION




We expect
to confront competition from existing products, such as standard and "Narrow
Aisle or NA" lift trucks, and from competing technologies. Competition with
standard lift trucks, which retail from $16,000 to $31,000, will be on the basis
of utility, price, and reliability. We believe that we will compete favorably
with a standard lift truck for reliability, and that a purchase decision will be
based upon weighing the operational advantages of our products against its
higher purchase price. NA and sideloader lift trucks retail at $45,000 or
greater. While our SIDEWINDER Omni-Directional Lift Truck cannot be classified
as "narrow aisle", it can perform "narrow aisle" functions at a significantly
less cost. We also are aware of multi-directional lift trucks now being offered
by other manufacturers that retail from $42,000 and higher for the standard
version. These newer products have improved operational features, however, they
are unable to travel in all directions, and hence are not omni-directional.
These machines have to stop, turn all four wheels, and then proceed to drive in
the sideward direction. Despite these improved operational features, management
believes these manufacturers have adhered to older conventional methods and have
added a substantial amount of parts to their lift trucks to achieve improved
functionality, which contrasts with the design and features of our product as
discussed previously herein. Therefore, to that extent, we believe that we
maintain a competitive advantage to these newer products.




We
recognize that many of these manufacturers are subsidiaries of major national
and international equipment companies, and have significantly greater financial,
engineering, marketing, distribution, and other resources than us. In addition,
the patent on the first omni-directional wheels expired in 1990. Although we
have received patent protection for certain aspects of our advanced technology,
no assurances can be given that such patent protection will effectively thwart
competition.




PATENTS
AND PROPRIETARY RIGHTS




In
December 1997, we were awarded a patent for an omni-directional helicopter
ground-handling device. On January 22, 2002, we received US patent #6,340,065
relating to our low vibrations wheels. On May 28, 2002, we received US patent
#6,394,203 encompassing certain aspects of the omni-directional wheel with some
features specific to the lift truck, and in April 15, 2003 we received US patent
#6,394,203 relating to methods for designing low-vibration wheels. We also have
several patent applications pending relating to other aspects of our technology.
We expect to make future patent applications relating to various other aspects
of our omni-directional technology. We also have filed a patent application for
our hybrid power module concepts. At this time, no foreign patents have been
issued for any of our technology.




On
September 8, 2003, we entered an exclusive license agreement with Excalibur
Design Services, Inc. and Nicholas Fenelli (Inventor), to secure and use certain
proprietary intellectual properties known collectively as “Omni-Directional
Vehicle Control Algorithms”. Mr. Fenelli is also our Chief Operating
Officer.  Due to severe cash flow restrictions in 2006, we were unable
to fulfill our obligations under the terms of the agreement and Excalibur
rescinded the exclusivity portion of the agreement. As of December 31, 2006, no
other party was granted rights to use the property. On February 19, 2007, we
negotiated an amendment with Excalibur to reinstate our exclusive rights to the
“Omni-Directional Vehicle Control Algorithms”. We expect to resolve all issues
to the mutual benefit of the two companies during 2007.




We also
seek to protect our proprietary technology through exclusive supply contracts
with manufacturers for specially designed and manufactured components.




12


PRODUCT
LIABILITY




Due to
nature of our business, we may face claims for product liability resulting from
the use or operation of our lift trucks or other products.





Presently,
we maintain product liability insurance in the amount of $1 million. We
anticipate increasing this amount $10 million in the future, as we deem
necessary to do so. We obtained our insurance commensurate with the initial
shipment of our Omni-Directional Lift Trucks.




EMPLOYEES




As of
March 31, 2007, we have 13 full time employees, and one contract employee, and
engage consultants from time to time. We have no collective bargaining
agreements with our employees and believe our relations with our employees are
good.




Item 2. Description of
Property




We
maintain our administrative offices and assembly facilities at 200 Freeway
Drive, Unit One, Blackwood, NJ 08012. This facility is a total of 30,000 square
feet with 3,000 square feet allocated to offices, and cost a monthly rental fee
of $12,750.





Item 3.   Legal Proceedings




We are
not currently a party to any legal proceedings. There has been no bankruptcy,
receivership or similar proceedings.





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




No matter
was submitted to a vote of security holders during the fourth quarter of the
fiscal year covered by this report.





13


PART
II




Item 5.   Market for Common Equity and Related
Stockholder Matters.






Our
common stock has been traded on the Over-The-Counter Bulletin Board under the
symbol "AITX". The table below sets forth, for the periods indicated, the high
and low closing prices per share of the common stock as reported on the
Over-The-Counter Bulletin Board. These quotations reflect prices between
dealers, do not include retail mark-ups, markdowns, and commissions and may not
necessarily represent actual transactions. The prices are adjusted to reflect
all stock splits.







$High
            
            $Low2007
      First Quarter
            
            
            0.97
            
            0.482006
      First Quarter
            
            
            2.39
            
            1.08Second
      Quarter
            
            
            2.17
            
            1.15Third
      Quarter
            
            
            2.03
            
            0.92Fourth
      Quarter
            
            
            1.01
            
            0.422005
      First Quarter
            
            
            3.07
            
            1.83Second
      Quarter
            
            
            2.95
            
            1.85Third
      Quarter
            
            
            4.70
            
            2.07Fourth
      Quarter
            
            
            3.40
            
            2.20




Common
Stock





Our
Amended Articles of Incorporation authorize the issuance of 100,000,000 shares
of common stock, no par value per share. Holders of shares of common stock are
entitled to one vote for each share on all matters to be voted on by the
stockholders. Holders of common stock have cumulative voting rights. Holders of
shares of common stock are entitled to share ratably in dividends, if any, as
may be declared, from time to time by the Board of Directors in its discretion,
from funds legally available therefore. In the event of a liquidation,
dissolution, or winding up of our company, the holders of shares of common
stock are entitled to share pro rata all assets remaining after payment in full
of all liabilities. Holders of common stock have no preemptive or other
subscription rights, and there are no conversion rights or redemption or sinking
fund provisions with respect to such shares.




As of
April 12, 2007, there were 24,379,887 shares of common stock
outstanding.




As of
April 12, 2007, there were approximately 878 stockholders of record of our
common stock, respectively. This does not reflect those shares held beneficially
or those shares held in "street" name.




Dividend
Policy





We have
never declared or paid any cash dividends on our common stock. We do not
anticipate paying any cash dividends to stockholders in the foreseeable future.
In addition, any future determination to pay cash dividends will be at the
discretion of the board of directors and will be dependent upon our financial
condition, results of operations, capital requirements, and such other factors
as the Board of Directors deem relevant. There are no restrictions in our
articles of incorporation or bylaws that restrict us from declaring dividends on
our common stock.




14




Preferred
Stock




As of
April 12, 2007, there were 275,000 shares of Preferred stock outstanding. We
held a special meeting of our shareholders on March 28, 2005 pursuant to which a
majority of our shareholders approved an amendment to our certificate of
incorporation to increase our authorized preferred stock from 500,000 to
5,000,000 shares. Accordingly, we are authorized to issue up to 5,000,000 shares
of preferred stock. In addition, pursuant to said meeting, a majority of our
shareholders approved an amendment to our certificate of incorporation to
provide that the shares of preferred stock may be issued in series, and shall
have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions providing for the issuance
of such stock adopted from time to time by the board of directors. Accordingly,
our board of directors is expressly vested with the authority to determine and
fix in the resolution or resolutions providing for the issuances of preferred
stock the voting powers, designations, preferences and rights, and the
qualifications, limitations or restrictions thereof, of each such series to the
full extent now or hereafter permitted by the laws of the State of New
Jersey.




The
holders of the preferred stock are entitled to receive, when, as, and if
declared by our board of directors, out of funds legally available therefore,
cash dividends on each share of preferred stock at the rate of 5% per annum, or
if cash is not legally available, in additional shares of common stock. The
preferred stock, in respect of dividends and distributions upon our liquidation,
winding-up, and dissolution, shall rank senior to all classes of our common
stock and each other class of capital stock or series of preferred stock created
that does not expressly provide that it ranks senior to, or on a parity with,
the preferred stock. The holders of preferred stock are entitled to cast 10
votes for each share held of the preferred Stock on all matters presented to our
shareholders for shareholder vote.




On April
1, 2005, we issued 100,000 shares of preferred stock to the sole holder of the
preferred stock as payment of dividends in lieu of cash dividends with respect
to previously issued shares of preferred stock. Our original Articles of
Incorporation, as amended, including on April 30, 2000, do not support the
issuance of additional shares of preferred stock as payment of dividends on
shares of issued and outstanding preferred stock. Accordingly, the 100,000
shares of preferred stock which were issued to the holder on April 1, 2005, were
issued in error.




Our
Articles of Incorporation, as amended, including on April 30, 2000, similarly do
not support the calculation we used in determining the number of shares of
common stock used to pay preferred stock dividends. The difference being the
date used in determining the stock price at the end of each preferred dividend
period, as opposed to the lowest common stock price during the preferred
dividend period, subject to a 70% discount, for calculating the number of common
shares issued as payment of the period’s preferred stock dividend. Accordingly,
the number of shares was greater than the number of shares required, and were
issued in error.




Our
financial statements at December 31, 2004 reflect 275,000 shares of preferred
stock outstanding and disclosed that an additional 100,000 shares of preferred
stock were deemed the equivalent of 221,892 shares of common stock that would
have been required to settle an equivalent amount of preferred dividends. We
have determined that the number of shares deemed the equivalent of the preferred
stock dividend has been recalculated based on our Articles of Incorporation, as
amended, including on April 30, 2000. Accordingly, we will issue 136,041 shares
of common stock to the sole holder of the preferred stock as payment of $51,561
of preferred stock dividends less other adjustments resulting from the
recalculation of the number of common shares required to pay preferred stock
dividends, subsequently approved. During the period January 1, 2003 through June
30, 2006, 200,238 shares of common stock were issued in excess of the amount
required.




15




Equity
Compensation Plan Information





The
following table shows information with respect to each equity compensation plan
under which our common stock is authorized for issuance as of December 31,
2006.




EQUITY
COMPENSATION PLAN INFORMATION





Plan
      category
            
            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)(a)
            
            (b)
            
            (c)Equity
      compensation plans approved by security holders
            
            -0-
            
            -0-
            
            
            -0-Equity
      compensation plans not approved by security holders
            
            -0-
            
            -0-
            
            
            -0-Total
            
            -0-
            
            -0-
            
            
            -0-





Currently,
we do not havea
formalized equity compensation plan under which our common stock is authorized
for issuance.





Unregistered
Sales of Equity Securities




Following is a summary of unregistered
securities issued during the fourth quarter of 2006.





●
            194,000
      shares of common stock were issued for professional services valued at
      $141,919.





●
            184,000
      shares of common stock were issued in connection with a settlement of a
      default on a convertible promissory note. These shares were valued at
      $93,490.





●
            41,666shares
      of common stock were issued in exchange of a $65,000 of convertible
      note.





●
            5,000
      shares were issued as an Employee bonus valued at
  $3,570.





●
            All
      of the above offerings and sales were deemed to be exempt under rule 506
      of Regulation D and Section 4(2) of the Securities Act of 1933, as
      amended. No advertising or general solicitation was employed in offering
      the securities. The offerings and sales were made to a limited number of
      persons, all of whom were accredited investors, business associates of
      Airtrax or executive officers of Airtrax, and transfer was restricted by
      Airtrax in accordance with the requirements of the Securities Act of 1933.
      In addition to representations by the above-referenced persons, we have
      made independent determinations that all of the above-referenced persons
      were accredited or sophisticated investors, and that they were capable of
      analyzing the merits and risks of their investment, and that they
      understood the speculative nature of their investment. Furthermore, all of
      the above-referenced persons were provided with access to our Securities
      and Exchange Commission filings.





16


Item 6.   MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS




Special Note on Forward-Looking
Statements. Certain statements in “Management’s Discussion and Analysis
or Plan of Operation” below, and elsewhere in this annual report, are not
related to historical results, and are forward-looking statements.
Forward-looking statements present our expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements.
Forward-looking statements frequently are accompanied by such words such as
“may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative
of such terms or other words and terms of similar meaning. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
achievements, or timeliness of such results. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this annual report. Subsequent
written and oral forward looking statements attributable to us or to persons
acting in our behalf are expressly qualified in their entirety by the cautionary
statements and risk factors set forth below and elsewhere in this annual report,
and in other reports filed by us with the SEC.




You
should read the following description of our financial condition and results of
operations in conjunction with the financial statements and accompanying notes
included in this report beginning on page F-1.




Overview





Since
1995, substantially all of our resources and operations have been directed
towards the development of the Omni-Directional wheel, related components,
Omni-Directional Lift Trucks and other Omni-Directional Vehicles. Many of the
components, including the unique shaped wheels, motors, and frames, have been
designed by Airtrax and are specially manufactured for us.




Omni-Directional
means that vehicles designed and built by us can travel in any direction. Our
Omni-directional vehicles are controlled with a joystick. The vehicle will
travel in the direction the joystick is pushed. If the operator pushes the
joystick sideways, the vehicle will travel sideways. If the operator were to
twist the joystick the vehicle will travel in circles. Our omni-directional
vehicles have one motor and one motor controller for each wheel. The
omni-directional movement is caused by coordinating the speed and direction of
each motor with joystick inputs which are routed to a micro-processor, then from
the micro-processor to the motor controllers and finally to the motor
itself.




During
the year ended December 31, 2006, we continued development of the COBRA and KING
COBRA scissor lifts and the Omni-Directional power chair. We anticipate
incurring more costs on these products and plan to begin production of the first
COBRA and the KING COBRA models in 2007. The growth and development of our
business will require a significant amount of additional working capital. We
currently have limited financial resources and based on our current operating
plan, we will need to raise additional capital in order to continue operations.
However, we are in discussions with lenders to raise capital in order to
continue operating. We currently do not have adequate cash to meet our short or
long term objectives. In the event additional capital is raised, it may have a
dilutive effect on our existing stockholders. There can be no assurance that
additional financing will be available at terms that are suitable to
us.




17




We have
incurred losses and experienced negative operating cash flow since our
inception. For the twelve month period ended December 31, 2006 and 2005, we had
net losses attributable to common shareholders of approximately $6.2 million and $ 11.6 million, respectively. The net loss
in both periods includes amortization of debt discount and
financing costs of $900,000 and $2.5 million in 2006 and 2005,
respectively, offset by revaluation income $1.4 million and $68,000 in
2006 and 2005, respectively, in connection with the repricing of the conversion
benefits of convertible debenture issues and of warrant conversion
prices. We also wrote down the advances to Filco of $4.7 million and $2 million
in 2006 and 2005, respectively. We expect to continue to incur significant
expenses. Our operating expenses have been and are expected to continue to
outpace revenue and result in additional losses in the near term. We may never
be able to reduce these losses, which will require us to seek additional debt or
equity financing. While we are in discussions with several prospective lenders,
we do not currently have commitments for these funds and there can be no
assurance that additional financing will be available, or if available, will be
on acceptable terms.




Restatement




In
conjunction with our independent registered public accounting firm and
professional advisors, we conducted an analysis of our various financial
instruments and agreements involving convertible debt and common stock
financings accompanied by warrants, with a particular focus on the
accounting treatment of derivative financial instruments under Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities(“SFAS 133”), the
Emerging Issues Task Force issued EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock(“EITF 00-19”), and FASB Staff Position
No. EITF 00-19-2, “Accounting for Registration Payment Arrangements”
(“EITF 00-19-2”), (collectively, the “Derivative Accounting
Pronouncements”). Accordingly, certain accounting policies we previously
considered to reflect what was deemed to be appropriate at the time when the
financings were previously reported, have been modified by recent
interpretations, including the Derivative Accounting Pronouncements.




On
November 2, 2007, as a result of this analysis, we noted that our previously
filed financial statements in the annual reports for the years ended
December 31, 2004, 2005 and 2006 filed on Form 10-KSB, together with the
quarterly reports on Form 10-QSB for the quarters ending March 31, 2005,
June 30, 2005, September 30, 2005, March 31, 2006, June 30, 2006, September 30,
2006, March 31, 2007, June 30, 2007 and September 30, 2007 (collectively, the
“Reports”) could no longer be relied upon.  We sent a formal letter request
to the Office of the Chief Accountant (OCA) of the Security and Exchange
Commission (SEC) dated December 17, 2007, petitioning the OCA to waive the
requirement to file separate amended and restated Reports for the periods noted
above, and instead file a comprehensive amended and restated comparative Form
10-KSB for the years ended December 31, 2006 and 2005, along with certain
comprehensive financial information and disclosures for 2004, and comprehensive
amended and restated comparative Form 10-QSBs for the periods ended March 31,
2007, June 30, 2007, and September 30, 2007 along with certain comprehensive
financial information and disclosures for 2005. This waiver was granted by the
OCA on December 27, 2007.




This restatement is
required to properly reflect our financial results for certain non-cash, and
non-operational related charges or credits to earnings associated with both
embedded and freestanding derivative liabilities, and the accounting for certain
derivatives under the control of the issuer due to the revised interpretation
and implementation of the Derivative Accounting Pronouncements.





18


Results
of Operations for the Year Ended December 31, 2006 Compared to the Year Ended
December 31, 2005





Liquidity
constraints and limited access to additional capital for production in 2004 and
2005 and the unexpected death of our Chief Executive Officer and President,
Peter Amico in August 2006 have limited production and sales of omni-directional
technology. Consequently, management believes that the year-to-year comparisons
described below are not indicative of future year-to-year comparative
results.





In
September 2006, Airtrax was awarded a $415,000 contract to design and build a
customized MP2 Equipment Handling Unit for the Israeli Air Force. The contract
includes an option to build five additional units at $95,000 each upon the
acceptance of the first unit. It is estimated that the follow on orders that
could result from this contract would be from 29 to 100 units over the next one
to three years. The Critical Design Review was completed in November 2006, the
design was approved and initial deliverables were provided. As a result, we
received a first process payment of $170,000 on December 12 2006. We expect to
begin the Acceptance Test Procedure in mid April 2007 and upon successful
completion, will receive a second payment of $162,000. We cannot predict whether
we will be able to successfully pass all of the acceptance tests and complete
the contract, or that if we do so, that any subsequent orders will
result.





We
believe that the joint cooperation between us and the United States Navy with
the MP2 contract, including building the ETU-110 omni-directional engine handler
and our contract to design and build a customized MP2 Equipment Handling Unit
for the Israeli Air Force, has bolstered the potential use of our technology
within the military. We do not intend to incur additional costs with the US Navy
unless we incur potential expenses in demonstrating the ETU-110 omni-directional
engine handler, or other omni-directional vehicles in connection with the
Israeli contract.




Revenue





Revenue
for the twelve-month period ended December 31, 2006 was approximately $1.3
million, representing an increase of approximately $600,000 from revenue of
$719,000 for the comparable period in 2005. This increase in revenue, is
primarily, attributed to sales of our SIDEWINDER ATX-3000.




Cost
of Goods Sold




Our cost
of goods sold for the twelve month period months ended December 31, 2006
amounted to approximately $1.5 million, an increase of approximately $800,000
from $729,000 for the twelve months ended December 31, 2005. This increase in
cost of goods sold, is primarily, attributed to sales of our SIDEWINDER
ATX-3000.




Operating
and Administrative Expenses




Operating
and administrative expenses which include administrative salaries, depreciation
and other expenses for the twelve month period ended December 31, 2006 totaled
$5.9 million which represents a decrease of approximately
$3.5 million from $9.4 million incurred in the twelve month period
ended December 31, 2005. The decrease is primarily due to recording of stock
option expenses of $1.1 million in 2005, compared to $76,000 in 2006, partially
offset by additional expenses relating to the increase in production of
our SIDEWINDER ATX-3000 and Cobra and King Cobra scissor lift and
Omni-Directional Power Chair development costs.





Operating
expenses also include a $2.0 million impairment charge for the Filco advances
which were completely written off in 2006, compared to the $4.7 million charged
in 2005.




19




Other Income and
Expense




Other income and
expenses, net, for the twelve month period ended December 31, 2006 totaled
($225,000) which includes amortization charges for deferred financing fees
($251,000), amortized discounts against certain debt issuances in connection
with conversion privileges ($649,000), liquidated damages for settlement of debt
covenants ($214,000) and settlement expenses in connection with debt issuances
($290,000), offset by an increase in revaluation income of $1.4 million for
warrant and conversion privileges being revalued at the end of the reporting
period. During the twelve month period ended December 31, 2005, we recorded
other income and expenses of ($2.8 million) which included charges for deferred
financing fees ($773,000), amortized discounts against certain debt issuances in
connection with conversion privileges ($1..8 million), and settlement expenses
of ($281,000), partially offset by revaluation income of $68,000.




Loss Attributable to
Common Shareholders




Loss attributable to
common shareholders for the twelve months ended December 31, 2006 was
approximately $(6.2) million compared with a loss of $(11.6) million for the
same period in 2005. The decrease is in part to the recording of stock option
expenses of approximately $1.1 million in 2005, compared with $76,000 in the
current period, and other income and expenses (net) in the twelve months ended
December 31, 2005 of approximately $2.8 million compared with $225,000 in 2006.
Additionally, we recorded revaluation income of $1.4 million in 2006 compared
with $68,000 in 2005 in connection with the repricing of warrant and conversion
privileges of convertible debenture issues and of warrant conversion prices. We
also wrote down the remaining Filco advance of $2.0 million during 2006,
compared with an impairment of $4.7 million in 2005, along with approximately
$300,000 of deemed dividend expense in each year.





Research
and Development





We
incurred $519,134 and $544,933 in research and development expenses during the
year ended December 31, 2006 and 2005, respectively. Research and development
activities during fiscal 2005 primarily involved continued testing and
evaluation of omni-directional components and preparing these components for
production in 2005. Our wheel design was changed from the "concept" to
"production" phase. This was and is an ongoing process between our Company and a
vendor’s engineers to insure manufacturability. The motors and controllers were
designed and/or changed in design in order to meet ANSI (American National
Standards Institute) and UL (Underwriters Laboratories) testing requirements.
Danaher and




Liquidity
and Capital Resources




Since our
inception, we have financed our operations through the private placement of our
common stock and sales of convertible debt. During the twelve months ended
December 31, 2006 and 2005, we raised net of offering costs approximately $1.3
million and $5.9 million, respectively, from the private placement of our
securities.




During
2000, we were approved by the State of New Jersey for our technology tax
transfer program pursuant to which we could sell our net operating losses and
research and development credits as calculated under state law. In the years
2006 and 2005, we recorded credits of $493,258 and $867,413, respectively, from
the sale of our losses and credits.




20




We have
consistently demonstrated our ability to meet our cash requirements through
private placements of our common stock and convertible notes. We have continued
to similarly satisfy those requirements during the twelve months ended December
31, 2006. However, there can be no assurances that we will be successful in
raising the required capital to continue our current operating
plan.




We
anticipate that our cash requirements for the foreseeable future will be
significant. In particular, management expects substantial expenditures for
inventory, product production, and advertising with production of its
Omni-Directional lift truck and the start of Cobra and King Cobra
(Scissors-Lift) production.





We will
require additional funds to continue our operations beyond the initial
production run. We anticipate that operating capital in the amount of
approximately $3 to 5 million will be required during the next 12 months to
sufficiently fund operations. We expect to recognize lower per unit
manufacturing and part costs in the future due to volume discounts, as well as
lower per unit shipping costs as we transition from the initial rate to
larger-scale production. While we are in discussions with several prospective
lenders, we do not currently have commitments for additional funds and there can
be no assurance that additional financing will be available, or if available,
will be on acceptable terms. If we are unable to obtain sufficient funds during
the next six months we will further reduce the size of our organization and may
be forced to reduce and/or curtail our production and operations, all of which
could have a material adverse impact on our business prospects.





As a
result of our liquidity issues, we have experienced delays in the repayment of
certain promissory notes upon maturity and payments to vendors and others. If in
the future, the holders of our promissory notes may demand repayment of
principal and accrued interest instead of electing to extend the due date and if
we are unable to repay our debt when due because of our liquidity issues, we may
be forced to refinance these notes on terms less favorable to us than the
existing notes, seek protection under the federal bankruptcy laws or be forced
into an involuntary bankruptcy filing.




As
of December 31, 2006, our working capital deficit was $1,225,143. Fixed assets,
net of accumulated depreciation were $283,920, and total assets, as of December
31, 2006, were $3,017,404. Current liabilities as of December 31, 2006 were
$3,676,558 compared with total liabilities of $4,208,100.


As
of December 31, 2005, our working capital was $299,940. Fixed assets, net of
accumulated depreciation was $190,893, and total assets, as of December 31, 2005
were $5,489,101. Current liabilities as of December 31, 2005 were $2,959,663
compared with total liabilities of $4,298,188.
  As
of January 1, 2005, our working capital deficit was $572,184. Fixed assets, net
of accumulated depreciation were $93,587, and total assets, as of December 31,
2005 were $4,600,023. Current and total liabilities as of December 31, 2004 were
$2,291,153.





February
2007 Financing





On
February 20, 2007, we entered into a Securities Purchase Agreement with certain
accredited and/or qualified institutional investors pursuant to which we sold an
aggregate of $3,734,040 principal amount secured convertible debentures
convertible into shares of our common stock at a conversion price equal to $0.45
for an aggregate purchase price of $3,219,000. In addition, we issued to the
investors (i) warrants to purchase 8,297,866 shares of our common stock at an
exercise price equal to $0.54 per share, which represents 100% of the number of
shares issuable upon conversion of the debentures; (ii) callable warrants to
purchase 4,148,933 shares of our common stock at an exercise price equal to
$0.75 per share, which represents 50% of the number of shares issuable upon
conversion of the debentures; and (iii) callable warrants to purchase 4,148,933
shares of our common stock at an exercise price equal to $1.25 per share, which
represents 50% of the number of shares issuable upon conversion of the
debentures.




21





The
debentures mature on February 20, 2009. We may in our discretion redeem the
debentures, subject to certain equity conditions being met by us as set forth in
the debentures, at a price equal to 150% of the principal balance, accrued
interest, and all liquidated damages, if any, thereon that are requested to be
redeemed. Our obligations under the securities purchase agreement, the
debentures and the additional definitive agreements with respect to this
transaction are secured by all of our assets. In addition, our wholly owned
subsidiaries, Airtrax Financial Services LLC and Airtrax Manufacturing Corp.,
which are non-operating entities,  are guaranteeing the satisfaction
of our obligations under the Securities Purchase Agreement , the
debentures and the additional definitive agreements with respect to this
transaction.




Off-Balance
Sheet Arrangements




We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenue, results of
operations, liquidity or capital expenditures.




Liquidated
Damages




In
connection with financings we entered into with various investors in November
2004 and October 2005, we provided such investors registration rights. Pursuant
to those registration rights, in the event that we did not file a registration
statement by a certain date registering for resale shares of common stock
issuable upon conversion of their securities or have such registration statement
effective by another date, we agreed to pay to such investors liquidated
damages. To date, we have not filed such registration statement, and as a
result, we have accrued the required obligation for liquidated
damages.




During
2006, we issued  to the investors in the November 2004 financing, an
aggregate principal amount of $198,248  in our 4% Unsecured
Convertible Debentures and 5 year warrants to purchase an aggregate of 72,201
shares of our common stock in exchange for the settlement of $244,632 in accrued
liquidated damages through June 30, 2006. The debentures mature on March 1,
2008, and September 30, 2008, respectively, pay simple interest at a rate of 4%
per annum and are convertible into shares of our common stock at a price equal
to $ 1.56 per share. The warrants are exercisable into shares of our
common stock at a price equal to $ 1.75 per share. In addition, the
investors agreed to forego any future accrual and payment of such liquidated
damages.




In July
2006 we issued 2% Unsecured Convertible Debentures to the investors in the
October 2005 financing, aggregating $359,549 and Stock Purchase Warrants to
acquire 110,808 shares of our common stock at $ 1.56 per share, in full
settlement of liquidated damages resulting from our not filing a registration
statement by a certain date registering for resale shares of common stock
issuable upon conversion of their securities. The conversion price of the shares
underlying the note was $ 1.75 .  In addition, the investors agreed
to forego any future accrual and payment of such liquidated
damages.




Critical Accounting
Policies and Estimates




Intangibles




We
incurred costs to acquire certain patent rights. These costs are capitalized and
are being amortized over a period of fifteen years on a straight line basis.




We
continually evaluate whether events and changes in circumstances warrant revised
estimates of useful lives or recognition of an impairment loss of our
intangibles, which as of December 31, 2006, consisted mainly of patents and
licensing agreements. The conditions that would trigger an impairment assessment
of our intangible assets include a significant, sustained negative trend in our
operating results or cash flows, a decrease in demand for our products, a change
in the competitive environment and other industry and economic factors.




22




Deferred Financing
Costs




Deferred financing
costs represent legal, commitment; processing, consulting, and other fees
associated with the issuance of our debt. Deferred financing costs are being
amortized over the term of the related debt.




Impairment of
Long-Lived Assets




Pursuant to Statement
of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-lived Assets”, we continually
monitor events and changes in circumstances that could indicate carrying amounts
of long-lived assets may not be recoverable. An impairment loss is recognized
when expected cash flows are less than the asset's carrying value. Accordingly,
when indicators of impairment are present, we evaluate the carrying value of
such assets in relation to the operating performance and future undiscounted
cash flows of the underlying assets. Our policy is to record an impairment loss
when it is determined that the carrying amount of the asset may not be
recoverable. Impairment charges of $2,000,000 were recorded for the year ended
December 31, 2006, while impairment charges of $4,700,839 were recorded for the
year ended December 31, 2005 related to the write down of the Filco
advances .




Use
of Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimated.




Revenue Recognition




Revenue on product
sales is recognized when persuasive evidence of an arrangement exists, such as
when a purchase order or contract is received from the customer, the price is
fixed, title to the goods has changed and there is a reasonable assurance of
collection of the sales proceeds. We obtain written purchase authorizations from
customers for a specified amount of product at a specified price and consider
delivery to have occurred at the time of shipment. Revenue is recognized at
shipment, and where the following criteria are met; persuasive evidence of an
arrangement exists; delivery has occurred; the sales price is fixed or
determinable; and collectability is reasonably assured.




Revenue from services
is recognized when the service is performed, and where the following criteria
are met: persuasive evidence of an arrangement exists; the contract price is
fixed or determinable; and collectability is reasonably assured. Revenue from
research and development activities relating to firm fixed-price contracts is
generally recognized as billing occurs. Revenue from research and development
activities relating to cost-plus-fee contracts include costs incurred plus a
portion of estimated fees or profits based on the relationship of costs incurred
to total estimated costs. Contract costs include all direct material and labor
costs and an allocation of allowable indirect costs as defined by each contract,
as periodically adjusted to reflect revised agreed upon rates. These rates are
subject to audit by the other party. Amounts can be billed on a bi-monthly
basis. Billing is based on subjective cost investment factors.




23




Accounting for Income
Taxes




As
part of the process of preparing our financial statements, we are required to
estimate our income taxes. This process involves estimating our actual current
tax exposure together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences
may result in deferred tax assets and liabilities, which are included within our
consolidated balance sheet. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income. If there is not
persuasive evidence that recovery will occur, we would establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, the value of the benefit of the tax deferral is reduced
or eliminated.




Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We have recorded a valuation allowance of $8,257,629 as of
December 31, 2006, due to uncertainties related to our ability to utilize some
of our deferred tax assets, primarily consisting of certain net operating losses
carried forward before they expire and certain accrued expenses, which are
deferred for income tax purposes until paid. The valuation allowance is based on
our estimates of taxable income and the period over which our deferred tax
assets will be recoverable. The net deferred tax asset as of December 31, 2006
was $ 919,889, net of the valuation allowance.


Accounting for
Derivatives




Our
issuances of convertible debt were accompanied by other financial instruments.
These financial instruments include warrants to purchase stock, and the right to
convert debt to stock at specified rates (“conversion benefits”). Pursuant to
SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended (SFAS
133),
and EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, A
Company’s Own Stock(EITF 00-19), we have identified certain embedded and
freestanding derivative instruments. Generally, where the ability to physical or
“net-share” settle an embedded conversion option or free standing financial
instrument is not deemed to be within our control, the embedded conversion
option is required to be bifurcated or separated, and both the freestanding
instruments and bifurcated conversion feature are accounted for as derivative
liabilities. At each reporting date, we estimate the fair values of all
derivatives, and changes in the fair value are reported in the statement of
operations.




Under EITF 00-19,
warrants are considered free-standing instruments in that they are legally
detachable and separately exercisable. The conversion benefits, which are
embedded in these debt issues, derive value from the relationship between the
stock price and debt conversion price, and are considered embedded derivatives
under the provisions of SFAS 133. The fair values of both the warrants and
conversion benefits are calculated using a Black -Scholes Model, taking into
consideration factors such as the underlying price of the common stock, the
exercise price for warrants or the conversion price for the conversion benefit,
the stock volatility, and the risk-free interest rates available for comparable
time periods.




Free-standing
instruments (warrants), and embedded derivatives (conversion benefits) which are
initially bifurcated or separated from the host financial instrument, are
recorded as separate liabilities, in cases where the security holder has a right
to choose to receive a “net settlement” of cash. The identification of such net
settlement provisions in one such prior convertible debt issuance with warrants
resulted in us concluding that such warrants should have been identified as
“derivatives”. Therefore, the warrant liability related to this issuance must be
recorded as a derivative liability on our restated balance sheet, and marked to
market for each subsequent reporting period with any non-cash charges or credits
attributed to the revised fair value of the liability being recognized through
the statement of operations.




24




If
the decision to settle an outstanding liability remains with us, the value of
the warrants is recorded in an equity account. The identification of settlement
provisions being controlled by us under certain debt issuances resulted in us
determining that the securities should be reflected in the restated financial
statements as components of equity, as compared to having been previously
recorded as liabilities with non-cash charges and/or credits to operations as a
result of being marked to market for each period presented. As of December 31,
2006 and 2005, we recognized and recorded the value of certain warrants as
equity of $2,315,935 and $2,051,118, respectively, in the accompanying
financials.




EITF 00-19-2
specifies that the contingent obligations to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement, or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, “Accounting
for Contingencies” (SFAS 5). EITF 00-19-2 also requires additional
disclosure regarding the nature of any registration payment arrangements,
alternative settlement methods, the maximum potential amount of consideration
and the current carrying amount of the liability, if any. We adopted the
provisions of EITF 00-19-2 for the reporting period beginning January 1,
2007.




We
also previously sold stock units which included warrants along with common
stock. In these cases, a portion of the proceeds equal to the value of the
warrants is allocated to the warrants with the balance allocated to the stock.
In such cases, the values of the warrants are treated as liabilities or equity,
depending on whether the issuance documents contain “net cash settlement”
provisions. For those warrants that are treated as liabilities, the liabilities
are revalued at the end of each reporting period with any change in value being
recognized currently as a non-cash charge and/or credit to operations. When a
warrant classified as a liability is exercised or canceled, the fair value of
the warrant, as determined at the time of exercise or cancellation, is
transferred to equity and is no longer revalued. A similar adjustment is made
for a conversion benefit classified as a liability when the debt is converted to
stock, or canceled.




For
embedded and free standing derivatives valued as of December 31, 2006 and 2005,
we have recognized in the statement of operations, revaluation income of
$1,412,143 and $68,481, respectively, for the years ended December 31, 2006 and
2005. In addition, we recognized a derivative liability in the accompanying
balance sheet for conversion benefits and warrants of $236,144 in 2006 and
$1,620,683 in 2005.




To
the extent that the initial fair values of the bifurcated and/or freestanding
derivative liabilities exceed the net proceeds received, an immediate charge to
the statement of operations is recognized for the excess. The remainder of the
discount from the face value of the convertible debt resulting from allocating
part or all of the proceeds to the derivative liabilities is amortized over the
life of the instrument through periodic charges to the statements of operations,
using the straight line method, which was the most systematic and rational
approach that approximated the interest method of amortization due to the short
two year amortization term of the debt.




Stock
Based Compensation




Common Stock for
Services


Because of the
significant liquidity issues we have faced since our inception, we have issued
common stock to third party vendors and others in return for product, services,
and as dividends on the preferred stock. These issuances are assigned values
equal to the value of the common stock on the earlier of the dates of issuance
or the date on which a commitment is made to provide compensation in the form of
equity securities, whichever date is earlier. Such issuances are recorded as
expenses in the periods in which the stock is issued, unless the right to the
stock has not fully vested, in which case the expense is recorded in the periods
of vesting. During the years ended December 31, 2006 and 2005, we issued an
aggregate of 871,257 and 330,895 shares, respectively, of common stock
representing a value of services of $1,197,826 and $836,500, respectively, to
third parties in exchange for services performed.


25




Warrants




We
have issued warrants both as part of “stock units”, and as an integral part of
convertible note issues. The value of the warrants and conversion options which
are classified as liabilities are revalued each reporting period. These values
are determined by a Black-Scholes Model. Most of these issuances contain
Registration Payment Arrangements (RPAs), which impose liquidated damages under
certain circumstances. EITF 00-19-2 specifies the accounting treatment for
derivatives that contain RPA’s and provides guidance on accounting for potential
obligations of the RPA’s. The accounting treatment of derivatives will not
change as a result of EITF 00-19-2 as the “RPAs” were not the sole determining
factor in prior decisions about derivative classification. Each of these
warrants is exercisable over five year periods from dates of issuance at prices
ranging from $0.45-$1.56 per share.   See Note 4 - Capitalization for
additional information.





Recent
Accounting Pronouncement





The
Financial Accounting Standards Board (FASB) has recently issued FASB Staff
Position EITF 00-19-2 which modifies the accounting treatment of derivatives
that flow from financings involving embedded derivatives. This Staff Position is
effective for financial statements for periods beginning January 1, 2007.
Management believes that this will cause some change in the way we account for
derivatives. Management is evaluating this position and has not made a
determination as to the effective it will have on our financial
statements.




The
Company has reviewed other accounting pronouncements issued during 2006, and has
concluded that they will have no effect on our financials
statements.




RISK
FACTORS





In
addition to other information contained in this Form 10-KSB, the following Risk
Factors should be considered when evaluating the forward-looking statements
contained in this Form 10-KSB:




RISKS
RELATED TO OUR FINANCIAL CONDITION AND BUSINESS




WE
MAY NEVER BECOME PROFITABLE AND CONTINUE AS A GOING CONCERN BECAUSE WE HAVE HAD
LOSSES SINCE OUR INCEPTION.




We may
never become profitable because we have incurred losses and experienced negative
operating cash flow since our formation. For our fiscal years ended December 31,
2006 and 2005, we had a net loss attributable to common stockholders of
approximately $ 6.2 million and $ 11.7 million, respectively.
We expect to continue to incur significant expenses. Our operating expenses have
been and are expected to continue to outpace revenues and result in significant
losses in the near term. We anticipate that our cash requirements to fund
operating or investing cash requirements over the next 12 months will be greater
than our current cash on hand. We may never be able to reduce these losses,
which will require us to seek additional debt or equity financing. We do not
currently have commitments for additional funds and there can be no assurance
that additional financing will be available, or if available, will be on
acceptable terms. If we are unable to obtain sufficient funds during the next 12
months we will further reduce the size of our organization and may be forced to
reduce and/or curtail our production and operations, all of which could have a
material adverse impact on our business prospects.




26




OUR
BUSINESS OPERATIONS WILL BE HARMED IF WE ARE UNABLE TO OBTAIN ADDITIONAL
FUNDING.




Our
business operations will be harmed if we are unable to obtain additional
funding. We do not know if additional financing will be available when needed,
or if it is available, if it will be available on acceptable terms. Insufficient
funds may prevent us from implementing our business strategy or may require us
to delay, scale back or eliminate certain opportunities for the provision of our
technology and products.




THE
PRICING POLICY FOR OUR LIFT TRUCKS MAY BE SUBJECT TO CHANGE, AND ACTUAL SALES OR
OPERATING MARGINS MAY BE LESS THAN PROJECTED.




We are
assessing present and projected component pricing in order to establish a
pricing policy for the SIDEWINDER Lift Truck. We have not finalized our
assessment as current prices for certain lift truck components reflect special
development charges, which are expected to be reduced as order volume for such
components increase and as manufacturing efficiencies improve. We intend to
price our lift trucks so as to maximize sales yet provide sufficient operating
margins. Given the uniqueness of our product, we have not yet established final
pricing sensitivity in the market. Consequently, the pricing policy for its lift
trucks may be subject to change, and actual sales or operating margins may be
less than projected.




WE
HAVE RECEIVED LIMITED INDICATIONS OF THE COMMERCIAL ACCEPTABILITY OF OUR
OMNI-DIRECTIONAL LIFT TRUCK. ACCORDINGLY, WE CANNOT PREDICT WHETHER OUR
OMNI-DIRECTIONAL PRODUCTS CAN BE MARKETED AND SOLD IN A COMMERCIAL
MANNER.




Our
success will be dependent upon our ability to sell Omni-Directional products in
quantities sufficient to yield profitable results. To date, we have received
limited indications of the commercial acceptability of our Omni-Directional lift
truck. Accordingly, we cannot predict whether the Omni-Directional product can
be marketed and sold in a commercial manner.




WE
CANNOT ASSURE THAT WE WILL HAVE IN PLACE PATENT PROTECTION AND CONFIDENTIALITY
AGREEMENTS FOR OUR PROPRIETARY TECHNOLOGY. IF WE DO NOT ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS, THERE IS A RISK THAT THEY WILL BE INFRINGED UPON
OR THAT OUR TECHNOLOGY INFRINGES UPON ONE OF OUR COMPETITOR'S PATENTS. AS A
RESULT, WE MAY EXPERIENCE A LOSS OF REVENUE AND OUR OPERATIONS MAY BE MATERIALLY
HARMED.




Our
success will be dependent, in part, upon the protection of our proprietary
Omni-Directional technology from competitive use. A form of our Omni-Directional
technology was originally patented in 1973 and was sold to the US Navy. We
secured a transfer of this technology from the Navy in 1996 under the terms of a
CRADA agreement (Cooperative Research and Development Agreement) and we have
worked since that time to commercialize Omni-Directional products. We received 3
patents regarding the "redesign" of the wheel. In addition, we have a license
agreements for the algorithms used to control vehicular movement, and a patent
for this technology has been applied for. Further, we have applied for patents
for a movable operator's control station and a munitions handler.
Notwithstanding the foregoing, we believe our lack of patent protection is a
material competitive risk. Our competitors could reverse engineer our technology
to build similar products. Also, certain variations to the technology could be
made whereby our competitors may use the technology without infringing upon our
intellectual property.




27




The
patent for the Omni-Directional wheel expired in 1990. We, however, have
received patent protection of certain other aspects of its Omni-Directional
wheel, and for features specific to our lift truck. In addition to the patent
applications, we rely on a combination of trade secrets, nondisclosure
agreements and other contractual provisions to protect our intellectual property
rights. Nevertheless, these measures may be inadequate to safeguard our
underlying technology. If these measures do not protect the intellectual
property rights, third parties could use our technology, and our ability to
compete in the market would be reduced significantly. In addition, if the sale
of our product extends to foreign countries, we may not be able to effectively
protect its intellectual property rights in such foreign countries.




In the
future, we may be required to protect or enforce our patents and patent rights
through patent litigation against third parties, such as infringement suits or
interference proceedings. These lawsuits could be expensive, take significant
time, and could divert management's attention from other business concerns.
These actions could put our patents at risk of being invalidated or interpreted
narrowly, and any patent applications at risk of not issuing. In defense of any
such action, these third parties may assert claims against us. We cannot provide
any assurance that we will have sufficient funds to vigorously prosecute any
patent litigation, that we will prevail in any of these suits, or that the
damages or other remedies awarded, if any, will be commercially valuable. During
the course of these suits, there may be public announcements of the results of
hearings, motions and other interim proceedings or developments in the
litigation. If securities analysts or investors perceive any of these results to
be negative, it could cause the price of our common stock to
decline.




WE
CURRENTLY LACK ESTABLISHED DISTRIBUTION CHANNELS FOR OUR LIFT TRUCK PRODUCT
LINE.




We do not
have an established channel of distribution for our lift truck product line. We
have initiated efforts to establish a network of designated dealers throughout
the United States. Although we have received indications of interest from a
number of equipment distributors, to date, such indications have been limited.
We cannot predict whether we will be successful in establishing our intended
dealer network.





IF
WE ARE UNABLE TO RETAIN THE SERVICES OF ROBERT WATSON, OUR CHIEF EXECUTIVE
OFFICER, OR IF WE ARE UNABLE TO SUCCESSFULLY RECRUIT, QUALIFIED PERSONNEL, WE
MAY NOT BE ABLE TO CONTINUE OPERATIONS.




Our
ability to successfully conduct our business affairs will be dependent upon the
capabilities and business acumen of current management including Robert Watson,
our President and Chief Executive Officer. We have entered into an employment
agreement with Mr. Watson; however, we do not maintain key man life insurance
with respect to Mr. Watson. Accordingly, shareholders must be willing to entrust
all aspects of our business affairs to our current management. Further, the loss
of any one of our management team could have a material adverse impact on our
continued operation.




OUR
INDUSTRY AND PRODUCTS ARE CONSIDERED TO BE HIGH-RISK WITH A HIGH INCIDENCE OF
SERIES PERSONAL INJURY OR PROPERTY LOSS WHICH COULD HAVE A MATERIAL ADVERSE
IMPACT ON OUR BUSINESS.




The
manufacture, sale and use of Omni-Directional lift trucks and other mobility or
material handling equipment is generally considered to be an industry of a high
risk with a high incidence of serious personal injury or property loss. In
addition, although we intend to provide on-site safety demonstrations, the
unique, sideways movement of the lift truck may heighten potential safety risks.
Despite the fact that we intend to maintain sufficient liability insurance for
the manufacture and use of our products, one or more incidents of personal
injury or property loss resulting from the operation of our products could have
a material adverse impact on our business.




28




IF
WE DO NOT SUCCESSFULLY DISTINGUISH AND COMMERCIALIZE OUR DEVELOPED PROPRIETARY
PRODUCTS AND SERVICES, WE WILL NOT ATTRACT A SUFFICIENT NUMBER OF CUSTOMERS.
ACCORDINGLY, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WITH OUR COMPETITORS OR TO
GENERATE REVENUE SIGNIFICANT TO SUSTAIN OUR OPERATIONS.




Although
management believes our product will have significant competitive advantages to
conventional lift trucks, we are competing in an industry populated by some of
the foremost equipment and vehicle manufacturers in the world. All of these
companies have greater financial, engineering and other resources than us. No
assurances can be given that any advances or developments made by such companies
will not supersede the competitive advantages of our Omni-Directional lift
truck. In addition, many of our competitors have long-standing arrangements with
equipment distributors and carry one or more of competitive products in addition
to lift trucks. These distributors are prospective dealers for our company. It
therefore is conceivable that some distributors may be loath to enter into any
relationships with us for fear of jeopardizing existing relationships with one
or more competitors.




RISKS
RELATING TO OUR COMMON STOCK




WE
HAVE ISSUED COMMON STOCK, WARRANTS, AND CONVERTIBLE NOTES TO INVESTORS AND IN
EXCHANGE FOR FEES AND SERVICES AT A DISCOUNT TO THE MARKET PRICE OF OUR COMMON
STOCK AT THE TIME OF SUCH ISSUANCE. THIS RESULTS IN A LARGE NUMBER OF SHARES
WHICH HAVE BEEN ISSUED AND A LARGE NUMBER OF SHARES UNDERLYING OUR WARRANTS AND
OTHER CONVERTIBLE SECURITIES THAT ARE OR MAY BE AVAILABLE FOR FUTURE SALE AND
THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON
STOCK.




We had
24,376,887 shares of common stock outstanding as of April 12, 2007, and we had
convertible notes which require the issuance of 5,336,740 additional shares of
common stock pursuant to our May and October 2005 private placements
and  July 2006  note issuances, in which the conversion price has
been adjusted resulting from the February 20, 2007 issuance of $3,734,040
Secured Convertible Promissory Notes, convertible into 8,297,867 additional
shares of common stock at $0.45 per common share. Additionally, warrants which
require the issuance of 10,494,131 additional shares of common stock pursuant to
our November 2004, and February, May, and October 2005 private placements and
2006 note issuances. Further, we issued 16,959,726 warrants in connection with
the February 20, 2007 issuance of $3,734,040 Secured Convertible Promissory
Notes. Further, we often issue common stock and warrants in exchange for fees
and services at a discount to the market price of our common stock at the time
of such issuance. This results in a large number of shares, which have been
issued, a large number of shares underlying our warrants and other convertible
securities that are or may be available for future sale, and may create an
overhang of securities for sale. The sale of these shares which were or will be
issued upon exercise or conversion of our securities at a discount to the market
price of our common stock at the time of issuance may depress the market price
of our common stock and is dilutive to shareholder value.




29


OUR
COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING
MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK
CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.




The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:




o that a
broker or dealer approve a person's account for transactions in penny stocks;
and




o the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased.




In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:




o obtain
financial information and investment experience objectives of the person;
and




o make a
reasonable determination that the transactions in penny stocks are suitable for
that person and the person has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of transactions in penny
stocks.




The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:




o sets
forth the basis on which the broker or dealer made the suitability
determination; and




o that
the broker or dealer received a signed, written agreement from the investor
prior to the transaction.




Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.




Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.







30


Item 7. Financial
Statements.





Index
to Financial Statements




PageReport
      of Independent Registered Public Accounting Firm
            F-1Balance
      Sheets as of December 31, 2006 and 2005 (Restated)
            F-2Statements
      of Operations for the years ended December 31, 2006
      and 2005 (Restated)
            F-3Statements
      of Changes in Stockholders' Deficiency for the years
      ended December 31, 2006 and 2005 (Restated)
            F-4Statements of
      Cash Flows for the years ended December 31, 2006 and 2005 (Restated)
            F-5Notes to
      Financial Statements as of December 31, 2006 and 2005 (Restated)
            F-6




31




Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Shareholders


Airtrax,
Inc.




We have
audited the accompanying balance sheet of Airtrax, Inc. (the "Company") as of
December 31, 2006 and 2005 (both as restated) and the
related statements of operations, changes in stock holders'
deficiency and cash flows for the two years ended December 31,
2006 and 2005 (both as restated). 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 audits 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 under 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 includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, based on our audits, the financial statements referred to above present
fairly, in all material respects, the financial position of Airtrax, Inc. as of
December 31, 2006 and 2005 (both as restated), and the
results of its operations and its cash flows for the years ended December 31,
2006 and 2005 (both as restated) in accordance with U.S. generally
accepted accounting principles.




As
detailed in Note 2 to the financial statements, factors were discovered which
caused restatements of the financial statements for the years ended December 31,
2005 and December 31, 2006, and for the restatement of the stockholders’ equity
section of the balance sheet as of January 1, 2005.




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As shown in the accompanying financial
statements, at December 31, 2006, the Company had a working capital deficiency
of $ 1.2 million as well as an accumulated deficit of $ 26.4
million. In addition, the Company has had a continuing record of losses. These
factors among other things discussed in the notes to the financial
statements, raise substantial doubt about the ability of the Company to continue
as a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts or classification of liabilities that might be necessary should the
Company be unable to continue in operation.




/s/ Robert G. Jeffrey,
Certified Public Accountant


February 9,
2008 Wayne,
New Jersey


F-1




AIRTRAX,
INC.


Balance
Sheets


December
31, 2006 and 2005


(Restated)




2006
              
              
              2005ASSETSCurrent
      AssetsCash
              
              $
              327,737
              
              
              $
              19,288Accounts
      receivable
              
              
              50,704
              
              
              
              94,357Inventory
              
              
              1,049,457
              
              
              
              2,005,139Vendor
      advance s
              
              
              103,628
              
              
              
              163,517Deferred
      tax asset
              
              
              919,889
              
              
              
              977,302Total
      current assets
              
              
              2,451,415
              
              
              
              3,259,603Fixed
      Assets
              
              
              623,136
              
              
              
              492,779Less:
      accumulated depreciation
              
              
              (339,216
              )
              
              
              (301,886
              )Net
      fixed assets
              
              
              283,920
              
              
              
              190,893Other
      AssetsAdvances
      to Filco GmBH
              
              
              -
              
              
              
              2,000,000Patents
      – net
              
              
              148,151
              
              
              
              154,263Deferred
      financing costs and other
              
              
              133,918
              
              
              
              337, 856Total
      other assets
              
              
              282,069
              
              
              
              2,492,119TOTAL
      ASSETS
              
              $
              3,017,404
              
              
              $
              5,942,615LIABILITIES AND STOCKHOLDERS’
      DEFICIENCYCurrent
      LiabilitiesAccounts
      payable
              
              $
              1,097,361
              
              
              $
              885,463Accrued
      liabilities
              
              
              437,140
              
              
              
              266,556Shareholder
      loans payable
              
              
              75,713
              
              
              
              186,961Current
      portion-convertible debt, net of discount
              
              
              1,830,200
              
              
              
              -Derivative
      liability-warrants and conversion privileges
              
              
              236,144
              
              
              
              1,620,683Total
      current liabilities
              
              
              3,676,558
              
              
              
              2,959,663Long
      Term Convertible Debt, net of discount
              
              
              531,542
              
              
              
              1,338,525-
              
              
              
              -TOTAL
      LIABILITIES
              
              
              4,208,100
              
              
              
              4,298,188Stockholders’
      DeficiencyPreferred
      stock – authorized; 5,000,000 shares, no par value, 275,000 issued and
      outstanding
              
              
              12,950
              
              
              
              12,950Common
      stock – authorized, 100,000,000 shares; no par value, issued and
      outstanding –  24,260,352 and  21,939,360,
      respectively
              
              
              21,520,559
              
              
              
              18,426,605Paid
      in capital – options
              
              
              1,407,299
              
              
              
              1330948Paid
      in capital – warrants
              
              
              2,315,935
              
              
              
              2,051,118Accumulated
      deficit
              
              
              (26,447,439
              )
              
              
              (20,177,194
              )Total
      stockholders’ deficiency
              
              
              (1,190,696
              )
              
              
              1,644,427TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
              
              $
              3,017,404
              
              
              $
              5,942,615
  The
accompanying notes are an integral part of these financial
statements.


F-2




AIRTRAX,
INC.


Statements
of Operations


For
the Years Ended December 31, 2006 and 2005


(Restated)




2006
              
              
              2005Revenues
              
              $
              1,346,913
              
              
              $
              718,842Cost
      of sales
              
              
              1,470,542
              
              
              
              729,080Gross
      profit
              
              
              (123,629
              )
              
              
              (10,238
              )Operating
      and administrative expensesGeneral
      and Administrative costs
              
              
              3,943,632
              
              
              
              4,677,340Impairment
      of Filco advances
              
              
              2,000,000
              
              
              
              4,700,839Total
      Operating Expenses
              
              
              5,943,632
              
              
              
              9,378,179Operating
      loss
              
              
              (6,067,261
              )
              
              
              (9,388,417
              )Other
      income/expense , netInterest
      expense
              
              
              (230,149
              )
              
              
              (90,597
              )Revaluation
      income
              
              
              1,412,143
              
              
              
              68,481Amortization
      of financing costs
              
              
              (251,438
              )
              
              
              (773,673
              )Amortization
      of debt discount
              
              
              (648,440
              )
              
              
              (1,757,386
              )Liquidated
      damages
              
              
              (214,247
              )
              
              
              -Settlement
      expenses
              
              
              (290,801
              )
              
              
              (281,281
              )Other
      income
              
              
              (2,255
              )
              
              
              31,741Other
      income/expense , net
              
              
              (225,187
              )
              
              
              (2,802,715
              )Net
      loss before taxes
              
              
              (6,292,448
              )
              
              
              (12,191,132
              )Income
      tax benefit (State): Current
              
              
              437,803
              
              
              
              867,413Net
      loss before dividends
              
              
              (5,854,645
              )
              
              
              (11,323,719
              )Deemed
      dividends on preferred stock
              
              
              303,100
              
              
              
              274,978Net
      loss attributable to common stockholders
              
              
              (6,157,745
              )
              
              
              (11,598,697
              )Preferred
      stock dividends paid
              
              
              (112,500
              )
              
              
              (51,563
              )Deficit  attributable
      to common stockholders
              
              $
              (6,270,245
              )
              
              $
              (11,650,260
              )-
              
              
              
              -Net
      loss per share - basic and dilutedLoss
      attributable to common stockholders
              
              $
              (6,157,745
              )
              
              $
              (11,598,697
              )Adjustment
      for preferred stock dividends accumulated
              
              
              (68,750
              )
              
              
              (68,750
              )Net
      loss attributable to common stockholders
              
              $
              (6,226,495
              )
              
              $
              (11,667,447
              )Net
      loss per share - basic and diluted
              
              $
              (0.27
              )
              
              $
              (0.56
              )Weighted
      average shares outstanding
              
              
              23,055,578
              
              
              
              20,951,187


F-3


AIRTRAX,
INC.


Statements
of Changes in Stock holders’ Deficiency


For
the Years Ended December 31, 2006 and 2005


(Restated)




Common
      Shares
            
            
            Common
      Amount
            
            
            Preferred
      Shares
            
            
            Preferred
      Amount
            
            
            Paid
      in Capital Warrants
            
            
            Paid
      in Capital Options
            
            
            Accumulated
      Deficit
            
            
            TotalBalance
      at January 1, 2005 (RESTATED)
            
            
            15,089,342
            
            
            
            9,368,534
            
            
            
            275,000
            
            
            
            12,950
            
            
            
            1,454,320
            
            
            
            -
            
            
            
            (8,526,934
            )
            
            
            2,308,870Shares
      issued in  private placement
            
            
            68,750
            
            
            
            55,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            55,000Warrants
      issued with convertible debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            777,798
            
            
            
            -
            
            
            
            -
            
            
            
            777,798Warrants
      exercised
            
            
            593,000
            
            
            
            718,486
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            718,486Options
      issued
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,330,948
            
            
            
            -
            
            
            
            1,330,948Options
      exercised
            
            
            45,000
            
            
            
            19,619
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            19,619Shares
      issued for services
            
            
            291,695
            
            
            
            735,387
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            735,387Employee
      stock awards
            
            
            20,000
            
            
            
            48,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            48,000Shares
      issued in lieu of rent
            
            
            19,200
            
            
            
            48,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            48,000Issuance
      of shares sold in prior year
            
            
            1,749,827
            
            
            
            1,401,172
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,401,172Shares
      issued in settlement of interest
            
            
            28,453
            
            
            
            66,295
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            66,295Reclass
      liability on exercise of
              warrants
            
            
            -
            
            
            
            181,000
            
            
            
            -
            
            
            
            -
            
            
            
            (181,000
            )
            
            
            -
            
            
            
            -
            
            
            
            -Conversion
      of convertible debt
            
            
            3,846,154
            
            
            
            5,000,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,000,000Shares
      issued for Filco investment
            
            
            187,939
            
            
            
            458,571
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            458,571Dividends
      on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (51,563
            )
            
            
            (51,563
            )Restatement
      of preferred stock
              dividend
            
            
            -
            
            
            
            326,541
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            326,541Net
      Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (11,598,697
            )
            
            
            (11,598,697
            )Balance
      at December 31, 2005 (RESTATED)
            
            
            21,939,360
            
            
            $
            18,426,605
            
            
            
            275,000
            
            
            
            12,950
            
            
            $
            2,051,118
            
            
            $
            1,330,948
            
            
            $
            (20,177,194
            )
            
            $
            1,644,427Warrants
      issued with convertible debt
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            264,817
            
            
            
            -
            
            
            
            -
            
            
            
            264,817Employee
      stock awards
            
            
            75,000
            
            
            
            115,470
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            115,470Shares
      issued for services
            
            
            651,257
            
            
            
            859,856
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            859,856Shares
      issued to directors
            
            
            145,000
            
            
            
            222,500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            222,500Shares
      issued in settlement of interest
            
            
            49,081
            
            
            
            66,516
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            66,516Shares
      issued in settlement of Note
              default
            
            
            184,000
            
            
            
            93,490
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            93,490Conversion
      of convertible debt
            
            
            761,952
            
            
            
            1,138,012
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,138,012Options
      issued
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            76,351
            
            
            
            -
            
            
            
            76,351Shares
      issued for preferred dividend
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Shares
      issued for cash
            
            
            35,723
            
            
            
            65,500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            65,500Proceeds
      from warrant extensions
            
            
            
            117,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            117,000Dividends
      on preferred stock
            
            
            418,979
            
            
            
            415,610
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (112,500
            )
            
            
            303,110Net
      Loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (6,157,745
            )
            
            
            (6,157,745
            )Balance
      at December 31, 2006 (RESTATED)
            
            
            24,260,352
            
            
            
            21,520,559
            
            
            
            275,000
            
            
            
            12,950
            
            
            
            2,315,935
            
            
            
            1,407,299
            
            
            
            (26,447,439
            )
            
            
            (1,190,696
            )




The
accompanying notes are an integral part of these financial
statements.




F-4


AIRTRAX,
INC.


Statements
of Cash Flows


For
the Years Ended December 31, 2006 and December 31, 2005


(Restated)




2006
              
              
              2005Net
      loss
              
              $
              (6,157,745
              )
              
              $
              (11,598,697
              )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
              
              
              69,019
              
              
              
              59,500Amortization of debt financing fees
              
              
              251,438
              
              
              
              773,673Amortization
      of debt discounts
              
              
              648,440
              
              
              
              1,757,386Impairment
      of Filco advances
              
              
              2,000,000
              
              
              
              4,700,839Common
      stock issued in settlement of liabilities
              
              
              93,490
              
              
              
              149,589Equity
      securities issued for services
              
              
              1,274,177
              
              
              
              1,918,750Expense
      of settling liquidated damages
              
              
              183,572
              
              
              
              -Deemed
      dividend on preferred stock
              
              
              303,100
              
              
              
              274,978Increase
      in accrual of deferred tax benefit
              
              
              7,413
              
              
              
              (752,888
              )Revaluation
      of liabilities for warrants and conversion privileges
              
              
              (1,412,143
              )
              
              
              (68,481
              )Common
      stock issued to settle Interest liability
              
              
              66,464
              
              
              
              -Interest
      accrual on shareholder loan & other
              
              
              7,136
              
              
              
              4,015Changes
      in assets liabilitiesIncrease
      in accounts receivable
              
              
              43,653
              
              
              
              (94,357
              )Increase
      in vendor advances
              
              
              59,889
              
              
              
              (111,500
              )(Decrease)
      increase in accounts payable
              
              
              211,898
              
              
              
              490,504Increase
      in inventory
              
              
              955,682
              
              
              
              (1,295,858
              )Increase
      (decrease) in accrued liabilities
              
              
              524,984
              
              
              
              90,672Net
      cash used in operating activities
              
              
              (869,533
              )
              
              
              (3,701,875
              )Acquisition
      of equipment
              
              
              (151,577
              )
              
              
              (150,806
              )Additions
      to patent cost
              
              
              (6,800
              )
              
              
              (42,861
              )Advances
      to Filco GmbH
              
              
              -
              
              
              
              (3,605,881
              )(158,377
              )
              
              
              (3,799,548
              )Proceeds
      from convertible debt
              
              
              1,219,800
              
              
              
              4,277,500Proceeds
      from the sale of common stock
              
              
              65,500
              
              
              
              55,000Proceeds
      from convertible loans
              
              
              -
              
              
              
              1,659,138Proceeds
      from warrant exercises & extensions
              
              
              117,000
              
              
              
              718,486Proceeds
      from exercise of options
              
              
              -
              
              
              
              19,619Preferred
      stock dividends paid in cash
              
              
              -
              
              
              
              -Proceeds
      from notes payable to related parties
              
              
              35,000
              
              
              
              151,493Payment
      of notes payable to related parties
              
              
              (100,941
              )
              
              
              (2,002
              )Net
      cash provided by financing activities
              
              
              1,336,359
              
              
              
              6,879,234Net
      increase (decrease) in cash
              
              
              308,449
              
              
              
              (622,189
              )19,288
              
              
              
              641,477$
              327,737
              
              
              $
              19,288
  The
accompanying notes are an integral part of these financial
statements.   F-5


NOTE 1- SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES




The
accompanying audited financial statements have been prepared on the accrual
basis of accounting in conformity to generally accepted accounting principles in
the United States.




Business




The
Company was formed April 17, 1997. It has designed a lift truck vehicle using
omni-directional technology obtained under a contract with the United States
Navy Surface Warfare Center in Panama City, Florida. The right to exploit this
technology grew out of a Cooperative Research and Development Agreement with the
Navy. Significant resources have been devoted during prior years to the
construction of a prototype of this omni-directional forklift vehicle. The
Company recognized its first revenues from sales of this product during the year
2005.




Development
Stage Accounting




In prior
periods the Company was a development stage company, as defined in Statement of
Financial Accounting Standards No. 7 (SFAS 7). The Company became an
operational company in 2005.




The
Company has incurred losses since its inception. Until the end of 2004, these
losses were financed by private placements of equity securities. During 2005 and
2006, the Company obtained financing almost exclusively from the issuance of
convertible debentures. The Company will need to raise additional capital
through the issuance of debt or equity securities to continue to fund
operations.




Cash and Cash
Equivalents




The
Company considers cash deposits and short term debt securities that can be
redeemed on demand and investments that have original maturities of less than
three months to be cash equivalents.




Fair Value of Financial
Instruments




The
Company’s financial instruments are cash and cash equivalents, accounts
receivable, accounts payable, and notes payable, and the related security
issuances.  The recorded values of these financial instruments
approximate their fair values based on their short-term nature.  The
recorded values of notes payable approximate their fair values, as interest
approximates market rates.




Concentrations of
Credit Risk




Financial instruments
subject the Company to concentrations of credit risk.  The Company
places its cash and temporary cash investments with credit quality
institutions.  At times, such investments may be in excess of
applicable government mandated insurance limits.  With respect to
accounts receivable, the Company limits credit risk by performing ongoing credit
evaluations.  Management does not believe significant risk exists in
connection with the Company’s concentrations of credit at December 31, 2006.




Accounts Receivable




The
Company provides an allowance for doubtful accounts (when necessary) equal to
the estimated uncollectible amounts.  The Company’s estimate is based
on historical collection experience and a review of the current status of trade
accounts receivable.  It is reasonably possible that the Company’s
estimate of the allowance for doubtful accounts will change.  As of
December 31, 2006 and 2005, there were no allowances for doubtful accounts.




F-6




Inventories




Inventory consists
principally of component parts and supplies used to assemble lift truck
vehicles. Inventories are stated at the lower of cost (determined on a first
in-first out basis) or market.




Fixed Assets




Fixed assets,
consisting of office furniture and equipment, demo and shop equipment along with
castings and tools, are recorded at cost. The cost of developing and
constructing the prototype omni-directional helicopter handling vehicle and the
omni-directional lift truck vehicle is expensed as incurred. Expenditures for
major additions and improvements are capitalized and minor replacements,
maintenance, and repairs are charged to expense as incurred.  When
property and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations for the respective
period.  Depreciation is provided over the estimated useful lives of
the related assets ranging from 5 to 7 years using the straight-line method
for financial statement purposes.




Intangibles




The
Company incurred costs to acquire certain patent rights. These costs are
capitalized and are being amortized over a period of fifteen years on a straight
line basis.




In
accordance with Statement of Financial Accounting Standards  No. 142,
“Goodwill
and Other Intangible Assets,” the Company reviews intangibles for
impairment annually, or more frequently if an event occurs or circumstances
change that would more likely than not reduce the fair value of the Company's
business enterprise below its carrying value. The impairment test requires the
Company to estimate the fair value of the Company's overall business enterprise
down to the reporting unit level. The Company performs its annual impairment
test in its fiscal fourth quarter. No impairment charges related to goodwill or
other intangibles were recorded in the years ended December 31, 2006 and
2005.




The
Company continually evaluates whether events and changes in circumstances
warrant revised estimates of useful lives or recognition of an impairment loss
of our intangibles, which as of December 31, 2006, consist mainly of patents and
licensing agreements.  The conditions that would trigger an impairment
assessment of our intangible assets include a significant, sustained negative
trend in our operating results or cash flows, a decrease in demand for our
products, a change in the competitive environment and other industry and
economic factors.




Deferred Financing
Costs




Deferred financing
costs represent legal, commitment; processing, consulting, and other fees
associated with the issuance of the Company’s debt.  Deferred
financing costs are being amortized over the term of the related debt.




Impairment of
Long-Lived Assets




Pursuant to Statement
of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-lived Assets”, the Company
continually monitors events and changes in circumstances that could indicate
carrying amounts of long-lived assets may not be recoverable. An impairment loss
is recognized when expected cash flows are less than the asset's carrying value.
Accordingly, when indicators of impairment are present, the Company evaluates
the carrying value of such assets in relation to the operating performance and
future undiscounted cash flows of the underlying assets. The Company’s policy is
to record an impairment loss when it is determined that the carrying amount of
the asset may not be recoverable. Impairment charges of $2,000,000 were recorded
for the year ended December 31, 2006, while impairment charges of $4,700,839
were recorded for the year ended December 31, 2005 related to the write down of
the Filco advances.




F-7




Use
of Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimated.




Revenue Recognition




Revenue on product
sales is recognized when persuasive evidence of an arrangement exists, such as
when a purchase order or contract is received from the customer, the price is
fixed, title to the goods has changed and there is a reasonable assurance of
collection of the sales proceeds. The Company obtains written purchase
authorizations from customers for a specified amount of product at a specified
price and considers delivery to have occurred at the time of shipment. Revenue
is recognized at shipment, and where the following criteria are met; persuasive
evidence of an arrangement exists; delivery has occurred; the sales price is
fixed or determinable; and collectability is reasonably assured.




Revenue from services
is recognized when the service is performed, and where the following criteria
are met: persuasive evidence of an arrangement exists; the contract price is
fixed or determinable; and collectability is reasonably assured. Revenue from
research and development activities relating to firm fixed-price contracts is
generally recognized as billing occurs. Revenue from research and development
activities relating to cost-plus-fee contracts include costs incurred plus a
portion of estimated fees or profits based on the relationship of costs incurred
to total estimated costs. Contract costs include all direct material and labor
costs and an allocation of allowable indirect costs as defined by each contract,
as periodically adjusted to reflect revised agreed upon rates. These rates are
subject to audit by the other party. Amounts can be billed on a bi-monthly
basis. Billing is based on subjective cost investment factors.




Advertising Costs




Advertising costs are
expensed as incurred.  There were no advertising costs incurred during
2006 and 2005.




Accounting for Income
Taxes




As
part of the process of preparing our financial statements, we are required to
estimate our income taxes. This process involves estimating our actual current
tax exposure together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences
may result in deferred tax assets and liabilities, which are included within our
consolidated balance sheet. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income. If there is not
persuasive evidence that recovery will occur, we would establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, the value of the benefit of the tax deferral is reduced
or eliminated.




F-8




Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We have recorded a valuation allowance of $8,257,629 as of
December 31, 2006, due to uncertainties related to our ability to utilize some
of our deferred tax assets, primarily consisting of certain net operating losses
carried forward before they expire and certain accrued expenses, which are
deferred for income tax purposes until paid. The valuation allowance is based on
our estimates of taxable income and the period over which our deferred tax
assets will be recoverable. The net deferred tax asset as of December 31, 2006
was $ 919,889, net of the valuation allowance.




Accounting for
Derivatives




The Company’s issuances
of convertible debt are accompanied by other financial instruments. These
financial instruments include warrants to purchase stock, and the right to
convert debt to stock at specified rates (“conversion benefits.”). Pursuant to
SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended (SFAS
133),
and EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, A
Company’s Own Stock(EITF 00-19),  the Company has identified
certain embedded and freestanding derivative instruments. Generally, where the
ability to physical or “net-share” settle an embedded conversion option or free
standing financial instrument is not deemed to be within the control of the
Company, the embedded conversion option is required to be bifurcated or
separated, and both the freestanding instruments and bifurcated conversion
feature are accounted for as derivative liabilities. At each reporting date, the
Company estimates the fair values of all derivatives, and changes in the fair
value are reported in the statement of operations.




Under EITF 00-19,
warrants are considered free-standing instruments in that they are legally
detachable and separately exercisable. The conversion benefits, which are
embedded in these debt issues, derive value from the relationship between the
stock price and debt conversion price, and are considered embedded derivatives
under the provisions of SFAS 133. The fair values of both the warrants and
conversion benefits are calculated using a Black Scholes Model, taking into
consideration factors such as the underlying price of the common stock, the
exercise price for warrants or the conversion price for the conversion benefit,
the stock volatility, and the risk-free interest rates available for comparable
time periods.




Free-standing
instruments (warrants), and embedded derivatives (conversion benefits) which are
initially bifurcated or separated from the host financial instrument, are
recorded as separate liabilities, in cases where the security holder has a right
to choose to receive a “net settlement” of cash. The identification of such net
settlement provisions in one such prior convertible debt issuance with warrants
resulted in the Company concluding that such warrants should have been
identified as “derivatives”.  Therefore, the warrant liability related
to this issuance must be recorded as a derivative liability on the Company’s
restated balance sheet, and marked to market for each subsequent reporting
period with any non-cash charges or credits attributed to the revised fair value
of the liability being recognized through the statement of operations.




If the decision to
settle an outstanding liability remains with the Company, the value of the
warrants is recorded in an equity account. The identification of settlement
provisions being controlled by the Company under certain debt issuances resulted
in the Company determining that the securities should be reflected in the
restated financial statements as components of equity, as compared to having
been previously recorded as liabilities with non-cash charges and/or credits to
operations as a result of being marked to market for each period
presented.  As of December 31, 2006 and 2005, the Company recognized
and recorded the value of certain warrants as equity of $2,315,935 and
$2,051,118, respectively, in the accompanying financials.




F-9




EITF 00-19-2
specifies that the contingent obligations to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement, or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, “Accounting
for Contingencies” (SFAS 5).  EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. The
Company adopted the provisions of EITF 00-19-2 for the reporting period
beginning January 1, 2007..




The
Company also previously sold stock units which included warrants along with
common stock. In these cases, a portion of the proceeds equal to the value of
the warrants is allocated to the warrants with the balance allocated to the
stock. In such cases, the values of the warrants are treated as liabilities or
equity, depending on whether the issuance documents contain “net cash
settlement” provisions.  For those warrants that are treated as
liabilities, the liabilities are revalued at the end of each reporting period
with any change in value being recognized currently as a non-cash charge and/or
credit to operations. When a warrant classified as a liability is exercised or
canceled, the fair value of the warrant, as determined at the time of exercise
or cancellation, is transferred to equity and is no longer revalued. A similar
adjustment is made for a conversion benefit classified as a liability when the
debt is converted to stock, or canceled.




For
embedded and free standing derivatives valued as of  December 31, 2006
and 2005, the Company has recognized in the statement of operations, revaluation
income <expense>  of $ 1,412,143
and  $  68,481, respectively, for the years ended December
31, 2006 and 2005. In addition, the Company recognized a derivative liability in
the accompanying balance sheet for conversion benefits and warrants of $236,144
in 2006 and $1,620,683 in 2005.




To
the extent that the initial fair values of the bifurcated and/or freestanding
derivative liabilities exceed the net proceeds received, an immediate charge to
the statement of operations is recognized for the excess. The remainder of the
discount from the face value of the convertible debt resulting from allocating
part or all of the proceeds to the derivative liabilities is amortized over the
life of the instrument through periodic charges to the statements of operations,
using the straight line method, which was the most systematic and rational
approach that approximated the interest method of amortization due to the short
two year amortization term of the debt.




The
estimated fair values of derivatives have been calculated based on the
Black-Scholes Model, using the following assumptions as of December 31:





2006
            
            
            2005Fair Value
      of stock
            $
            .0.47
            
            $
            2.30Exercise
      Price
            $
            1.56-$1.65
            
            $
            1.30-$2.00Dividend
      Yield
            
            None
            
            
            NoneRisk Free
      Interest Rate
            
            4.63%-5.10%
            
            
            3.76%-4.10%Expected
      Volatility
            
            89.25%-91.23%
            
            
            88.13%-92.72%Expected
      Life-Years
            
            2.5-3.5
            
            
            .7-2.1




F-10




Stock
Based Compensation




Common
Stock for Services




Because of the
significant liquidity issues the Company has faced since our inception, the
Company has issued common stock to third party vendors and others in return for
product, services, and as dividends on the preferred stock. These issuances are
assigned values equal to the value of the common stock on the earlier of the
dates of issuance, or the dates on which a commitment is made to provide
compensation in the form of equity securities, whichever date is earlier. Such
issuances are recorded as expenses in the periods in which the stock is issued,
unless the right to the stock has not fully vested, in which case the expense is
recorded in the periods of vesting.  During the years ended December
31, 2006 and 2005, the Company issued an aggregate of 871,257 and 330,895
shares, respectively, of common stock representing a value of services of
$1,197,826 and $ 836,500, respectively, to third parties in exchange for
services performed.




Stock
Options




Stock options are
awarded to employees as compensation for services. Such awards have been
immediately exercisable. The Company adopted SFAS 123R, “Share
Based Payment” (SFAS 123R), and SFAS 148, “Accounting
for Stock Based Compensation - Transition and Disclosure” (SFAS 148) on
January 1, 2006. Prior to 2006, these awards were accounted for under the
intrinsic method as permitted by Accounting Principles Board Opinion
No.  25. Since the time of adopting SFAS 123R, the option awards have
been valued at their grant-date fair value as determined through the use of the
Black Scholes Model.




The
following presents information ($000 omitted) about the net loss and loss per
share of the year 2005, as if the Company had applied the provisions of SFAS
123R and 148 to all options granted during the year 2005.




Net
      loss as reported
            
            $
            (15,210
            )Less:
      Stock-based employee compensationdetermined
      under the Intrinsic Method
            
            
            1,082Add:
      Stock bases compensation determinedunder
      the Fair Value Method
            
            
            (1,105
            )Pro
      forma net loss
            
            $
            (15,233
            )Loss
      per share:Basic
      and diluted as reported
            
            $
            (.73
            )Basic
      and diluted-pro forma
            
            $
            (.73
            )




Pursuant to the
requirements of SFAS 123R, the weighted average fair value of options granted
during 2006 and 2005, as determined on the dates of grant, were $ .25 and $1.37,
respectively. The fair values were determined using a Black Scholes Model, based
on the following major assumptions:




2006
            
            
            2005Volatility
            
            
            89.88
            %
            
            
            91.10
            %Risk-free
      interest rate
            
            
            4.25
            %
            
            
            3.71
            %Expected Life –
      years
            
            
            3.33
            
            
            
            4.52




Warrants




The
Company has issued warrants both as part of “stock units”, and as an integral
part of convertible note issues.  The value of the warrants and
conversion options which are classified as liabilities are revalued each
reporting period.  These values are determined by a Black Scholes
Model.  Most of these issuances contain Registration Payment
Arrangements (RPAs), which impose liquidated damages under certain
circumstances.  EITF 00-19-2 specifies the accounting treatment for
derivatives that contain RPA’s and provides guidance on accounting for potential
obligations of the PRA’s.  The accounting treatment of derivatives
will not change as a result of EITF 00-19-2 as the “RPAs” were not the sole
determining factor in prior decisions about derivative classification. The
following is a schedule of changes in warrants outstanding through December 31,
2006.  Each of these warrants is exercisable over five year periods from
dates of issuance at prices ranging from $0.45-$1.56 per share.




F-11





Basic and Diluted Loss
Per Share




In
accordance with Statement of Financial Accounting Standards No.  128,
“Earnings
Per Share” (SFAS 128), and SEC Staff Accounting Bulletin
No.  98 (SAB 98), both basic and diluted earnings/loss per share
(“EPS”) are presented on the face of the income statement. Basic EPS is computed
by dividing net loss available to common stockholders by the weighted average
number of common shares outstanding. Diluted EPS is computed similarly to basic
EPS, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were not
anti-dilutive. The Company has excluded all common stock equivalents arising
from outstanding options, warrants, convertible preferred stock and convertible
debt from the calculation of diluted net loss per share because these securities
are anti-dilutive. During the years ended December 31, 2006 and 2005, the
Company had approximately 23,055,578 and 20,951,187 weighted average number of
shares, respectively, outstanding and used in both the Basic and Diluted EPS
calculation.




Segment Reporting




Management treats the
operations of the Company as one single segment.




Reclassifications




Certain amounts in the
2005 financial statements have been reclassified to conform to the 2006
financial statement presentation.




NOTE 2-
RESTATEMENTS




In
conjunction with our independent registered public accounting firm and
professional advisors, the Company conducted an analysis of our various
financial instruments and agreements involving convertible debt and common stock
financings accompanied by warrants, with a particular focus on the
accounting treatment of derivative financial instruments under Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities(“SFAS 133”), the
Emerging Issues Task Force issued EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock(“EITF 00-19”), and FASB Staff Position
No. EITF 00-19-2, “Accounting for Registration Payment Arrangements”
(“EITF 00-19-2”), (collectively, the “Derivative Accounting
Pronouncements”). Accordingly, certain accounting policies we previously
considered to reflect what was deemed to be appropriate at the time when the
financings were previously reported, have been modified by recent
interpretations, including the Derivative Accounting Pronouncements.




On
November 2, 2007, as a result of this analysis, the Company filed  a
Form 8-K noting that its previously filed financial statements in the
annual reports for the years ended December 31, 2004, 2005 and 2006 filed on
Form 10-KSB, together with the quarterly reports on Form 10-QSB for the quarters
ending March 31, 2005, June 30, 2005, September 30, 2005, March 31, 2006,
June 30, 2006, September 30, 2006, March 31, 2007, June 30, 2007 and September
30, 2007(collectively, the “Reports”) could no longer be relied upon.  The
Company sent a formal letter request to the Office of the Chief Accountant (OCA)
of the Security and Exchange Commission (SEC) dated December 17,
2007,  petitioning the OCA to waive  the requirement to file
separate amended and restated Reports for the periods  noted above,
and instead, file a comprehensive amended and restated  comparative
Form 10-KSB for the years ended December 31, 2006 and 2005, along with certain
comprehensive financial information and disclosures for 2004, and comprehensive
amended and restated  comparative Form 10-QSBs for the periods ended
March 31, 2007, June 30, 2007, and September 30, 2007 along with certain
comprehensive financial information and disclosures for 2005. Such waiver was
received from the OCA on December 27, 2007.
  The
restatement is required to properly reflect the Company’s financial results for
certain non-cash, and non-operational related charges or credits to earnings
associated with both embedded and freestanding derivative liabilities, and the
accounting for certain derivatives under the control of the issuer due to the
revised interpretation and implementation of the Derivative Accounting
Pronouncements.
  The
Company has made adjustments to its accounting records in the restated amounts
to more fully comply with requirements of the Derivative Accounting
Pronouncements, and the Securities and Exchange Commission (SEC) dealing with
derivatives.  Among these adjustments were reductions in the balances
of derivative liabilities, offset by reductions in the amounts of debt discount,
the amounts of paid in capital-warrants, revaluation income, and common
stock.  The adjustments to the common stock were caused by the
elimination of credits to common stock that had resulted principally from the
erroneous recognition of liabilities for conversion privileges upon issuances of
convertible debt.  These credits were erroneously transferred to pay
in capital upon debt conversion.  Other partial offsets to these
adjustments affected the amounts of amortization expense and paid in
capital-warrants.


F-12




The
effects of these changes on the Company’s previously issued audited December 31,
2006 and 2005 financial statements and the related disclosures included
elsewhere in the notes to consolidated financial statements, along with the
comprehensive disclosures of the restated balance sheet as of December 31, 2004,
are as follows:




The
effect on the Company's previously issued audited December 31, 2006 and 2005 financial
statements are summarized below:


Balance
Sheet as of December 31, 2006


Previously
            
            
            Increase
            
            
            AsReported
            
            
            (decrease)
            
            
            ReportedDeferred
      financing fees
            
            $
            -
            
            
            $
            133,853
            (1)
            
            $
            133,853Total assets
            
            $
            2,883,551
            
            
            $
            133,853
            
            
            $
            3,017,404Current portion-convertible debt, net of discounts
            
            $
            2,129,797
            
            
            $
            (299,597
            )  (1)
            
            $
            1,830,200Obligations for outstanding options
            
            
            1,407,299
            
            
            
            (1,407,299
            ) 
      (2)Derivative
      liability-warrants and conversion priviledges
            
            
            316,958
            
            
            
            (80,814
            ) 
      (3)
            
            
            236,144Accrued
      liabilities
            
            
            461,973
            
            
            
            24,833
            
            
            
            437,140Total
      current liabilities
            
            
            5,489,101
            
            
            
            (1,812,543
            )
      (16)
            
            
            3,676,558Long term-convertible debt, net of discounts
            
            
            557,797
            
            
            
            (26,255
            ) 
      (1)
            
            
            531,542Total
      liabilities
            
            
            6,046,898
            
            
            
            (1,838,798
            )
            
            
            4,208,100Common
      stock
            
            
            25,133,164
            
            
            
            (3,612,605)
            (4)
            
            
            21,520,559Paid
      in capital-options
            
            
            -
            
            
            
            1,407,299
            (2)
            
            
            1,407,299Paid in capital-warrants
            
            
            1,194,725
            
            
            
            1,121,210
            (5)
            
            
            2,315,935Accumulated
      deficit
            
            
            (29,504,186
            )
            
            
            3,056,747
            (6)
            
            
            (26,447,439
            )Total stockholders' deficiency
            
            
            (3,163,347
            )
            
            
            1,972,651
            
            
            
            (1,190,696
            )Total Liabilities and stockholders' deficiency
            
            $
            2,883,551
            
            
            $
            (133,853
            )
            
            $
            3,017,404Statement
      of Operations December 31, 2006Previously
            
            
            Increase
            
            
            AsReported
            
            
            (decrease)
            
            
            ReportedGeneral and administrative costs
            
            $
            (4,686,763
            )
            
            $
            743,131
            (14)
            
            $
            (3,943,632
            )Operating
      loss
            
            
            (6,810,392
            )
            
            
            743,131
            
            
            
            (6,067,261
            )Other Income and ExpensesConversion
      expense
            
            
            (1,009,069
            )
            
            
            1,009,069
            (11)
            
            
            -Revaluation
      income
            
            
            3,534,179
            
            
            
            (2,122,036
            )
      (13)
            
            
            1,412,143Amortization of financing costs
            
            
            -
            
            
            
            (251,438
            ) 
      (9)
            
            
            (251,438
            )Amortization of debt discounts
            
            
            -
            
            
            
            (648,440
            )
      (10)
            
            
            (648,440
            )Liquidated
      damages
            
            
            -
            
            
            
            (214,247
            )
      (14)
            
            
            (214,247
            )Settlement
      expenses
            
            
            -
            
            
            
            (290,801
            ) (14)
            
            
            (290,801
            )Net
      loss before taxes
            
            
            (4,517,686
            )
            
            
            (1,774,762
            )
            
            
            (6,292,448
            )Net loss attributable to common stockolders
            
            $
            (4,382,983
            )
            
            $
            (1,774,762
            )
            
            $
            (6,157,745
            )Loss
      per share-basic and diluted
            
            $
            (0.19
            )
            
            $
            (0.08
            )
            
            $
            (0.27
            )Statement
      of Cash Flows, Decmber 31, 2006Previously
            
            
            Increase
            
            
            AsReported
            
            
            (decrease)
            
            
            ReportedNet
      loss
            
            $
            (4,382,983
            )
            
            $
            (1,774,762
            )
            
            $
            (6,157,745
            )Amortization
      of financing costs
            
            
            -
            
            
            
            251,438
            (9)
            
            
            251,438Amortization
      of debt discounts
            
            
            -
            
            
            
            648,440
            (10)
            
            
            648,440Cost
      of Conversion
            
            
            961,569
            
            
            
            (961,569
            )
      (11)
            
            
            -Cost of settling liquidated damages
            
            
            424,426
            
            
            
            (240,854
            )
      (15)
            
            
            183,572Increase
      in accrued liabilities
            
            
            569,713
            
            
            
            (44,729
            )
            
            
            524,984Revaluation
      of derivative liability-warrants andconversion
      priviledges
            
            
            (3,534,179
            )
            
            
            2,122,036
            (13)
            
            
            (1,412,143
            )Net cash used in operating activities
            
            $
            (869,533
            )
            
            $
            -
            
            
            $
            (869,533
            )






F-13




Balance
Sheet as of December 31, 2005




Previously
              
              
              Increase
              
              
              AsReported
              
              
              (decrease)
              
              
              ReportedDeferred
      financing fees
              
              $
              388,392
              
              
              $
              (50,601
              )
      (1)
              
              $
              337,791Total
      assets
              
              $
              5,993,216
              
              
              $
              (50,601
              )
              
              $
              5,942,615Obligations for outstanding options
              
              $
              1,330,948
              
              
              $
              (1,330,948
              )
      ( 2)
              
              $
              -Derivative liability-warrants and conversion priviledges
              
              
              3,516,462
              
              
              
              (1,895,779
              )
      ( 3)
              
              
              1,620,683Total current liabilities
              
              
              6,186,390
              
              
              
              (3,226,727
              )
              
              
              2,959,663Long term-convertible debt, net of discounts
              
              
              2,048,000
              
              
              
              (709,475
              ) 
      ( 1)
              
              
              1,338,525Total liabilities
              
              
              8,234,390
              
              
              
              (3,936,202
              )
              
              
              4,298,188Common
      stock
              
              
              21,712,179
              
              
              
              (3,285,574
              ) 
      ( 4)
              
              
              18,426,605Paid in capital-options
              
              
              -
              
              
              
              1,330,948
              (2)
              
              
              1,330,948Paid
      in capital-warrants
              
              
              1,042,400
              
              
              
              1,008,718
              (5)
              
              
              2,051,118Accumulated deficit
              
              
              (25,008,703
              )
              
              
              4,831,509
              (6)
              
              
              (20,177,194
              )Total
      stockholders' deficiency
              
              
              (2,241,174
              )
              
              
              3,885,601
              (7)
              
              
              1,644,427Total liabilities and stockholders' equity
              
              $
              5,993,216
              
              
              $
              (50,601
              )
              
              $
              5,942,615Statement
      of Operations December 31, 2005Previously
              
              
              Increase
              
              
              AsReported
              
              
              (decrease)
              
              
              ReportedGeneral
      and administrative costs
              
              $
              5,057,596
              
              
              $
              380,256
              (8)
              
              $
              4,677,340Operating loss
              
              
              (9,768,673
              )
              
              
              380,256
              
              
              
              (9,388,417
              )Other
      Income and ExpensesInterest
      expenses
              
              
              (488,342
              )
              
              
              397,745
              (9)
              
              
              (90,597
              )Revaluation
      income
              
              
              993,837
              
              
              
              925,356
              (13)
              
              
              68,481Amortization
      of financing costs
              
              
              -
              
              
              
              (773,673
              ) 
      (9)
              
              
              (773,673
              )Amortization
      of debt discounts
              
              
              -
              
              
              
              (1,757,386
              )
      (10)
              
              
              (1,757,386
              )Conversion
      expense
              
              
              (6,571,454
              )
              
              
              6,571,454
              (11)
              
              
              -Liquidated
      damages
              
              
              -
              
              
              
              (281,281
              )
      (12)
              
              
              (281,281
              )Net
      loss before taxes
              
              
              (15,802,891
              )
              
              
              3,611,759
              
              
              
              (12,191,132
              )Net
      loss attributable to common stockholders
              
              $
              (15,210,456
              )
              
              $
              3,611,759
              
              
              $
              (11,598,697
              )Loss
      per share-basic and diluted
              
              $
              (0.73
              )
              
              $
              0.17
              
              
              $
              (0.56
              )Statement
      of Cash Flows, Decmber 31, 2005Previously
              
              
              Increase
              
              
              AsReported
              
              
              (decrease)
              
              
              ReportedNet
      loss
              
              $
              (15,210,456
              )
              
              $
              3,611,759
              
              
              $
              (11,598,697
              )Cost of conversion
              
              
              7,068,174
              
              
              
              (7,068,174
              )
      (11)
              
              
              -Amortization of financing costs
              
              
              
              
              
              
              773,673
              (9)
              
              
              773,673Amortization of debt discounts
              
              
              -
              
              
              
              1,757,386
              (10)
              
              
              1,757,386Revaluation
      of derivative liability-warrants andconversion
      priviledges
              
              
              (992,757
              )
              
              
              924,276
              (13)
              
              
              (68,481
              )Increase in accrued liability
              
              
              89,592
              
              
              
              1,080
              
              
              
              90,672-Net
      cash used in operating activities
              
              $
              (3,701,875
              )
              
              $
              -
              
              
              $
              (3,701,875
              )


F-14




NOTES TO RESTATED
FINANCIALS-2006 and 2005




(1)
            Issuance costs of
      debt obligations have been separately reported as a component of assets on
      the balance sheet as deferred financing fees.  The value of
      derivatives and other securities accompanying debt issuances have been
      subtracted from the issuance proceeds and the remaining amounts reported
      as debt discount which is a component of convertible debt.  The
      combined total of the issuance costs and the values of derivatives and
      other securities accompanying debt issuances are being amortized over the
      terms of the related debt.  The adoption of this procedure
      resulted in adjustments to deferred financing costs and the carrying
      amounts of the debt issuances.


(2)
            The obligations
      for outstanding stock options have been reclassified to paid in
      capital.


(3)
            As noted above,
      the Company has made adjustments to its accounting records to more fully
      comply with requirements of the FASB and the SEC dealing with derivatives.
      Among these adjustments were reductions in the balances of derivative
      liabilities. Offsetting these reductions were reductions in the amounts of
      debt discount, the amounts of paid in capital-warrants, and the amounts of
      revaluation income; these offsets are further described in others of these
      footnotes.


(4)
            Among the
      adjustments made to comply with the requirements of the FASB and the SEC,
      were reductions in the amounts of common stock.  These were
      caused by the elimination of credits to common stock that had resulted
      principally from the erroneous recognition of liabilities for conversion
      privileges upon issuances of convertible debt.  These credits
      were erroneously transferred to paid in capital upon debt
      conversion.  The 2005 adjustment relates to corrections of these
      2005 debt issuances; the adjustment increased in 2006 to give recognition
      to corrections of the 2006 issuances.  Other partial offsets to
      these adjustments affected the amounts of amortization expense.


(5)
            Increases in the
      amounts of paid in capital-warrants result from adjustments to the
      derivative liability account, which treated most warrants as
      liabilities.  They are now treated as equity.  The
      2005 adjustment corrects the accounting for the 2005 issuances; the
      increase in the adjustment in 2006 reflects correction of the 2006
      issuances.


(6)
            The changes in
      the balances of accumulated deficit are the sum of the adjustments of the
      statements of operations ($3,611,759 in the case of 2005), and the
      adjustments of the statement of operations of the prior year ($1,219,750
      in the case of 2005).  In the case of 2006, these amounts are
      ($1,774,762) and $4,831,509, respectively.


(7)
            The changes in
      the balances of total stockholders’ deficiency are the sum of the changes
      to the accounts that make up stockholders’ deficiency.


(8)
            The reduction in
      the amount of the 2005 general and administrative expense is the result of
      reclassifying amounts previously charged to this account for amortization
      of financing costs ($98,975), and liquidated damages ($281,281).


(9)
            Amortization of
      issuance costs, which were previously recorded as interest expense have
      now been reclassified to amortization of financing
      costs.  These, along with amounts reclassified from general and
      administrative expense and conversion expense make up the amount of the
      change in amortization of financing costs, and amortization of debt
      discount.


(10)
            The cost of
      derivatives issued with convertible debt are now treated as offsets to the
      debt proceeds and amortized over the lives of the underlying debt
      issues.  The adjustment to amortization of debt discounts is the
      result of that amortization in each of the years presented.


(11)
            The Company
      previously treated the values of all conversion privileges as
      liabilities.  The offsetting charges that resulted from this
      accounting were ultimately applied against operations.  These
      charges have now been reversed.


(12)
            SFAS 00-19-2
      requires that SFAS 5 be applied to estimate the likely amounts of damages
      that will result from future failures to timely comply with debt issuance
      provisions requiring certain filings with the SEC.  The Company
      has now fully complied with the requirements.


(13)
            It has been
      determined that a number of warrants and conversion privileges previously
      treated as liabilities, and subject to periodic revaluation, have been
      recharacterized as equity instruments.  As a result, they are no
      longer revalued causing adjustments in the amounts of revaluation
      income.


(14)
            The $743,131
      reduction in the 2006 general and administrative costs is the result of
      reclassifying to separate expense categories the amounts of settlement
      expenses ($531,655), and liquidated damages ($214,247).


(15)
            Reclassification
      from general and administrative costs.






F-15




The
following tables set forth a summary of the adjustments that are included in the
amended and restated equity section of the balance sheet as of January 1, 2005
due to the restatement:




Balance
Sheet as of  January 1, 2005


Previously
                
                
                Increase
                
                
                AsReported
                
                
                (decrease)
                
                
                ReportedDeferred
      financing fees
                
                $
                -
                
                
                $
                -
                
                
                $
                -Total
      assets
                
                $
                4,600,023
                
                
                $
                -
                
                
                $
                4,600,023Common
      stock
                
                $
                10,822,854
                
                
                $
                (1,454,320
                )
      (1)
                
                $
                9,368,534Paid
      in capital- options
                
                
                
                
                
                
                -
                
                
                
                -Paid
      in capital-warrants
                
                
                
                
                
                
                1,454,320
                (2)
                
                
                1,454,320Total
      stockholders' equity
                
                
                2,308,870
                
                
                
                -
                
                
                
                2,308,870Total
      labilities and stockholders' equity
                
                $
                4,600,023
                
                
                $
                -
                
                
                $
                4,600,023




Supplemental
Financial Data


(Dollars
in thousands except per share data)




For
      the year 2004:
            
            2004Revenue
            
            $
            -Operating
      (loss)/income
            
            
            (2,530
            )Net Loss
      allocatable to common stockholders
            
            
            (2,272
            )Preferred stock
      dividends paid
            
            
            132Deficit
      allocatable to common stockholders
            
            
            (2,404
            )Net Loss per
      share, basic and dilutive
            
            $
            (0.19
            )Shares
      outstanding, year end
            
            
            12,075,448At
      January 1, 2005:Total
      assets
            
            $
            4,600Net investment in
      plant and equipment
            
            
            95Working
      capital
            
            
            (572
            )Total convertible
      debt
            
            
            -Stockholders'
      deficit
            
            $
            2,309




NOTES TO RESTATED
BALANCE SHEET-2004


(1)
Among the adjustments made to comply with the requirements of the FASB and the
SEC were reductions in the amounts of common stock.  These were caused
by the elimination of credits to common stock that had resulted principally from
the erroneous recognition of liabilities for conversion privileges upon
issuances of convertible debt.  These credits were erroneously
transferred to paid in capital upon debt conversion.  The 2005
adjustment relates to corrections of these 2005 debt issuances; the adjustment
increased in 2006 to give recognition to corrections of the 2006
issuances.  Other partial offsets to these adjustments affected the
amounts of amortization expense.


F-16




(2)
Increases in the amounts of paid in capital-warrants result from adjustments to
the derivative liability account, which treated most warrants as
liabilities.  They are now treated as equity.  The 2005
adjustment corrects the accounting for the 2005 issuances, and the increase in
the adjustment in 2006 reflects correction of the 2006 issuances.




NOTE 3– DEBT AND
RELATED SECURITIES




Convertible notes
payable consist of the following at December 31, 2006 and 2005:


Convertible
notes payable consist of the following at December 31, 2006:


Debt
              
              
              
              
              
              Conversion
              
              
              ExerciseNote
              
              
              Discount
              
              
              Net
              
              
              Price
              
              
              Warrants
              
              
              PriceMay
      31, 2005, 8% interest, due May 31, 2007
              
              $
              246,797
              
              
              $
              (27,371
              )
              
              $
              219,426
              
              
              $
              1.30
              
              
              
              423,077
              
              
              $
              2.11
              (1)October
      18, 2005, 8% interest, October 18, 2007
              
              
              1,483,000
              
              
              
              (272,226
              )
              
              
              1,210,774
              
              
              $
              2.00
              
              
              
              851,400
              
              
              $
              3.25
              ( 1)
      (3)March
      1, 2006, 4% interest, due March 1, 2008
              
              
              150,000
              
              
              
              (10,216
              )
              
              
              139,784
              
              
              $
              1.56
              
              
              
              48,077
              
              
              $
              1.75June
      30, 2006, 4% interest, due June 30, 2008
              
              
              48,248
              
              
              
              (5,511
              )
              
              
              42,737
              
              
              $
              1.56
              
              
              
              24,124
              
              
              $
              1.75July
      26, 2006, 12% interest, due October 26, 2006
              
              
              359,549
              
              
              
              (10,528
              )
              
              
              349,021
              
              
              $
              1.56
              
              
              
              282,051
              
              
              $
              1.75Long
      term convertible notes payable
              
              
              400,000
              
              
              
              -
              
              
              
              400,000
              
              
              $
              1.56
              
              
              
              110,808
              
              
              $
              1.56
              (1)Total
      Convertible Notes Payable
              
              $
              2,687,594
              
              
              $
              (325,852
              )
              
              $
              2,361,742
              
              
              
              
              
              
              
              1,739,537Less:
      Current Portion
              
              $
              2,129,797
              
              
              $
              (299,597
              )
              
              $
              1,830,200Long
      term convertible notes payable
              
              $
              557,797
              
              
              $
              (26,255
              )
              
              $
              531,542
 Convertible
notes payable consist of the following at December 31, 2005:
  Debt
              
              
              
              
              
              Conversion
              
              
              ExerciseNote
              
              
              Discount
              
              
              Net
              
              
              Price
              
              
              Warrants
              
              
              PriceMay
      31, 2005, 8% interest, due May 31, 2007
              
              $
              500,000
              
              
              $
              (147,763
              )
              
              
              352,237
              
              
              $
              1.30
              
              
              
              423,077
              
              
              $
              2.11
              (2)October
      18, 2005, 8% interest, October 18, 2007
              
              
              1,548,000
              
              
              
              (561,712
              )
              
              
              986,288
              
              
              $
              2.00
              
              
              
              851,400
              
              
              $
              3.25
              (2)Total
      Convertible Notes Payable
              
              $
              2,048,000
              
              
              $
              (709,475
              )
              
              $
              1,338,525
              
              
              
              
              
              
              
              1,274,477Less:
      Current Portion
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              
              
              
              
              $
              -Long
      term convertible notes payable
              
              $
              2,048,000
              
              
              $
              (709,475
              )
              
              $
              1,338,525
              
              
              
              
              
              
              $
              1,274,477
  (1)
              Reduced to $ .45
      due to the February 2007 issuance.(2)
              Susequently
      reduced to $1.56 due to the February 2006 issuance and $ .45 due to the
      February 2007 issuance.(3)
              The October 2005
      issuance due October 18, 2007 was extended to April 18,
2008.




On
February 11, 2005, the Company entered into a Subscription Agreement pursuant to
which the Company sold an aggregate of $5,000,000 of principal amount promissory
notes (February 2005 Note) convertible into shares of common stock, no par
value, at a conversion price equal to $1.30 per share, and an aggregate of
2,884,615 Class A and Class B share purchase warrants to purchase shares of
common stock to certain purchasers who are a party to the Subscription
Agreement.  First Montauk Securities Corp. acted as selling agent
(Selling Agent) in connection with the offering.  The Company issued a
total of 384,616 warrants on February 11, 2005 to the Selling Agent as partial
consideration for services performed in connection with the
offering.  The Class A warrants are exercisable at a price equal to
$1.85 from the date of issuance until 5 years after the closing
date.  The Class B warrants are exercisable at a price equal to $2.11,
representing 101% of the 3 day average closing bid prices of our common stock on
the trading day immediately preceding the closing date, from the date of
issuance until 5 years after the closing date.  The Class A and Class
B warrants both have a cashless exercise feature.




On
May 31, 2005, the Company entered into a 8% Series B Unsecured Convertible
Debenture and Warrants Purchase Agreement with one accredited investor pursuant
to which the Company sold a $500,000 principal amount unsecured convertible
debenture convertible into shares of our common stock (May 2005 Note), no par
value, at a conversion price equal to $1.30 per share, and stock purchase
warrants to purchase 384,615 shares of our common stock at an exercise price
equal to $3.25 per share, to a certain investor who is a party to the Purchase
Agreement for an aggregate purchase price of $500,000.  First Montauk
Securities Corp. acted as Selling Agent in connection with the
offering.  The Company issued a total of 38,462 warrants on May 31,
2005 to the Selling Agent as partial consideration for services performed in
connection with the offering.  The warrants are exercisable at a price
equal to $2.11 for a period of 5 years from the closing date.  On
August 28, 2006, $253,302 of principal and $54,040 of accrued interest was
converted into 234,802 shares of common stock at $1.30 per share.  The
remaining principal and warrant prices were subject to adjustment based on
subsequent more favorable pricing of issues and were adjusted to $ .45 as a
result of the pricing of the February 20, 2007 private placement.
On June 1, 2007, the remaining principal of the May 2005 8% Series B Unsecured
Convertible Debenture, $246,797, plus accrued interest of $15,736 was converted
into 583,407 shares of common stock at $ .45 per share.




F-17




On
October 18, 2005, The Company entered into a 8% Series C Unsecured Convertible
Debenture and Warrants Purchase Agreement with certain accredited investors
pursuant to which the Company sold an aggregate of $1,000,000 principal amount
unsecured convertible debentures convertible into shares of our common stock
(October 2005 Note), no par value, at a conversion price of $2.00 per share, and
an aggregate of 500,000 stock purchase warrants to purchase shares of our Common
Stock at $3.25 per share to certain accredited investors who are parties to the
Purchase Agreement for an aggregate purchase price of
$1,000,000.  Further, the Company issued 50,000 Warrants to the
placement agent, a registered broker dealer firm, exercisable at $3.25 per
share, as consideration for services performed in connection with the issuance
of the Debentures and Warrants to the Investors pursuant to the Purchase
Agreement.  The prices were adjusted to $1.56 due to the issuance of
the February 2006 debt issuance, and were subsequently reduced to $0.45 per
share due to the pricing of the February 20, 2007 private placement.




On
October 28, 2005, the Company held a second and final closing with certain
accredited investors pursuant to a right of participation, which was granted to
such investors under that certain securities purchase agreement dated as of
November 23 and 24, 2004 and the subscription agreement dated as of
February 11,
2005.  In connection with the second closing, The Company sold an
aggregate of $548,000 principle amount of Debentures convertible into shares of
our common stock, no par value, at a conversion price of $2.00 per share, and
issued 275,000 warrants exercisable at $3.25 per share for an aggregate purchase
price of $ 548,000.  The prices were adjusted to $1.56 due to the
issuance of the February 2006 debt issuance, and were subsequently reduced to
$0.45 per share due to the pricing of the February 20, 2007 private
placement.




The
October 2005 convertible debt issuance contains a provision that automatically
extends the term of the note six months until April 18, 2008 if the Company’s
common stock is trading at a closing bid price of less than $2.00 on the
maturity date.  The maturity date was October 18, 2007 and Company’s
common stock price on October 18, 2007 was $0.24. As such, the October 2005 Note
was extended until April 18, 2008.




Furthermore,
upon the occurrence of an Event of Default, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, anything herein or
in any note or other instruments contained to the contrary notwithstanding, and
the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law;
provided, that any payment of this Debenture in connection with an Event of
Default may, at the option of the Holder, be made in shares of Common Stock of
the Company which number of shares shall be calculated based upon at the closing
sale price of the Common Stock on the date the Debenture becomes due and
payable.  Such payment of shares shall be made within
ten  (10) Trading Days of such demand, and if not paid within such
period, the Company shall pay the Holder liquidated damages in cash of 2% per
month of such amount until paid, pro-rated for any partial months.




In
no event shall any holder be entitled to convert this Debenture for shares of
Common Stock in excess of that number of shares of Common Stock that, upon
giving effect to such conversion, would cause the aggregate number of shares of
Common Stock beneficially owned by the holder and its "affiliates" (as defined
in Rule 405 under the Securities Act) to exceed 9.99% of the outstanding shares
of the Common Stock of the Company following such conversion.




On
November 11, 2006, $65,000 of the October 2005 Note was converted into 41,666
shares of common stock.




In
March 2006, the Company issued $819,800 of 8% convertible debt, which was
converted into equity in the second quarter of 2006 along with accrued interest,
at a conversion rate of $1.56 per share, resulting in the issuance of 534,352
additional shares of stock. This issue was accompanied by 525,513 warrants,
exercisable at $1.75 for a period of five years.




F-18




On
March 1, 2006, the Company issued $150,000 of 4% Convertible Notes (March 2006
Note) due March 1, 2008, accompanied by 48,077 warrants to purchase common stock
at $1.75 over five years in settlement of certain liquidated damages described
below.  The note is convertible at $1.56 over two years.




On
June 30, 2006, the Company issued an additional $48,248 in 4% Convertible Notes
(June 2006 Note) due September 30, 2008, accompanied by 24,124 warrants
exercisable at $1.75 per share over five years in settlement of the liquidated
damages described below.  The note is convertible at $1.56 over two
years.




As
of June 30, 2006, all damages payable to the investors of the Company’s November
2004 private placement were settled, and pursuant to a modification agreement
which the Company entered into with such investors on March 1, 2006 and June 30,
2006, as described in Supplemental Cash Flow Information included in Note 6, no
liquidated damages will accrue for the non-effectiveness of the registration
statement after the date of the modification agreements.  There was no
provision in these issues for repricing.




As
noted in the Subsequent Event Note (Note 12), on September 10, 2007, the Company
issued 123,371 shares of its common stock in connection with the terms of the
February 2005 equity issuance, and the “most favored nations” conversion pricing
related to the February 2005 convertible note issuance. In connection with the
February 2005 issuance, the Company may be obligated to issue up to an
additional 1.2 million shares of common stock to shareholder’s of record who
received the shares under the original February 2005 issuance, due to the
reduction in the conversion price of certain convertible debt issued in February
2007.  In November 2007, 817,093 shares of common stock were issued
based on the supported claims for certain shareholders




In
the July 21, 2006 Debt Issuance, the Company issued 2% unsecured convertible
debentures (July 2006 Unsecured Note) aggregating $359,549 accompanied by
warrants to acquire 110,808 shares of our common stock at $1.75 per
share.  These were issued in settlement of the liquidated damages
associated with the October 2005 issue.  The conversion price of the
shares underlying the note was $1.56.




On
July 26, 2006, the Company issued $400,000 of 12% convertible debt (July 2006
Note) due October 20, 2006.  After commissions, the Company received
net proceeds of $342,500.  The debt is convertible to stock at $1.56
per share.  The issue was accompanied by 282,052 warrants exercisable
at $1.56 for five years.  Both the conversion price and the warrants
purchase price have been adjusted to $.45 due to the pricing of the February 20,
2007 private placement.




In
October 2006, the Company was in technical default on its 12% Series A
Convertible Note (July 2006 Note) in the principal amount of $400,000 which the
Company issued to a qualified institutional buyer on July 26, 2006.  A
total of $412,000 of principal and accrued and unpaid interest was due on
October 26, 2006. The Company did not repay this obligation when it was
due.  The Company negotiated with the holder to extend the note
through the payment of cash, and the issuance of shares of common stock.




On
March 22, 2007, the Company made a $100,000 principal payment and paid interest
of $30,233 related to the July 2006 Note. The amount due was reduced to $300,000
and interest on the July, 2006 Note was reduced to 10% (July 2006 Renegotiated
Note). Additionally, the Company issued 184,000 shares of common stock as
settlement of the default period and paid a fee of $15,000 to Source Capital
Group, Inc., a registered representative of the Noteholder, and the Company also
agreed to make monthly interest payments.  The note conversion price
and warrant exercise prices were subsequently adjusted to $.45 per share due to
the February 20, 2007 private placement.


F-19




The
July 2006 Renegotiated Note was due and payable in full, including all accrued
and unpaid interest, on November 29, 2007.  The Note has not been
repaid, and is in default.  The Company is in discussions with the
lender to renegotiate the July 2006 Renegotiated Note.  There can be
no assurances that the Company will be successful.


The
Company’s private placements of convertible notes and common stock purchase
warrants issued in 2005 contained liquidated damages provisions, one of which
has been settled as discussed above. For the two other financings (February 2005
Note and May 2005 Note), no liquidated damages have accrued despite the fact
that the shares underlying the notes and warrants issued in such private
placements have not been registered, since the payment of such damages is linked
to the effectiveness of the registration statement which was initially filed in
February 2005, and said registration statement has been withdrawn.




Each of the debt
issuances included associated warrants. The fair value of the warrants was
calculated using a Black-Scholes Model.  Based upon an evaluation of
the criteria in EITF 00-19, the fair value of the warrants associated with the
February 2005 issue was classified as a derivative liability, and is subject to
revaluation at the end of each reporting period.  Most of the warrants
issued with convertible debt have a “most favored nations” (MFN)
provision,  whereby the exercise prices are subject to adjustment
based on more favorable pricing of subsequent debt issuances.





DEBT, CONVERSION
TO STOCK AND RELATED WARRANTS




Balance
      of Convertible Notes and Warrants at December 31, 2006 and December 31,
      2005:CONVERTIBLE NOTES
              
              
              WARRANTSConversion
              
              
              
              
              
              ExerciseDecember
      31, 2006
              
              Note
              
              
              Shares
              
              
              Price
              
              
              Warrants
              
              
              PriceMay
      31, 2005, 8% interest, due May 31, 2007
              
              $
              246,797
              
              
              
              189,844
              
              
              $
              1.30
              
              
              
              423,077
              
              
              $
              2.11
              (1)October
      18, 2005, 8% interest, October 18, 2007
              
              
              1,483,000
              
              
              
              741,500
              
              
              $
              2.00
              
              
              
              851,400
              
              
              $
              3.25
              (1)
      (3)March
      1, 2006, 4% interest, due March 1, 2008
              
              
              150,000
              
              
              
              96,154
              
              
              $
              1.56
              
              
              
              48,077
              
              
              $
              1.75June
      30, 2006, 4% interest, due June 30, 2008
              
              
              48,248
              
              
              
              30,769
              
              
              $
              1.56
              
              
              
              24,124
              
              
              $
              1.75July
      21, 2006, 2% interest, due July 21, 2008
              
              
              359,549
              
              
              
              230,480
              
              
              $
              1.56
              
              
              
              282,051
              
              
              $
              1.75July
      26, 2006, 12 % interest, due October 26, 2007
              
              
              400,000
              
              
              
              256,410
              
              
              $
              1.56
              
              
              
              110,808
              
              
              $
              1.56
              (1)Total
      Convertible Notes Payable
              
              $
              2,687,594
              
              
              
              1,623,675
              
              
              
              
              
              
              
              1,739,537
  Conversion
              
              
              
              
              
              ExerciseDecember
      31, 2005
              
              Note
              
              
              Shares
              
              
              Price
              
              
              Warrants
              
              
              PriceMay
      31, 2005, 8% interest, due May 31, 2007
              
              $
              500,000
              
              
              
              384,615
              
              
              $
              1.30
              
              
              
              423,077
              
              
              $
              2.11
              (2)October
      18, 2005, 8% interest, October 18, 2007
              
              
              1,548,000
              
              
              
              774,000
              
              
              $
              2.00
              
              
              
              851,400
              
              
              $
              3.25
              (2)Total
      Convertible Notes Payable
              
              $
              2,048,000
              
              
              
              1,158,615
              
              
              
              
              
              
              
              1,274,477




(1)
            The conversion price
      and exercise price were subsequently reduced to $0.45 in connection with
      the February 20, 2007 convertible debt issuance.(2)
            Subsequently
      reduced to $1.56 due to the February 2006 issuance and $0.45 due
      to the February 20, 2007 convertible debt issuance.(3)
            The October 2005
      issuance due October 18, 2007 was extended to April 18,
  2008.




STOCK SALES AND PRIVATE
PLACEMENT OFFERINGS-


PENALTIES AND LIQUIDATED
DAMAGES





Included in the
Company’s financings during 2004 through stock sales was $1,312,000 received
from a Purchase Agreement dated November 22, 2004. The Purchase Agreement
required, among other things, that shares be registered under a registration
statement filed with the SEC, and that the registration statement be declared
effective by the SEC and the registered shares deemed tradable within a
prescribed time. The Company did not satisfy its obligation to cause the SEC to
declare the registration statement effective within the timeframe specified in
the November 2004 Registration Rights Agreement. As a result, the Company was
subject to, and accrued liquidated damages in an amount equal to 2% of the
amount invested for each 30-day period following the default date. On May 31,
2005, the Company entered into a Letter Agreement with a representative of this
shareholder group, under which $120,429 was paid to settle the accrued
liquidated damages to date. Under that Letter Agreement, no further liquidated
damages would accrue until after June 30, 2005. The obligation relating to the
effectiveness of the registration statement and registration of tradable shares
was not satisfied, and liquidated damages were accrued since June 30, 2005 at
the rate of approximately $26,240 per month. The liquidated damages paid or
accrued, were charged to expense during the periods in which they accrued. For
the year ended December 31, 2005, an additional $160,851 was accrued, and
$88,126 was accrued during 2006. All liquidated damages for this issue were
settled by the issuance of the June 2006 Note.




There were three
private placement offerings during 2005. Under the provisions of the first of
these offerings, penalties will not accrue as the registration requirements of
that offering have been satisfied.  Under the second private offering,
there is no provision for penalties.  Under the third such offering,
penalties began to accrue on March 18, 2006, and would have accrued for a period
of nine months.  A settlement was reached with the investors of this
issue on July 21, 2006, under which the penalties were canceled in exchange for
$359,549 of convertible debt, as previously discussed in the Debt section of
this Note.




F-20





NOTE
4-CAPITALIZATION




PREFERRED STOCK




The
Company is authorized to issue 5,000,000 shares of preferred stock, without par
value.  At December 31, 2005, 275,000 of these shares had been
issued.  Each of these shares entitles the holder to a 5% cumulative
dividend based on a $5 per share stated value.  If sufficient cash is
not available, or at the option of the shareholder, these dividends may be paid
in common stock.  This issue of preferred stock also provides the
shareholder with 10 votes for each share of preferred stock. The holder of this
preferred stock is a corporation wholly owned by the estate of the Company’s
former President and Chairman.




Dividends of $68,750
accrued on the preferred stock during each of the years 2002 through 2006. Cash
dividends of $131,771 were paid during 2004. The balance of unpaid dividends at
of December 31, 2006 was $47,916.




On
March 21, 2007, the Company determined, after consultation with its independent
registered public accounting firm, that a restatement of its financial
statements for the year ended December 31, 2005 filed on Form 10-KSB was
necessary due to the issuance of the Company’s preferred stock as payment of
dividends in lieu of cash dividends on April 1, 2005, with respect to previously
issued shares of preferred stock. The Company’s original Articles of
Incorporation, as amended, including on April 30, 2000, do not allow the
issuance of additional shares of preferred stock as payment of dividends on
shares of issued and outstanding preferred stock. Accordingly, the 100,000
shares of preferred stock which were issued to the holder on April 1, 2005 were
issued in error.




The
Company’s Articles of Incorporation, as amended, including on April 30, 2000,
similarly do not support the calculation used by the Company in determining the
number of shares of common stock used to pay preferred stock dividends. The
difference being the date used in determining the stock price at the end of each
preferred dividend period, as opposed to the lowest common stock price during
the preferred dividend period, subject to a 70% discount, for calculating the
number of common shares issued as payment of the period’s preferred stock
dividend. Accordingly, the numbers of shares were greater than the number of
shares required, and were issued in error resulting in increased preferred
dividend expenses and preferred stock equity.




The
Company has determined that the number of shares deemed the equivalent of the
preferred stock dividend will be recalculated based on the Company’s Articles of
Incorporation, as amended, including on April 30, 2000. (See Note 2
-Restatements). Accordingly, the Company will issue 136,041 shares of common
stock to the sole holder of the preferred stock as payment of $51,561 of
preferred stock dividends less other adjustments resulting from the
recalculation of the number of common shares required to pay preferred stock
dividends, subsequently approved. During the period January 1, 2003 through June
30, 2006, 200,238 shares of common stock were issued in excess of the amount
required.


F-21




STOCK
OPTIONS
 
 The
Company has periodically awarded stock options under employment contracts with
certain key employees. These options were immediately exercisable; they have an
implicit life of five years and none was forfeited during either year. A summary
of option activity is presented below for the weighted average exercise prices
for the options exercised:




2006
            
            
            2005Shares
            
            
            Price
            
            
            Shares
            
            
            PriceOptions
      outstanding at beginning of year
            
            
            1,375,000
            
            
            $
            .80
            
            
            
            620,000
            
            
            $
            .73Options granted
      during year
            
            
            350,000
            
            
            
            .46
            
            
            
            800,000
            
            
            
            .83Options exercised
      during year
            
            
            (7,500
            )
            
            
            
            
            
            
            (45,000
            )
            
            
            .40Options
      outstanding at end of year1,715,500
            
            
            $
            .73
            
            
            
            1,375,000
            
            
            $
            .80Weighted average
      Fair Value of options granted
            
            
            
            
            
            $
            0.25
            
            
            
            
            
            
            $
            1.37Weighted average
      remaining life of outstanding options – years
            
            
            
            
            
            
            3.33
            
            
            
            
            
            
            
            4.33




Stock
option expense for 2006 and 2005 was $ 76,351 and $1,082,250, respectively.




SHARES ISSUED FOR
SERVICES




There were shares
awarded as compensation for other services aggregating $1,242,177 and
$1,918,750, in 2006 and 2005, respectively. These share issuances for 2006 and
2005 are detailed below by type of service performed.




The
following shares were issued for services in 2006:





Number
      of
            
            Grant
            
            Price
      at
            
            Value
      atServices
      Rendered
            
            Shares
            
            Date
            
            Date
            
            Grant
      DateEmployee
      awards
            
            
            32,500
            
            
            1/26
            
            $
            1.64
            
            $
            53,250Investor
      relations
            
            
            22,500
            
            
            1/26
            
            
            2.13
            
            
            47,925Professional
      Services
            
            
            2,500
            
            
            1/26
            
            
            2.20
            
            
            5,500Professional
      Services
            
            
            6,712
            
            
            2/1
            
            
            1.57
            
            
            10,534Legal
      Services
            
            
            25,000
            
            
            2/5
            
            
            1.95
            
            
            48,750Professional
      Services
            
            
            5,000
            
            
            2/9
            
            
            1.73
            
            
            8,650Product
      Development services
            
            
            30,000
            
            
            2/28
            
            
            1.49
            
            
            44,700Marketing
      services
            
            
            25,000
            
            
            3/27
            
            
            1.08
            
            
            27,000Software
      Consulting services
            
            
            1,440
            
            
            3/22
            
            
            1.31
            
            
            1,886Legal
      Services
            
            
            1,304
            
            
            3/22
            
            
            1.51
            
            
            1,969Investor
      relations
            
            
            85,000
            
            
            4/12
            
            
            1.49
            
            
            126,650Professional
      Services
            
            
            5,847
            
            
            4/12
            
            
            1.49
            
            
            8,712Employee
      awards
            
            
            25,000
            
            
            4/12
            
            
            1.49
            
            
            37,253Professional
      Services
            
            
            5,599
            
            
            5/1
            
            
            1.64
            
            
            9,182Director
      awards
            
            
            145,000
            
            
            5/1
            
            
            1.53
            
            
            222,500Investor
      relations
            
            
            26,000
            
            
            5/10
            
            
            1.27
            
            
            33,020Professional
      Services
            
            
            6,142
            
            
            5/10
            
            
            1.27
            
            
            7,804Professional
      Services
            
            
            26,000
            
            
            5/11
            
            
            1.30
            
            
            33,800Investor
      relations
            
            
            15,000
            
            
            6/1
            
            
            1.64
            
            
            24,600Professional
      Services
            
            
            22,900
            
            
            6/5
            
            
            1.80
            
            
            41,220Marketing
      services
            
            
            10,000
            
            
            6/22
            
            
            1.85
            
            
            18,500Professional
      Services
            
            
            6,750
            
            
            6/22
            
            
            1.85
            
            
            12,488Professional
      Services
            
            
            25,000
            
            
            6/30
            
            
            1.90
            
            
            47,500Professional
      Services
            
            
            15,000
            
            
            7/1
            
            
            1.27
            
            
            19,050Professional
      Services
            
            
            13,560
            
            
            9/9
            
            
            1.31
            
            
            17,764Employee
      awards
            
            
            12,500
            
            
            9/28
            
            
            1.71
            
            
            21,400Investor
      relations s
            
            
            75,000
            
            
            9/28
            
            
            1.61
            
            
            120,736Professional
      Services
            
            
            100,000
            
            
            10/9
            
            
            .75
            
            
            74,800Marketing
      services
            
            
            35,000
            
            
            10/20
            
            
            .71
            
            
            24,990Legal
      Services
            
            
            10,000
            
            
            10/20
            
            
            .71
            
            
            7,140Professional
      Services
            
            
            49,000
            
            
            10/20
            
            
            .84
            
            
            34,986Employee
      awards
            
            
            5,000
            
            
            10/20
            
            
            .84
            
            
            3,570Total
      shares issued for services
            
            
            871,257
            
            
            
            
            
            
            
            
            1,197,826Value of options
      granted for services
            
            
            -
            
            
            
            
            
            
            
            
            76,351Value of equity
      items issued for services
            
            
            871,257
            
            
            
            
            
            
            
            
            $ 1,242,177


F-22




The
following shares were issued for services in 2005:





Number
      of
            
            Grant
            
            Price
      at
            
            Value
      atServices
      Rendered
            
            Shares
            
            Date
            
            Date
            
            Grant
      DateAdvertising
            
            
            5,000
            
            2/24
            
            
            2.50
            
            12,500Lega1
      services
            
            
            11,000
            
            5/2
            
            
            2.78
            
            30,580Financial
      consulting
            
            
            100,000
            
            5/6
            
            
            2.60
            
            260,000Legal
      services
            
            
            50,000
            
            5/6
            
            
            2.60
            
            130,000Investor
      relations
            
            
            15,000
            
            4/1
            
            
            2.40
            
            36,000Public
      relations
            
            
            20,000
            
            5/1
            
            
            2.55
            
            51,000Facility
      search
            
            
            5,000
            
            5/1
            
            
            2.55
            
            12,750Marketing
      services
            
            
            9,009
            
            7/29
            
            
            2.25
            
            20,270Investor
      relations
            
            
            15,000
            
            9/6
            
            
            2.25
            
            33,750Financial
      services
            
            
            2,500
            
            12/1
            
            
            2.60
            
            6,500Investor
      relations
            
            
            21,186
            
            12/9
            
            
            2.35
            
            49,787Public
      relations
            
            
            18,000
            
            12/9
            
            
            2.35
            
            42,300Investor
      relations
            
            
            15,000
            
            12/9
            
            
            2.35
            
            35,250Total
      shares issued to consultants
            
            
            286,695
            
            
            
            
            
            
            720,687Other
      Issuances:Employee
      awards
            
            
            20,000
            
            various
            
            
            2.40
            
            48,000Shares
      issued in lieu of rent
            
            
            19,200
            
            various
            
            
            
            
            48,000Shares
      issued as partialcompensation
      of financing
            
            
            5,000
            
            various
            
            
            
            
            14,700Amortization
      of cost of grants madein
      prior periods
            
            
            
            
            
            
            
            
            
            5,113Total
      Value of stock issued for services
            
            
            330,895
            
            
            
            
            
            
            836,500Value
      of options granted for services
            
            
            -
            
            
            
            
            
            
            1,082,250Value
      of equity items issued for services
            
            
            330,895
            
            
            
            
            
            
            $ 1,918,750




WARRANTS




The
Company has issued warrants both as part of “stock units” and as an integral
part of convertible note issues. The determination to classify the warrants as
either derivative liabilities or equity was based upon consideration of the
specific criteria for classification established in EITF 00-19.  The
fair value of the warrants is determined using a
Black-Scholes Model.  Those warrants classified as liabilities
are subject to revaluation for each reporting period following the guidance in
SFAS 133.




F-23




The
following is a schedule of changes in warrants outstanding during the years 2006
and 2005. Each of these warrants is exercisable over five year periods from
dates of issuance at prices ranging from $0.45-$1.75 per share. They were
recorded at their fair values as determined by a Black Scholes Model.





Balance
      December 31, 2004
            
            
            
            
            
            5,537,763Warrants
      issued in conjunction with issuances of convertible debt:February
      issue
            
            
            2,884,615May
      issue
            
            
            384,615October
      issue
            
            
            774,000
            
            
            
            4,043,230Awarded
      as partial fees to brokers:February
      issue
            
            
            484,615May
      issue
            
            
            38,462October
      issue
            
            
            154,800
            
            
            
            677,877Warrants
      exercised during 2005
            
            
            
            
            
            
            (593,000
            )Warrants
      voided during 2005
            
            
            
            
            
            
            (200,000
            )Warrants
      issued for services
            
            
            
            
            
            
            37,688Balance
      December 31 2005
            
            
            
            
            
            
            9,503,558Warrants
      issued in conjunction  with issuances of 2006 convertible
      debt:Warrants
      issued with $819,800 convertible debt through May, subsequently converted
      to equity
            
            
            
            
            
            
            525,513Warrants
      issued with $150,000 convertible debt, March
            
            
            
            
            
            
            48,077Warrants
      issued with $48,248 convertible debt, June
            
            
            
            
            
            
            24,124Warrants
      issued with $400,000 convertible debt, July
            
            
            
            
            
            
            282,051Warrants
      issued with $359,549 convertible debt, July
            
            
            
            
            
            
            110,808Total
      warrants issued during 2006
            
            
            
            
            
            
            990,573Balance
      December 31, 2006
            
            
            
            
            
            
            10,494,131




The
exercise price of the warrants was changed primarily due to the presence of an
“MFN” clause that provides for adjustments based upon more favorable pricing of
subsequent issuances. When these events occur, repricing letters are sent to the
investors.




F-24





Certain issues have
“cashless exercise” features whereby the investor can convert warrants to stock
after a specified time period based, generally, on the absence of an effective
Registration Statement. The warrants are exchanged for stock based upon
predetermined formulas that reflect stock appreciation.




NOTE
5 - INCOME TAXES





The
Company has experienced losses each year since its inception. As a result, it
has incurred no Federal income tax. The Internal Revenue Code allows net
operating losses (NOL’s) to be carried forward and applied against future
profits for a period of twenty years. At December 31, 2006, the Company had NOL
carryforwards of $24,632,907 available for Federal taxes. The potential tax
benefit of the state NOL’s has been recognized on the books of the Company while
the potential benefit of the Federal NOL’s has been offset by a valuation
allowance. If not used, these Federal carryforwards will expire as
follows:




2011
            
            $
            206,9522012
            
            
            129,0922018
            
            
            486,7992019
            
            
            682,5892020
            
            
            501,1692021
            
            
            775,4032022
            
            
            590,7642023
            
            
            2,233,3862024
            
            
            2,493,4862025
            
            
            9,728,5542026
            
            
            6,804,713




During
the year 2006, the Company realized $445,216 from the sale, as permitted by New
Jersey law, of its rights to use the New Jersey NOL’s and research and
development credits that had accrued during 2005. These potential New Jersey
offsets for periods prior to 2006 are, thus, no longer available to the
Company.




Under
Statement of Financial Accounting Standards No. 109 (SFAS 109),
recognition of deferred tax assets is permitted unless it is more likely than
not that the assets will not be realized. The Company has recorded deferred tax
assets as follows:





Current
            
            
            Non-current
            
            
            TotalDeferred
      Tax Assets
            
            $
            919,889
            
            
            $
            8,257,629
            
            
            $
            9,177,518Valuation
      Allowance
            
            
            -
            
            
            
            8,257,629
            
            
            
            8,257,629Balance
      Recognized
            
            $
            919,889
            
            
            $
            -
            
            
            $
            919,889




The
entire balance of the valuation allowance relates to Federal taxes. Since state
tax benefits for years prior to 2005 have been realized, no reserve is deemed
necessary for the benefit of state tax losses of 2006. The valuation reserve
increased by $919,889 during the year.




F-25




NOTE 6 -SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION




Cash paid
for interest and income taxes is presented below:





2006
            
            2005Interest
            
            $
            1,971
            
            
            $
            9,741Income
      taxes
            
            
            500
            
            
            
            500




There
were no non-cash investing activities during either 2006 or 2005. The following
non-cash financing activities occurred:





a)
            Shares
      of common stock were issued for services during 2006 and 2005; these
      totaled 687,665 and 330,895 shares,
  respectively.





b)
            During
      2006, the following amounts were converted from debt to
      equity:





●
            $819,800 of
      convertible debt was converted into 525,513 shares of common stock.


●
            $253,203 of the
      May 2005 convertible debt issue was converted into 180,925 shares of
      stock.


●
            $65,000 of the
      October, 2005 convertible debt issue was converted into 41,666 shares of
      common stock.





c)
            During 2005,
      $5,000,000 of convertible debt was converted into 3,846,154 shares of
      common stock.




d)
            During 2006, the
      holder of the preferred stock issue elected to receive common stock in
      lieu of $112,500 of cash dividends. A total of 218,742 shares of common
      stock will be issued to satisfy this dividend.




During 2005, the
      holder of the preferred stock issue also elected to receive common stock
      in lieu of a $51,563 cash dividend. A total of 136,041 shares will be
      issued to satisfy this dividend.




e)
            During 2006,
      $66,464 of interest that had accrued on the May, 2005 convertible debt
      issue and the $819,800 2006 convertible issue were settled by the issuance
      of 54,373 shares of common stock.




f)
            During 2006, the
      Company issued $198,248 of 4% debentures as part of a Modification
      Agreement with investors, whereby the investors yielded their rights to
      liquidated damages on the November, 2004 stock issue.




g)
            During 2005, the
      Company issued 1,749,827 shares in settlement of stock sales that took
      place during 2004.




h)
            During 2005, the
      Company issued 28,453 shares in settlement of interest due to
      investors.




i)
            During 2005, the
      Company issued 187,939 shares in settlement of third party debt of a
      German company that the Company planned to acquire - see Note on FiLCO
      acquisition.




j)
            During 2006, the
      Company issued 2% Unsecured Convertible Debentures aggregating $359,549
      and Stock Purchase Warrants to acquire 110,808 shares of our common stock
      at $1.65 per share. The issuance satisfies an obligation for liquidated
      damages which would have totaled $278,647 by December 31, 2006.


F-26




NOTE 7
-PROPOSED ACQUISITION OF FILCO




On
February 19, 2004, the Company reached a tentative agreement (Tentative
Agreement) to purchase capital stock of FiLCO GmbH., a German manufacturer of
fork trucks (formerly Clark Material Handling Company of Europe) with a
manufacturing facility in Mulheim, Germany (FiLCO). It was expected that the
Company would acquire 75.1% of FiLCO. While negotiations were continuing, the
Company agreed to make advances to FiLCO. Through December 31, 2005 advances
totaling $6,275,881 had been made.




On
January 20, 2006, Filco filed for insolvency in Germany and a receiver was
appointed. As a result, on February 7, 2006 the Company terminated the tentative
agreement to acquired Filco stock and began negotiations with the receiver to
acquire some or all of the Filco assets. The $6,275,881 of advances to Filco
that were outstanding at December 31, 2005, were secured by liens filed against
the machinery and equipment owned by Filco which in 2003 was appraised at
$5,400,000, and by liens filed against its intellectual property, which had not
been appraised. Due to the uncertainty of the Company’s position under German
bankruptcy law, $4,275,881 of the Filco advances were written off in 2005, and
the remaining $2,000,000 was written off in 2006. In addition, $413,000 of
Company inventory stored at the Filco plant was abandoned and written off during
2006. During 2006, an auction of Filco assets was conducted by the receiver who
did not acknowledge the Airtrax liens against property and
equipment.




NOTE 8-RELATED PARTY
TRANSACTIONS




The
Chairman of the Board of Directors made periodic loans to the Company during
2006. The loans did not accrue interest and were due on demand. The combined
loans amounted to $35,000. At the end of the year 2006, these loans have been
fully paid.




The
majority shareholder of the corporation, who was also the Company President,
made loans to the Company from time to time. These notes together with accrued
interest at 12% are due on demand. The combined unpaid balance of principal and
interest on these notes at December 31, 2006 was $75,713.




During 2006, the Board
of Directors received 145,000 shares for services as directors; these were
valued at $222,500, reflecting the fair market value of the stock at time of
awards.




On
August 25, 2006, the Company’s CEO, President and Chairman (“President”) died.
The President’s employment contact expired on June 30, 2006, and was not
renewed. The employment agreement did not provide for the exercise of the
options upon death.  Under the terms of the employment contract, the
President was granted options to purchase 550,000 shares in 2004, valued at
$187,500.  In 2005, he was granted 750,000 options to purchase stock
under that two year employment contract; these options were valued at $975,000.
Subsequent to his death, the Board of Directors extended for one year from the
date of the termination of the employment contract, the time during which the
options can be exercised. No adjustment has been made to previously recorded
compensation expense, as the fair value at grant significantly exceeded its
current fair value. SFAS #123R indicates that modification adjustments should
only be made when they increase the value of the initially granted
option.  In 2006, the Company granted 300,000 options to its Chief
Executive Officer valued at $ 45,000.




NOTE 9
-COMMITMENTS AND CONTINGENCIES




At
present, the Company is not obligated under any operating lease. Rent expense
amount to $160,571 in 2006 and $87,627 in 2005.




During May 2002, the
Company signed an agreement with a broker-dealer to provide investment banking
and financial advisory services, which included the raising of funds. Under the
agreement, the broker-dealer was entitled to receive stock
warrants,  which if exercised would produce 450,000 shares of common
stock of the Company during a four year term at an exercise price of
approximately $1.75 per share. A dispute arose between the parties regarding the
agreement and its performance. The Company has asserted that the broker-dealer
induced the Company to enter into the agreement through material misstatements,
and has not otherwise performed its services under the agreement. The Company
believes the broker-dealer is not entitled to the stated compensation, and has
not issued the stock warrants.


F-27




In
connection with the Tentative Agreement mentioned in Note 7, Mr. Filipov was to
receive options to purchase 900,000 shares of the Company’s common stock at an
exercise price of $0.01. The Company did not issue such options because the
Acquisition Agreement was terminated and the conditions for such issuance were
never fulfilled. Mr. Filipov has indicated that he believes that the conditions
were fulfilled and that the Company owes him the options. The Company and Mr.
Filipov are continuing to discuss a mutually acceptable settlement.




NOTE 10- RECENT
ACCOUNTING PRONOUNCEMENTS




The
Financial Accounting Standards Board (FASB) has recently issued “FASB Staff
Position EITF 00-19-2 which modifies the accounting treatment of derivatives
that flow from financings involving embedded derivatives. This Staff Position is
effective for financial statements for periods beginning January 1, 2007.
Management believes that this will cause some change in the way the Company
accounts for derivatives. Management is evaluating this position and has not
made a determination as to the effect it will have on its financial
statements.




The
Company has reviewed other accounting pronouncements issued during 2006, and has
concluded that they will have no effect on the Company's financials
statements.




NOTE
11-GOING CONCERN




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As shown in the financial statements, the
Company had a material working capital deficiency and accumulated deficit as of
December 31, 2006, and has experienced continuing losses. These factors raise
substantial doubt about the ability of the Company to continue as a going
concern. The financial statements do not include adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue in operation. The Company’s
present plans, the realization of which cannot be assured, to overcome these
difficulties include but are not limited to the continuing effort to raise
capital in the public and private markets.




NOTE 12-SUBSEQUENT
EVENTS




FEBRUARY 2007 PRIVATE
PLACEMENT




On
February 20, 2007, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with certain accredited and/or qualified institutional
investors pursuant to which The Company sold an aggregate of $3,734,040
principal amount secured convertible debentures (the "Debentures") convertible
into shares of our common stock, no par value (the "Common Stock"), at a
conversion price equal to $0.45 (the "Conversion Price"), for an aggregate
purchase price of $3,219,000. The difference between the face amount of the
borrowing ($ 3,734,040) and proceeds   ($3,219,000) was recorded
as prepaid interest, and is being amortized over the life of the
loan.  In addition, the Company issued to the investors (i) warrants
to purchase 8,297,866 shares of the Company’s Common Stock (the February 2007
Warrants) at an exercise price equal to $0.54 per share, which represents 100%
of the number of shares assumable upon conversion of the Debentures; (ii)
callable warrants to purchase 4,148,933 shares of our Common Stock at an
exercise price equal to $0.75 per share, which represents 50% of the number of
shares assumable upon conversion of the Debentures; and (iii) callable warrants
to purchase 4,148,933 shares of our Common Stock at an exercise price equal to
$1.25 per share, which represents 50% of the number of shares assumable upon
conversion of the Debentures (collectively, the "Callable Warrants").




F-28




Previous Convertible
Issues and the warrants accompanying the November 2004 private placement of
common stock contain “Most Favored Nations” (MFN) clauses that guaranteed the
investors that subsequent issues of stock or notes would not be made on more
favorable terms. If the Company subsequently issues any shares of common stock
or securities convertible or exercisable into common stock at a per share
purchase price which is less than the conversion or exercise prices of
outstanding notes and warrants, such conversion or exercise prices would be
adjusted downward in accordance with their respective terms. As a result of the
issuance of the convertible notes on February 20, 2007, the following warrant
and conversion prices were adjusted:




1.
            The exercise
      price of the warrants associated with the May 2005 convertible debenture
      offering and the conversion price of that offering, which were previously
      adjusted to $1.56 per share, are now set at $0.45.


2.
            The conversion
      price of the October 2005 issuance of the convertible debentures, which
      was previously adjusted from $2.00 per share to $1.56 per share, is now
      set at $0.45.3.
            The exercise
      price of the warrants issued pursuant to the October 2005 debenture Offering,
      which was previously adjusted from $3.25 per share to $1.56 per share,is
      now set at $0.45


4.
            The exercise
      price of the warrants associated with the November 2004 stock offering was
      adjusted form $1.25 per share to $0.45 per share


5.
            The exercise
      price associated with the July 2006 convertible debentures was adjusted
      form $1.56 per share to $0.45 per share6.
            The warrant
      exercise price associated with the warrants issued with the July 2006
      convertible debentures was adjusted from $1.65 per share to $0.45 per
      share.




The effects of
these changes have been included in the calculation of revaluation income and
derivative liabilities during 2007.




During 2005, the
Company sold 68,750 shares in private placements, yielding proceeds of $55,000.
It also issued three convertible debt issues. Each of these issues included
detachable warrants.




OTHER 2007
TRANSACTIONS




On
March 1, 2007, an investor in the convertible debt issue October 2005 converted
$22,500 of the 8% Convertible Notes due October 18, 2007.  In
exchange, the Company issued 50,000 shares of common stock.  The
conversion price was $0.45 per share.




On
April 18, 2007, an investor in the October 2005 convertible debt issue converted
$45,000 of the 8% Convertible Notes due October 18, 2007.  In
exchange, the Company issued 100,000 shares of common stock.  The
conversion price was $0.45 per share.




On
June 1, 2007, an investor in the May 2005 convertible debt issue converted
$246,797 of principal and $15,736 of accrued interest of the 8% Convertible
Notes due June 2007 in exchange, the Company issued 583,407 shares of common
stock.  The conversion price was $0.45 per share.


F-29




On
June 5, 2007, an investor in the October 2005 convertible debt issue converted
$22,500 of the 8% Convertible Notes due October 18, 2007.  In
exchange, the Company issued 50,000 shares of common stock.  The
conversion price was $0.45 per share.




On
July 1, 2007, issued 15,000 shares of common stock for Directors of the
Company.




On
July 7, 2007 issued 147,059 shares of common stock in lieu of $50,000 in service
agreement with investor relations firm.




On
August 21, 2007 and September 4, 2007, issued 100,000 and 50,000 shares of
common stock, respectively, of the Company upon conversion of an aggregate of
$67,500 of convertible notes per share. In addition, the remaining October 2005
convertible notes due October 18, 2007, aggregating $1,325,500 plus accrued
interest, was automatically extended to a new maturity date of April 18, 2008 as
a result of the terms of the original agreement which states that the maturity
date of the convertible notes is automatically extended if the trading value of
the Common Stock of the Company is trading at a closing bid of less than $2.00
per share.




On
August 26, 2007, 200,000 warrants were issued with a five year life at an
exercise price of $1.00.




On
September 10, 2007, the Company issued 123,371 shares of its common stock in
connection with the terms of the February 2005 equity issuance and the “most
favored nations” conversion pricing related to the February 2005 convertible
note issuance. In connection with the February 2005 Note issuance, the Company
may be obligated to issue up to an additional 1.2 million shares of common stock
to shareholder’s of record who received the shares under the original issuance,
due to the reduction in the conversion price of certain convertible debt issued
in February 2007.  In November 2007, 817,093 shares of common stock
were issued based on the supported claims for certain shareholders.




The
October 2005 convertible debt issuance contains a provision that automatically
extends the term of the note six months until April 18, 2008 if the Company’s
common stock is trading at a closing bid price of less than $2.00 on the
maturity date.  The maturity date was October 18, 2007 and Company’s
common stock price on October 18, 2007 was $0.24. As such, the October 2005 Note
was extended on October 18, 2007 until April 18, 2008.




On
January 11, 2008, Peter Amico, Jr. resigned as a Director of the Company as
noted in the Form 8-K filing with the SEC.




On
January 25, 2008, the Company issued 50,000 shares of common stock to a holder
of the October 2005 debt issuance for $22,500 of principal.  The
conversion price was $0.45 per share.
 
 On
January 28, 2008, the Company issued 100,000 shares of common stock to a
Director as payment of prior board fees.
 
 On
January 31, 2008, the Company issued to the holder of the July 26, 2006
convertible note, 100,000 shares of common stock as consideration for four
months interest that was in arrears.
 
 On Feb
8, 2008, the Company issued 160,000 shares of common stock to eight Directors as
payment of board fees for 2008.
 
 On
Feb 8, 2008, the Company issued 1,021,705 shares of common stock to holders of
the October 2005 debt issuance for $395,000 of principal and $64,767 of accrued
interest.  The conversion price was $0.45 per
share.


F-30




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




None




Item
8A. Controls and Procedures




(a)
Evaluation of disclosure controls and procedures.




The
Company, under the supervision and with the participation of its management,
including the recently appointed principal executive officer and acting
principal financial officer, has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended (the “Act”) as of the end of
the period covered by this report (the “Disclosure Controls”). Based upon the
Disclosure Controls evaluation, the recently appointed principal executive
officer and acting principal financial officer have concluded that the Company’s
disclosure controls and procedures were not effective in connection with
preparing this Annual Report on Form 10-KSB/A due to a material weakness in the
Company’s internal control over financial reporting, mainly its financial
closing, review and analysis process and its ability to maintain adequate
records. The Company determined that a restatement of its financial statements
was necessary due to the issuance of convertible debentures and warrants
(collectively, the “Securities”) in various private placements over the last
three years. This restatement is required to properly reflect our financial
results for certain non-cash, and non-operational related charges or credits to
earnings associated with both embedded and freestanding derivative liabilities,
and the accounting for certain derivatives under the control of the issuer due
to the revised interpretation and implementation under Statement of Financial
Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities(“SFAS 133”), the
Emerging Issues Task Force issued EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock(“EITF 00-19”), and FASB Staff Position
No. EITF 00-19-2, “Accounting for Registration Payment Arrangements”
(“EITF 00-19-2”).




The
Company believes that the issues surrounding the restatement of this report,
mainly the internal controls related to the financial closing, review, and
analysis process and its ability to maintain adequate records has been addressed
and the Company has taken additional steps to avoid the reoccurrence of this
condition by adding an additional qualified person with SEC experience in the
financial reporting and analysis area. The Company has instituted a policy
requiring the controller, at the end of each quarter, to reconcile the
accounting records to the securities issuance report prepared and maintained by
the corporate secretary to ensure that all issuances have been properly recorded
and that appropriate adjustments to previously issued securities are recorded,
if necessary. The Company believes that these additional efforts taken by new
management since the end of 2006 to strengthen the Company’s internal controls
will be effective in future periods.





A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.





The
Company’s internal control over financial reporting has been modified during the
Company’s most recent fiscal quarter  by adding  additional
resources  to address deficiencies in the financial closing, review
and analysis process, and improve the Company’s record keeping, which has
materially  improved the
Company’s internal control over financial reporting.





Item
8B - Other Information





None.


32




PART
III





Item 9. Directors,Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act.





Directors
and Executive Officers





Name
            Age
            PositionRobert
      M. Watson
            59
            Chief
      Executive Officer, Acting Chief Financial Officer and
    DirectorD.
      Barney Harris
            46
            DirectorJames
      Hudson
            64
            DirectorWilliam
      Hungerville
            71
            DirectorFil
      Filipov
            60
            DirectorAndrew
      Guzzetti
            59
            Chairman
      of the Board of DirectorsPeter
      Amico, Jr.
            42
            DirectorRobert
      Borski, Jr.
            58
            DirectorNicholas
      Fenelli
            52
            Chief
      Operations Officer





Directors
serve until the next annual meeting and until their successors are elected and
qualified. The Directors of our company are elected by the vote of a
majority in interest of the holders of the voting stock of our company and hold
office until the expiration of the term for which he or she was elected and
until a successor has been elected and qualified.





A
majority of the authorized number of directors constitutes a quorum of the Board
for the transaction of business. The directors must be present at the meeting to
constitute a quorum. However, any action required or permitted to be taken by
the Board may be taken without a meeting if all members of the Board
individually or collectively consent in writing to the action.




Officers
are appointed to serve for one year until the meeting of the board of directors
following the annual meeting of stockholders and until their successors have
been elected and qualified.




The
principal occupations for the past five years (and, in some instances, for prior
years) of each of our executive officers and directors, followed by our key
employees, are as follows:




Robert Watson -Mr. Watson has
been our Chief Executive Officer and a Director since November 1, 2006. From
2001 until October 2006, Mr. Watson was President and CEO of Hartz &
Company, a manufacturer of tailored clothing, with two production facilities in
the United States with sales and marketing offices in New York City. From 1996
to 2001, Mr. Watson served as the Vice President, CFO and COO of America's Best
Contacts and Eyeglasses, a retail chain with 118 locations, a full service
laboratory and distribution center. His experience in the public arena was with
Continental Can Company, from 1967 through 1986, where he served as Controller
for the food packaging company with 29 manufacturing facilities and sales in
excess of $1 billion. Mr. Watson received a BS in accounting from Fairleigh
Dickinson University and an EMBA from the University of New Haven.





D. Barney Harris - Mr. Harris
has been a Director since December 1998 and a Vice President since July 1999.
From 1997 to July 1999, Mr. Harris was employed by UTD, Inc. Manassas, Virginia.
Prior to 1997, Mr. Harris was employed by EG&G WASC, Inc., Gaithersburg,
Maryland, as a Senior Engineer and Manager of the Ocean Systems Department where
he was responsible for the activities of 45 scientists, engineers and
technicians. During this period while performing contract services for the US
Navy, he was principally responsible for the design of the omni-directional
wheel presently used by the Company. Mr. Harris received his B.S.M.E. from the
United States Merchants Marine Academy in 1982.





James Hudson - Mr. Hudson has
been a Director since May 1998. From 1980 to present, he has been President of
Grammer, Dempsey & Hudson, Inc., a steel distributor located in Newark, New
Jersey.




33




William Hungerville - Mr.
Hungerville has been a Director since February 2002. Since 1998, Mr. Hungerville
has been retired from full time employment. From 1974 to 1998, he was the sole
owner of a pension administrative service firm. Mr. Hungerville is a graduate of
Boston College, and attended an MBA program at Harvard University for 2
years.





Fil Filipov - Mr. Filipov has
been a Director since December 2004. Mr. Filipov has served as the Chairman of
Supervisory Board of Tatra, a Czech Company, which is producing off highway
trucks. . Mr. Filipov was President & CEO of Terex Cranes, a $1 billion
dollar business segment of Terex Corporation. He was responsible for strategic
acquisitions and served as President and CEO from March 1995 through December
2003. From 1994 through 1996, Mr. Filipov was the Managing Director of Clark
Material Handling Company in Germany (Filco GmbH).





Andrew Guzzetti -Mr.
Guzzettihas
beena director
since April 1, 2006 and Chairman since August 31, 2006. From September 2004 to
the present, Andrew G. Guzzetti has served as Managing Director of the Private
Client Group of McGinn Smith and Co., Inc., an investment banking and retail
brokerage firm, where he is responsible for building the wealth management
private client group through recruitment and training. From February 2004
through September 2004, Mr. Guzzetti served as Managing Director of the Private
Client Division of The Keystone Equities Group in which he was responsible for
building the retail brokerage arm of this company. From February 2002 through
February 2004, Mr. Guzzetti was a private investor consultant in which he
assisted start-up public and private companies in raising funds. From November
1995 through February 2002, Mr. Guzzetti served as Senior Vice President and
Branch Manager of Salomon Smith Barney where he was responsible for increasing
the financial consultant population through recruitment and training. Mr.
Guzzetti received his BA in Economics from Utica College in 1969.





Peter Amico, Jr. -From 1988
to the present, Mr. Amico has served as a police officer in the State of New
Jersey where he has managed and trained personnel and directed police
operations. Mr. Amico served as a Police Investigator from 1994 to 1995 and was
promoted to Supervisor in 1996. From 1983 to 1987, he served in the United
States Marine Corps. where his service included police duties and training
coordination. In addition, Mr. Amico received an Associates Degree in Law
Enforcement from Gloucester County College in 2003.





Robert Borski, Jr. -From 1982
to 2003, Mr. Borski represented the Third Congressional District of Pennsylvania
for ten terms in the United States House of Representatives, where he was a
senior member of the House Transportation and Infrastructure Committee and a
vocal advocate for an improved national transportation system. He was awarded
the American Public Transportation Association’s National Distinguished Service
Award in 2002 and the Silver Order of the de Fleury Medal from the Army
Engineering Association. In 2003, Mr. Borski formed Borski Associates, a
government relations firm specializing in transportation and economic
development issues. He is a driving force behind efforts to revitalize the North
Delaware riverfront, an area of abandoned industrial sites, into a center of
residential and commercial activity. Currently, Mr. Borski serves on the Board
of Directors of the Northeast-Midwest Institute, an organization promoting
economic vitality for Northeastern and Midwestern states, and on the Board of
Directors of Pennoni Associates, a civil engineering firm. Mr. Borski received a
Bachelor of Arts degree from the University of Baltimore in 1971.





Nicholas Fenelli -Nicholas E.
Fenelli has been with our company since 2001 serving first as Project Engineer,
and as Vice President of Concept Development. From 1996 to 1998, Mr. Fenelli
served as Project Engineer NACCO Materials Handling Group, Inc, where his work
included the ergonomic improvement project for the Hyster/Yale order picker
trucks, and work on the development of the three wheeled sit down rider truck.
From 1990 to 1995, Mr. Fenelli was Plant Manager for Cammerzell Machinery
Company, a manufacturer of powder compaction and robotic conveying equipment for
the Ceramic, Refractory, and Pharmaceutical industries. Between 1988 and 2002,
Mr. Fenelli served as Treasurer and as a member of the Board of Directors of the
Engineers Club of Trenton. He received a BS in Mechanical Engineering from
Lehigh University in 1978.




34




COMMITTEES
OF THE BOARD




We
currently have no audit committee, compensation committee, nominations and
governance committee of our board of directors.




INDEBTEDNESS
OF EXECUTIVE OFFICERS AND DIRECTORS




No
executive officer, director or any member of these individuals' immediate
families or any corporation or organization with whom any of these individuals
is an affiliate is or has been indebted to us since the beginning of our last
fiscal year.





FAMILY
RELATIONSHIPS




There are
no family relationships among our executive officers and directors.




LEGAL
PROCEEDINGS




As of the
date of this prospectus, there are no material proceedings to which any of our
directors, executive officers, affiliates or stockholders is a party adverse to
us.




CODE
OF ETHICS




We have
not adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-B
of the Securities Exchange Act of 1934.





Section
16(a) Beneficial Ownership Compliance





Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who beneficially own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of change in ownership of common stock and other equity
securities of our company. Officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year
ended December 31, 2006, and Forms 5 and amendments thereto furnished to us with
respect to the fiscal year ended December 31, 2006, we believe that during the
year ended December 31, 2006, our executive officers, directors and all persons
who own more than ten percent of a registered class of our equity securities
complied with all Section 16(a) filing requirements.




Item
10. Executive
Compensation




The following table sets forth the cash
compensation (including cash bonuses) paid or accrued by us to our Chief
Executive Officer and our four most highly compensated officers other than the
Chief Executive Officer as of December 31, 2006 and December 31,
2005.




Name
      & Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
              Awards
              ($)
            
            Option
      Awards
              ($)
            
            Non-Equity
      Incentive Plan Compensation ($)
            
            Change
      in Pension Value and Non-Qualified Deferred Compensation
      Earnings
              ($)
            
            All
      Other Compensation ($)
            
            Total
              ($)Peter
      Amico,
              CEO,
      President & Director
            
            
            2006
              2005
            
            $168,269
              $303,751
            
            $
            0
              $0
            
            0
              0
            
            $
            0
              975,000
            
            0
              0
            
            
            0
              0
            
            0
              0
            
            $
            168,269
              $303,751Nicholas
      Fenelli, Vice President & COO
            
            
            2006
              2005
            
            $96,798
              $78,202
            
            $
            0
              $0
            
            0
              0
            
            $
            24,000
              $53,500
            
            0
              0
            
            
            0
              0
            
            0
              0
            
            $
            96,798
              $78,202Robert
      M. Watson. CEO, President & Director
            
            
            2006
              2005
            
            $11,538
              $0
            
            $
            50,000
              0
            
            
            
            $
            45,000
              0
            
            0
              0
            
            
            0
              0
            
            0
              0
            
            $
            61,538
              0




Outstanding Equity Awards at Fiscal
Year-End Table.





The
following table sets forth information with respect to grants of options to
purchase our common stock to the named executive officers at December 31,
2006.





Option
      Awards
            
            Stock
      AwardsName
            
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Exercisable
            
            
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Unexercisable
            
            
            Equity
              Incentive
              Plan
              Awards:
              Number
              of
              Securities
      Underlying
              Unexercised
              Unearned
              Options
              (#)
            
            
            Option
              Exercise
              Price
              ($)
            
            Option
              Expiration
              Date
            
            Number
              of
      Shares
              or
      Units
              of
      Stock
              That
      Have
              Not
              Vested
              (#)
            
            
            Market
              Value
      of
              Shares
      or
              Units
      of
              Stock
              That
      Have
              Not
              Vested
              ($)
            
            
            Equity
              Incentive
              Plan
      Awards:
              Number
              of
              Unearned
              Shares,
              Units
      or
              Other
      Rights
              That
      Have
              Not
              Vested
              (#)
            
            
            Equity
      Incentive
              Plan
      Awards:
              Market
      or Payout
              Value
              of
              Unearned
              Shares,
              Units
      or
              Other
              Rights
              That
      Have
              Not
              Vested
              ($)Robert
      M. Watson
            
            
            300,000
            
            
            
            0
            
            
            
            400,000
            
            
            $
            0.46
            
            Nov.
      30, 2008
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0




35




Director
Compensation





The
following table sets forth with respect to the named directors, compensation
information inclusive of equity awards and payments made at December 31,
2006.




Name
              (a)
            
            Fees
      Earned or Paid in Cash
              ($)
              (b)
            
            
            Stock
      Awards
              ($)
              (c)
            
            
            Option
              Awards
      ($)
              (d)
            
            
            Non-Equity
      Incentive Plan Compensation ($)
              (e)
            
            
            Change
      in Pension Value and Nonqualified Deferred Compensation
      Earnings
              (f)
            
            
            All
      Other Compensation
              ($)
              (g)
            
            
            Total
              ($)
              (h)Andrew
      Guzzetti
            
            
            -
            
            
            
            20,000
            
            
            $
            32,800
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            32,800Robert
      M. Watson
            
            
            -
            
            
            
            0
            
            
            
            -
            
            
            
            0
            
            
            
            
            
            
            
            0
            
            
            
            -James
      Hudson (1)
            
            
            -
            
            
            
            35,000
            
            
            $
            52,300
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            52,300William
      Hungerville (1)
            
            
            -
            
            
            
            35,000
            
            
            $
            52,300
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            52,300D.
      Barney Harris(1)
            
            
            -
            
            
            
            35,000
            
            
            $
            52,300
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            52,300Fil
      Filipov
            
            
            -
            
            
            
            0
            
            
            
            -
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            -Robert
      Borski
            
            
            -
            
            
            
            20,000
            
            
            $
            32,800
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            32,800Peter
      Amico, Jr,
            
            
            -
            
            
            
            0
            
            
            
            -
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            -




(1.)
Includes 15,000 shares issued for director fees earned in 2005.





EMPLOYMENT
AGREEMENTS




On
December 26, 2006, we entered into an Employment Agreement dated as of December
1, 2006 with Robert M. Watson, our President and Chief Executive
Officer.





Pursuant
to the Employment Agreement, we will employ Mr. Watson for a period of 2 years
commencing December 1, 2006 unless terminated upon 30 days prior written notice
by either party pursuant to the terms set forth therein. From December 1, 2006
through November 30, 2007, Mr. Watson will be paid an annual base salary of
$150,000 (“Base Salary”). In addition, Mr. Watson was paid a start-up bonus in
the amount of $50,000 for services rendered by him to our company prior to the
execution of the Employment Agreement and Mr. Watson will be issued options to
purchase 300,000 shares of our common stock at a price equal to $0.46 per share.
From December 1, 2007 through November 30, 2008, Mr. Watson’s Base Salary will
increase to $200,000 per year. On December 1, 2007 and June 1, 2008, Mr. Watson
shall be issued options to purchase 200,000 and 200,000 shares of our common
stock, respectively, each at a price equal to $0.46 per share. Further, Mr.
Watson will be eligible to earn an annual cash bonus at the discretion of our
Board of Directors based on meeting performance objectives and bonus
criteria.





During
the term of his employment and for a period thereafter, Mr. Watson will be
subject to confidentiality and non-competition provisions, subject to standard
exceptions.




36




Item 11. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters.




The
following table sets forth certain information regarding beneficial ownership of
our common stock as of April 12, 2007.





· by each person who is known by us to
beneficially own more than 5% of our common stock;


· by each of our officers and directors;
and


·by all of our officers and
directors as a group.





NAME
      AND ADDRESS
              OF
      OWNER
            TITLE
      OF
              CLASS
            NUMBER
      OF
              SHARES
      OWNED (1)
            PERCENTAGE
      OF CLASS (2)Robert
      M. Watson
            Common
      Stock
            320,000
      (4)
            1.30%200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012D.
      Barney Harris
            Common
      Stock
            221,562
            *200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012James
      Hudson
            Common
      Stock
            140,800
      (3)
            *200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012William
      Hungerville
            Common
      Stock
            221,000
            *200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012Fil
      Filipov
            Common
      Stock
            60,000
            *200
      Freeway Drive, Unit 1
              Blackwood,
      NJ 08012Andrew
      Guzzetti
            Common
      Stock
            190,000
            *200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012Peter
      Amico, Jr.
            Common
      Stock
            52,500
            *200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012Robert
      Borski, Jr.
            Common
      Stock
            78,504
            *200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012Nicholas
      Fenelli
            Common
      Stock
            138,500
            *200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012All
      Officers and Directors
            Common
      Stock
            1,442,866
            5.9%As
      a Group (9 persons)




* Less
than 1%.




37




(1)
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of April 12, 2007 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.





(2) Based upon
24,376,887 shares
issued and outstanding on April 12, 2007.





(3)
Includes 44,500 shares owned by a corporation owned by Mr. Hudson.





(4)
Includes 300,000 options for common stock issued in connection with Mr. Watson’s
employment contract dated December 1, 2006.





Item
12. Certain
Relationships and Related Transactions, and Director
Independence




Arcon
Corp., a corporation wholly owned by the estate of our former chairman and President Peter Amico, owns 275,000 shares of our preferred stock.
Each share of Preferred Stock is entitled to 10 votes per share on all matters
on which shareholders are entitled to vote. The holders of our common stock and
preferred stock vote as one single class. Mr. Amico and Arcon Corp. together
have 1,870,623 shares of common stock, representing 1,870,623 votes, plus
275,000 shares of preferred stock with 10 votes per share, or a total of
2,750,000 voting shares. The aforementioned equals a total of 4,620,623 voting
shares of capital stock by Mr. Amico and Arcon. The preferred stock has a stated
value per share of $5.00 and an annual dividend per share equal to 5% of the
stated value. The annual cash dividend as of December 31, 2004 was $68,750.
Dividends are cumulative and the holder has a right during any quarter to waive
any cash dividend and receive the dividend in the form of common stock at a
price per share equal to 30% of the trading price of the common stock on the
last day of the dividend period. The preferred stock is not convertible into
common stock, however, has a preference over common stockholders upon
liquidation equal to the stated value per share.




The
consideration paid by Mr. Amico and Arcon for the initial issuance of 275,000
shares of our preferred stock is as follows: Air Tracks, Inc. was incorporated
in May 1995. Peter Amico, our President and the largest shareholder of Air
Tracks, Inc., capitalized Air Tracks, Inc. with $20,000. In exchange, Mr. Amico
was issued 3.5 million shares of common stock of Air Tracks, Inc. We were formed
in April 1997 by Louis Perosi and Albert Walla. In April 1997, it was agreed to
merge our company with Air Tracks, Inc. Pursuant to the merger, Mr. Amico
exchanged 3.5 million shares of Air Tracks, Inc. stock for 1 million shares of
our common stock, plus 275,000 shares of preferred stock. It was determined by
the parties that the voting shares that would be held by Mr. Amico/Arcon would
be essentially the same.




Since the
preferred shares are not convertible and thus held no exit method it was
determined to provide a dividend. The $5.00 per share was the price used to
satisfy the issue.





Arcon is
entitled to a 5% dividend on the 275,000 shares of preferred stock which it
owns. This dividend is based on preferred stock value of $5 per share. The
holder of the preferred stock has the right to elect to receive its dividends in
common stock in lieu of cash. The dividends accrued through 2001 have been
satisfied. Dividends accrued subsequent to 2001 have been paid partly in cash
and partly by the issuance of common stock, as follows:




38





Dividends
      accrued during 2002 - 2005
            
            
            
            
            $
            275,000Cash
      payment during 2004
            
            $
            131,771Dividend
      to be paid in common stock
            
            
            51,562
            
            
            
            183,333Balance
      unpaid at 12/31/05
            
            
            
            
            
            
            91,667Dividends
      accrued during 2006
            
            
            
            
            
            
            68,750Dividends
      paid in 2006 in common stock
            
            
            
            
            
            
            112,500Balance
      unpaid at 12/31/06
            
            
            
            
            
            $
            47,917





The
$51,562 amount was originally satisfied by the issuance of 100,000 shares of
preferred stock. Early in 2007 it was determined that the issuance of preferred
stock to satisfy preferred dividends is not permitted by the certificate of
incorporation. The 100,000 preferred shares were, therefore, retrieved and will
be replaced in 2007 by 136,041 shares of common stock. The $112,500 dividend
payment will be made in 2007 by the issuance of 218,742 shares of common
stock.




The
financial statements at December 31, 2004 reflect 275,000 shares of preferred
stock outstanding and disclosed that an additional 100,000 shares of preferred
stock were deemed the equivalent of 221,892 shares of common stock that would
have been required to settle an equivalent amount of preferred dividends. We
have determined that the number of shares deemed the equivalent of the preferred
stock dividend and has been recalculated based on our Articles of Incorporation,
as amended, including on April 30, 2000. Accordingly, we will issue 136,041
shares of common stock to the sole holder of the preferred stock as payment of
$51,562 of preferred stock dividends less other adjustments resulting from the
recalculation of the number of common shares required to pay preferred stock
dividends, subsequently approved. During the period January 1, 2003 through June
30, 2006, 200,238 shares of common stock were issued in excess of the amount
required.





Item
13. Exhibits.




Exhibit No.
            Description3.1
            Certificate
      of Incorporation of Airtrax, Inc. dated April 11, 1997, filed as an
      exhibit to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on November 19, 1999 and incorporated herein by
      reference.





3.2
            Certificate
      of Correction of the Certificate of Incorporation dated April 30, 2000,
      filed as an exhibit to the Current Report on Form 8-K filed with the
      Securities and Exchange Commission on November 17, 1999 and incorporated
      herein by reference.





3.3
            Certificate
      of Amendment of Certificate of Incorporation dated March 19, 2001, filed
      as an exhibit to the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on November 17, 1999 and incorporated herein by
      reference.





3.4
            Amended
      and Restated By-Laws , filed as an exhibit to the Current Report on Form
      8-K filed with the Securities and Exchange Commission on November 19, 1999
      and incorporated herein by
reference.





4.1
            Form
      of Common Stock Purchase Warrant issued to investors pursuant to the May
      2004 private placement. (To be filed at a later
  date)





39





4.2
            Form
      of Common Stock Purchase Warrant dated as of November 22, 2004 and
      November 23, 2004, filed as an exhibit to the Current Report on Form 8-K
      filed with the Securities and Exchange Commission on November 30, 2004 and
      incorporated herein by reference.





4.3
            Form
      of Series A Convertible Note dated as of February 11, 2005, filed as an
      exhibit to the Current Report on Form 8-K filed on February 11, 2005 and
      incorporated herein by reference.





4.4
            Form
      of Class A Common Stock Purchase Warrant dated as of February 11, 2005,
      filed as an exhibit to the Current Report on Form 8-K filed on February
      11, 2005 and incorporated herein by
reference.





4.5
            Form
      of Class B Common Stock Purchase Warrant dated as of February 11, 2005,
      filed as an exhibit to the Current Report on Form 8-K filed on February
      11, 2005 and incorporated herein by
reference.





4.6
            Form
      of Broker's Common Stock Purchase Warrant dated as of February 11, 2005,
      filed as an exhibit to the Current Report on Form 8-K filed on February
      11, 2005 and incorporated herein by
reference.





10.1
            Employment
      agreement dated July 12, 1999, by and between Airtrax, Inc. and D. Barney
      Harris, filed as an exhibit to the Current Report on Form 8-K/A filed with
      the Securities and Exchange Commission on January 13, 2000 and
      incorporated herein by reference.





10.2
            Consulting
      Agreement by and between MAS Financial Corp. and Airtrax, Inc. dated
      October 26, 1999, filed as exhibit to the Current Report on Form 8-K filed
      with the Securities and Exchange Commission on November 19, 1999 and
      incorporated herein by reference.





10.3
            Product
      Development, Sales and Manufacturing Representation Agreement dated March
      13, 2004 by and between Airtrax, Inc., and MEC Aerial Platform Sales
      Corporation, filed as an exhibit to the Current Report on Form 8-K filed
      on March 15, 2004 and incorporated herein by
  reference.





10.4
            Joinder
      to the Purchase Agreement, dated November 23, 2004, by and among Airtrax,
      Inc., Excalibur Limited Partnership, Stonestreet Limited Partnership and
      Linda Hechter, filed as an exhibit to the Current Report on Form 8-K filed
      on November 30, 2004 and incorporated herein by
  reference.





10.5
            Registration
      Rights Agreement, dated November 22, 2004, by and among Airtrax, Inc.,
      Excalibur Limited Partnership, Stonestreet Limited Partnership, Whalehaven
      Capital Fund and First Montauk Securities Corp, filed as an exhibit to the
      Current Report on Form 8-K filed on November 30, 2004 and incorporated
      herein by reference.





10.6
            Joinder
      to the Registration Rights Agreement, dated November 23, 2004, by and
      among Airtrax, Inc., Excalibur Limited Partnership, Stonestreet Limited
      Partnership, Linda Hechter and First Montauk Securities Corp., filed as an
      exhibit to the Current Report on Form 8-K filed on November 30, 2004 and
      incorporated herein by reference.





10.8
            Subscription
      Agreement dated February 11, 2005 by and among Airtrax, Inc. and the
      investors named in the signature pages thereto, filed as an exhibit to the
      Current Report on Form 8-K filed on February 11, 2005 and incorporated
      herein by reference.





10.9
            Series
      B Unsecured Convertible Debenture and Warrants Purchase Agreement dated
      May 31, 2005, by and between Airtrax, Inc. and the investor named on the
      signature page thereto, filed as an exhibit to the Current Report on Form
      8-K filed on June 6, 2005 and incorporated herein by
      reference.




40




10.10
            Registration
      Rights Agreement dated May 31, 2005, by and between Airtrax, Inc. and the
      investor named on the signature page thereto, filed as an exhibit to the
      Current Report on Form 8-K filed on June 6, 2005 and incorporated herein
      by reference.





10.11
            Series
      B Unsecured Convertible Debenture of Airtrax, Inc., filed as an exhibit to
      the Current Report on Form 8-K filed on June 6, 2005 and incorporated
      herein by reference.





10.12
            Form
      of Stock Purchase Warrant of Airtrax, Inc., filed as an exhibit to the
      Current Report on Form 8-K filed on June 6, 2005 and incorporated herein
      by reference.





10.13
            Letter
      Agreement dated May 31, 2005 by and among Airtrax, Inc. and the investors
      named on the signature page thereto, filed as an exhibit to the Current
      Report on Form 8-K filed on June 6, 2005 and incorporated herein by
      reference.





10.14
            Series
      C Unsecured Convertible Debenture and Warrants Purchase Agreement, dated
      October 18, 2005 by and between Airtrax, Inc. and the investor named on
      the signature page thereto, filed as an exhibit to the Current Report on
      Form 8-K filed on October 24, 2005 and incorporated herein by
      reference.





10.15
            Registration
      Rights Agreement dated October 18, 2005, by and between Airtrax, Inc. and
      the investor named on the signature page thereto, filed as an exhibit to
      the Current Report on Form 8-K filed on October 24, 2005 and incorporated
      herein by reference.





10.16
            Series
      C Unsecured Convertible Debenture of Airtrax, Inc., filed as an exhibit to
      the Current Report on Form 8-K filed on October 24, 2005 and incorporated
      herein by reference.





10.17
            Form
      of Stock Purchase Warrant of Airtrax, Inc., filed as an exhibit to the
      Current Report on Form 8-K filed on October 24, 2005 and incorporated
      herein by reference.





10.18
            Amended
      and Restated Stock Acquisition Agreement effective as of as of February
      19, 2004 by and between Airtrax, Inc. and Fil Filipov, filed as an exhibit
      to the Registration Statement on Form SB-2 filed on January 11, 2006 and
      incorporated herein by reference.





10.19
            Promissory
      Note of Filco GmbH dated as of January 15, 2005 issued to Airtrax, Inc.,
      filed as an exhibit to the Registration Statement on Form SB-2 filed on
      January 11, 2006 and incorporated herein by
  reference.





10.20
            Promissory
      Note of Filco GmbH dated as of June 5, 2005 issued to Airtrax, Inc., filed
      as an exhibit to the Registration Statement on Form SB-2 filed on January
      11, 2006 and incorporated herein by
reference.





10.21
            Assignment
      and Purchase Agreement dated as of August 25, 2005 by and between Werner
      Faenger and Airtrax, Inc., filed as an exhibit to the Registration
      Statement on Form SB-2 filed on January 11, 2006 and incorporated herein
      by reference.





10.22
            Promissory
      Note of Filco GmbH with Guarantees dated as of November 25, 2005 issued to
      Airtrax, Inc., filed as an exhibit to the Registration Statement on Form
      SB-2 filed on January 11, 2006 and incorporated herein by
      reference.





41




10.23
            Form
      of Subscription Agreement of Airtrax, Inc. dated as of February 13, 2006,
      filed as an exhibit to the Current Report on Form 8-K filed on February
      27, 2006 and incorporated herein by
reference.





10.24
            Series
      D Unsecured Convertible Debenture of Airtrax, Inc., filed as an exhibit to
      the Current Report on Form 8-K filed on February 27, 2006 and incorporated
      herein by reference.





10.25
            Form
      of Stock Purchase Warrant of Airtrax, Inc., filed as an exhibit to the
      Current Report on Form 8-K filed on February 27, 2006 and incorporated
      herein by reference.





31.1
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.





31.2
            Certification
      of the acting Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d
      14(a), promulgated under the Securities and Exchange Act of 1934, as
      amended.





32.1
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
  Officer).





32.2
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer).





Item
14. Principal Accountant
Fees and Services.




AUDIT
FEES




The
aggregate fees billed for professional services rendered by our principal
accountants for the audit of our financial statements and for the reviews of the
financial statements included in our annual report on Form 10-KSB and 10-QSBs
respectively, and for other services normally provided in connection with
statutory filings were $76,803 and $23,000, respectively, for the years ended
December 31, 2006 and December 31, 2005.




AUDIT-RELATED
FEES




We
incurred fees of $47,947 and $15,000, respectively, for the years ended December
31, 2006 and December 31, 2005 for professional services rendered by our
independent auditors that are reasonably related to the performance of the audit
or review of our financial statements and not included in "Audit Fees." In
addition, we incurred accounting (audit) fees of $75,000 for accounting fees to
audit Filco GmbH.




TAX
FEES




The
aggregate fees billed by our auditors for tax compliance matters were $1,045 and
$750 respectively, for the fiscal years ended December 31, 2006 and December 31,
2005.




ALL
OTHER FEES




We did
not incur any fees for other professional services rendered by our independent
auditors during the years ended December 31, 2006 and December 31,
2005.





The Board
of Directors has considered whether the provision of non-audit services is
compatible with maintaining the principal accountant's
independence.





42


SIGNATURES





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






AIRTRAX, INC.February 12,
      2008
              By:
              /s/ ROBERT
      M. WATSONRobert
      M. WatsonChief
      Executive Officer (Principal Executive Officer) and Acting Chief Financial
      Officer (Principal Financial and Accounting Officer)









43